A PROJECT REPORT

ON

NON-BANKING FINANCIAL COMPANIES

IN THE SUBJECT FINANCIAL SERVICE

SUBMITTED TO

UNIVERSITY OF MUMBAI

FOR SEMESTER I OF M.COM (BANKING AND FINANCE)

Page 1

BY

SAYLI SHASHIKANT NAFDE

Roll No. 258

UNDER THE GUIDANCE OF

Prof. / Dr. SEEMA MALANKAR

YEAR 2012 2013

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C E R T I F I C A T E

This is to certify that the project entitled Non-Banking Financial Companies

Submitted by Ms. Sayli Shashikant Nafde Roll No. 258 student of M.Com. (Part-I)
Accountancy / Management / Banking & Finance (University of Mumbai) Semester I
examination has not been submitted for any other examination and does not form a part of
any other course undergone by the candidate. It is further certified that he / she has
completed all required phases of the project. This project is original to the best of our
knowledge and has been accepted for Internal Assessment.

Internal Examiner

External Examiner

Co-ordinator

Principal

College seal

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DECLARATION BY THE STUDENT

I, Sayli Shashikant Nafde student of M.Com. Part-I Banking and Finance, Roll No. 258
hereby declare that the project for the Paper Financial Services titled, Non-Banking Financial
Companies submitted by me to University of Mumbai, Semester I examination during the
academic year 2012-2013, is based on actual work carried by me under the guidance and
supervision of Prof.Dr. Seema Malankar.

I further state that this work is original and not submitted anywhere else for any examination.

Signature of student

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ACKNOWLEDGEMENT

At the beginning, I would like to thank GOD for his shower of blessing. The desire of
completing this project was given by my guide Prof.Dr. Seema Malankar. I am very much
thankful to her / him for the guidance, support and for sparing her / his precious time from a busy
schedule.
I would fail in my duty if I dont thank my parents who are pillars of my life. Finally I would
express my gratitude to all those who directly and indirectly helped me in completing this
project.

(Signature of the student)

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INDEX
CHAPTER

SUBJECT

PAGE NO.

NO.
1

Introduction

6-8

Historical Background

9-11

Meaning, Definition, Factors, and Regulation of NBFCs

12-14

Classification of NBFCs

15-23

Role of NBFCs

24-26

Function of NBFCs

27-28

Commercial Bank v/s Non- Banking Financial Companies

29-30

RBI Guideline for Asset and Liability Management System

31-34

in NBFCs
9

Liquidity Risk Management

35

10

Financial Companies Regulation Bill, 2000

36

11

Appraisal of Financial Companies Regulation Bill,2000

37

12

Norms for NBFCs

38-39

13

Current Status of NBFCs

40-41

14

Financial Linkage Between Bank and NBFCs

42-43

15

List of NBFCs

44

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16

Conclusion

45

17

Bibliography

46

1. INTRODUCTION:
We studied about banks, apart from banks the Indian Financial System has a large number of
privately owned, decentralized and small sized financial institutions known as Non-banking
financial companies. In recent times, the non-financial companies (NBFCs) have contributed to
the Indian economic growth by providing deposit facilities and specialized credit to certain
segments of the society such as unorganized sector and small borrowers. In the Indian Financial
System, the NBFCs play a very important role in converting services and provide credit to the
unorganized sector and small borrowers.

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have grown
rapidly since 1990. They offer attractive rate of return. They are fund based as well as service
oriented companies. Their main companies are banks and financial institutions. According to
RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of India.

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The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the financial system.

NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. They play very crucial role in channelizing the scare financial resources to capital
formation.

NBFCs supplement the role of the banking sector in meeting the increasing financial need of the
corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs
have more flexible structure than banks. As compared to banks, they can take quick decisions,
assume greater risks and tailor-make their services and charge according to the needs of the
clients. Their flexible structure helps in broadening the market by providing the saver and
investor a bundle of services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of the

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organized financial system in India. The Financial System of any country consists of financial
Markets, financial intermediation and financial instruments or financial products. All these Items
facilitate transfer of funds and are not always mutually exclusive. Inter-relationships Between
these are parts of the system e.g. Financial Institutions operate in financial markets and are,
therefore, a part of such markets.

