Non Banking Finance

Companies ( NBFCs)
 What is NBFC ?
• A Non-Banking Financial company is a
company registered under the companies
Act,1956 and is engaged in the business of
loans , advances , acquisition of Shares /
Stock/Bonds /debentures/Securities issued by
the government or local authority or other
securities of like marketable nature , leasing ,
hire-purchase , insurance business , chit
business.
 Conti…
• In the terms of section 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 non-banking financial
institution as defined in clause (a) of section
45 I of the RBI Act , 1934.
 Conti…
• As of March 2014 , there were 12,029 NBFCs
registered with the Reserve Bank , of which
241 were deposit –accepting (NBFCs-D) and
11,788 were non-deposit accepting (NBFCs-
ND).
 HISTORICAL BACKGROUND
• The Reserve Bank of India Act, 1934 was
amended on 1st December, 1964 by the Reserve
Bank Amendment Act, 1963 to include provisions
relating to non-banking institutions receiving
deposits and financial institutions.
• With a view to review the existing framework and
address these shortcomings, various committees
were formed and reports were submitted by
them.
 THE COMMITTEES
• James Raj Committee (1974)
 It was formed by the Reserve Bank of India in 1974.
 Suggested for a ban on Prize chit and other schemes.
 Based on these suggestions, the Prize Chits and Money Circulation Schemes
(Banning) Act, 1978 was enacted.
• Dr. A.C. Shah Committee (1992)
 Agenda for reforms in the NBFC sector.
 Wide ranging recommendations covering
 compulsory registration of large sized NBFCs,
 prescription of prudential norms for NBFCs
 more statutory powers to Reserve Bank for better regulation of NBFCs.
– Vasudev Committee (1998)
 RBI should consider measures for easing the flow of credit from banks to
NBFCs
 Consider prescribing a suitable ratio as between secured and unsecured
deposits for NBFCs.
 Appointment of depositors’ grievance redressal authorities with specified
territorial jurisdiction.
 A separate instrumentality for regulation and supervision of NBFCs under
the aegis of the RBI should be set up, so that there is a great focus in
regulation and supervision of the NBFC sector.
 NBFCs V/S Banks
Banks NBFCs

Definition Banking is acceptance of deposits NBFC are companies carrying

withdraw able by cheque or demand , financial business
NBFC cannot accept demand deposits

Scope of business Scope of business of the bank is There is no bar on NBFC

limited by sec16(1) of BR Act. carrying activity other then
financial activity.
Major limitations on No non banking activity are carried. Cannot provide checking
business facilities.
Foreign investment Up to 74% is allowed to private sector Up to 100% is allowed
bank.
Need for a licence Licence norms are tightly controlled It is comparatively much
and generally it is perceived to be quite easier to get a registration as
dfficult to get a licence for a bank an NBFC.

Regulations BR Act and RBI Act lay down the Much lesser control over
stringent control over the bank. NBFC
 Regulations
• In the terms of sec 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 non banking financial institution .
• However to obviate dual registration certain categories of
NBFCs which are regulated by other regulations are exempted
from the requirement of registration with RBI viz. Venture
capital fund/ merchant banking companies/stock broking
companies registered with SEBI.
• Should have a minimum net owned fund of Rs. 25 lakh
• NBFC have to maintain 10 and 15 per cent of their deposits in
liquid assets effectively from January 1 and April 1, 1998 ,
respectively.
 Conti..
• They have to create reserve fund and transfer not less
than 20 per cent of their net deposits to it every year.
• 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.
• They have to obtain a minimum credit rating from any
one of the three credit rating agencies.
• NBFCs cannot offer gifts/ incentives or any other
additional benefits to the deposits.
 Role and Importance of NBFCs
• Financial Intermediation
• Economic basis of Financial Intermediation
1. Law of Large Numbers
2. Economies of Scale
• Inducement to Save
• Mobilisation of Saving
• Investment of funds
• Size of sector
• Growth
• Profitability
• Infrastructure Lending
• Promoting Inclusive Growth
Types of NBFC
Types of Services provided by NBFCs

• Hire Purchase Services

• Leasing Services
• Housing Finance Services
• Asset Management Company
• Venture Capital Companies
• Mutual Benefit Finance Companies ( MBFCs)
• Investment Company
 Conti..
• Loan Company
• Chit Fund Company
• Residuary Non-Banking Company
• Infrastructure Fiance Company (IFC)
• Systemically Important Corew Investment Company
( CIC-ND-SI)
• Infrastructure Debt Fund
• Non Banking Financial Company – Micro Finance
Institution (NBFC-MFI)
 1.LOAN COMPANY

• Loan company means any financial institution whose

principal business is that of providing finance, whether by
making loans or advances or otherwise for any activity other
than its own (excluding any equipment leasing or hire-
purchase finance activity).
• A loan is a type of debt. Like all debt instruments, a loan
entails the redistribution of financial assets over time,
between the lender and the borrower.
 2.INVESTMENT COMPANY

• Investment Company is any financial intermediary

whose principal business is that of buying and selling
of securities.
• It is a company whose main business is holding 
securities of other companies purely for investment
 purposes.
• The investment company invests money on behalf of
its shareholders who in turn share in the profits and
losses.
• xample : brokerage co. underwriting co.
 3. EQUIPMENT LEASING COMPANY

Equipment leasing company is any financial institution whose principal

business is that of leasing equipments or financing of such an activity.

Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed
assets for which it must pay a series of contractual, periodic, tax deductible
payments.
• The lessee is the receiver of the services or the assets under the lease
 contract and the lessor is the owner of the assets. The relationship
between the tenant and the landlord is called a tenancy, and can be for a
fixed or an indefinite period of time (called the term of the lease). The 
consideration for the lease is called rent.
• Example: Shriram Transport Finance Corporation
 4.HIRE-PURCHASE COMPANY

• Any financial intermediary whose principal business relates to

hire purchase transactions or financing of such transactions.
• A method of buying goods through making installment
payments over time.
• Under a hire purchase contract, the buyer is leasing the goods
and does not obtain ownership until the full amount of the
contract is paid.
• Hire purchase combines elements of both a loan and a lease.
You reach an agreement with the dealer to pay an initial
deposit, typically anything between 10% and 50%, and then
pay off the balance in monthly installments over an agreed
period of time. At the end of this period, the product is yours.
  MUTUAL BENEFIT FINANCIAL COMPANY
(MBFC)
• Mutual Benefit Finance Companies are one of the oldest forms of non-financial
companies. It is a company structure in which the company's owners are also its
clients.
• That is, the mutual company's profits are distributed to its participating
customers each year in proportion to their individual exposures to the company.
• Some of the important objectives of Nidhis are to enable the members to save
money, to invest their savings and to secure loans at favorable rates of interest.
• They work on the principles of complete mutuality of interest and are generally
well-managed.
• The Government has granted certain concessions under Section 620A of the
Companies Act, 1956.
• Primarily regulated by Department of Company Affairs (DCA) under the directions
/ guidelines issued by them under Section 637 A of the Companies Act, 1956.
•  The Government of India constituted an Expert Committee in March 2000
(Chairman: Shri P.Sabanayagam)
 MISCELLANEOUS NON-BANKING COMPANIES (MNBCS)
• MNBCs are mainly engaged in the Chit Fund business.
• Conducting or supervising as a promoter, by which the company enters
into an agreement with a specified number of subscribers that every
one of them shall subscribe a certain sum in instalments over a
definite period and that every one of such subscribers shall in turn, as
determined by lot or by auction or by tender or in such manner as may
be provided for in the arrangement, be entitled to the prize amount.
• The Chit Fund companies have been exempted from all the core
provisions of Chapter IIIB of the RBI Act including registration.
• In terms of Miscellaneous Non-Banking Companies (RB) Directions, the
companies can accept deposits up to 25 per cent and 15 per cent from
public and shareholders, respectively, for a period of 6 months to 36
months, but cannot accept deposits repayable on demand/notice.
 Role of NBFCs
• Development of sectors like Transport & Infrastructure
• Substantial employment generation
• Help & increase wealth creation
• Broad base economic development
• Major thrust on semi-urban, rural areas & first time
buyers / user.
• To finance economically weaker sections
 IMPORTANCE OF NBFCs
• In the present economic environment it is very difficult to cater
need of society by Banks alone so role of Non Banking Finance
Companies and Micro Finance Companies become indispensable.
• The role of NBFCs as effective financial intermediaries has been
well recognised as they have inherent ability to take quicker
decisions, assume greater risks, and customise their services and
charges more according to the needs of the clients.
• At present, NBFCs in India have become prominent in a wide
range of activities like hire-purchase finance, equipment lease
finance, loans, investments, etc.
• To help in developing the large number of industries as well as
entrepreneur in different sectors of different areas.
• To cover all the areas which is being untouched or uncovered by
RBI or other FCIs.
 Progress of NBFC
Non Banking Financial companies have made great
progress in the last ten years .At present there are
12,375 NBFCs in india with an assest base of greater
than INR 6.500 billon a growth from 347 billion in
1997-98.NBFC as a whole account for 12.3% of
assets of the total financial system.By focusing on
the Small and Medium Enterprises sector and
growing microfinance,NBFCs are playing a vital role
in furthering the cause of financial institiution
Number of NBFC Registered with the RBI

2006 13014

2009 12968
2012 12809
2014 12740
2016 12630
 Areas
• Focus on SME
• Microfinnace
• To finance economically weaker sections
• Development of sectors like Transport &
Infrastructure Substantial employment
generation Help & increase wealth creation
• Major thrust on semi-urban, rural areas
 Problems Of NBFCs
• 1.The NBFCs area unit allowed to accept/ public deposits for a minimum
amount of twelve months and most amount of sixty months. they not
settle for deposits due on demand.
• 2. NBFCs cannot provide interest rates more than the ceiling rate
prescribed by tally time to time. the current ceiling is twelve percent each
year. The interest could also or combined at rests not shorter than rests.
• 3. NBFCs cannot provide gifts/incentives other extra profit to the
depositors.
 Conti....
• 4. NBFCs (except bound AFCs) ought to have
minimum investment grade credit rating.
• 5.Not all NBFCs can accept deposits. Only those
holding a deposit accepting Certificate of
Registration from the RBI can accept deposits.
• 6. The reimbursement of deposits by NBFCs isn't
secure by tally.
• 7. Certain obligatory disclosures area unit be
created regarding the corporate with the form
issued by the corporate solicit deposits.
 Major NBFCs in India
• Birla Global Finance
• Cholamandalam Investment & Finance Co. Ltd
• First Leasing Company of India
• LIC Housing Finance
• Sundaram Finance
• CanFin Homes
• Countrywide Finance
• Housing Development Finance Company Sakura
Capital India Ltd