NBFCs at present providing financial services partly fee based and partly fund based. Their fee
based services include portfolio management, issue management, loan syndication, merger and
acquisition, credit rating etc. their asset based activities include venture capital financing,
housing finance, equipment leasing, hire purchase financing factoring etc. In short they are now
providing variety of services. NBFCs differ widely in their ownership: Some are subsidiaries of
large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned
by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers
Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial
institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd (Devdas,
2005).
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings
for rendering other financial services including investment. All such Institutions are financial
intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries
(NBFIs) or Investment Institutions.
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The term Finance is often understood as being equivalent to money. However, final exactly
is not money; it is the source of providing funds for a particular activity. The word system, in the
term financial system, implies a set of complex and closely connected or inter-linked Institutions,
agents, practices, markets, transactions, claims, and liabilities in the Economy. The financial
system is concerned about money, credit and finance. The three terms are intimately related yet
are somewhat different from each other:

Money refers to the current medium of exchange or means of payment.

Credit or loans is a sum of money to be returned, normally with interest; it refers to a

debt
Finance is monetary resources comprising debt and ownership funds of the state,
company or person.

2.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. It was observed that the existing legislative and regulatory
framework required further refinement and improvement because of the rising number of
defaulting NBFCs and the need for an efficient and quick system for Redressal of grievances of
individual depositors. Given the need for continued existence and growth of NBFCs, the need to
develop a framework of prudential legislations and a supervisory system was felt especially
to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to

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review the existing framework and address these shortcomings, various committees were formed
and reports were submitted by them. Some of the committees and its recommendations are given
hereunder:

1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying
the various money circulation schemes which were floated in the country during that time and
taking into consideration the impact of such schemes on the economy, the Committee after
extensive research and analysis had suggested for a ban on Prize chit and other schemes which
were causing a great loss to the economy. Based on these suggestions, the Prize Chits and Money
Circulation Schemes (Banning) Act, 1978 was enacted

2. Dr.A.C.Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee
set out the agenda for reforms in the NBFC sector. This committee made wide ranging

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recommendations covering, inter-alia entry point norms, compulsory registration of large sized
NBFCs, prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit
rating for acceptance of public deposits and more statutory powers to Reserve Bank for better
regulation of NBFCs.

3. Khan Committee (1995)

This Group was set up with the objective of designing a comprehensive and effective supervisory
framework for the non-banking companies segment of the financial system. The important
recommendations of this committee are as follows:
i.

Introduction of a supervisory rating system for the registered NBFCs. The ratings assigned
to NBFCs would primarily be the tool for triggering on-site inspections at various

ii.

intervals.
Supervisory attention and focus of the Reserve Bank to be directed in a comprehensive
manner only to those NBFCs having net owned funds of Rs.100 laths and above.

iii.

Supervision over unregistered NBFCs to be exercised through the off-site surveillance

mechanism and their on-site inspection to be conducted selectively as deemed necessary
depending on circumstances.

iv.

Need to devise a suitable system for co-coordinating the on-site inspection

of the

NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they were
subjected to one-shot examination by different regulatory authorities.
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v.

Some of the non-banking non-financial companies like industrial/manufacturing units

were also undertaking financial activities including acceptance of deposits, investment
operations, leasing etc to a great extent. The committee stressed the need for identifying
an appropriate authority to regulate the activities of these companies, including plantation
and animal husbandry companies not falling under the regulatory control of Either
Department of Company Affairs or the Reserve Bank, as far as their mobilization of public
deposit was concerned.

vi.

Introduction of a system whereby the names of the NBFCs which had not complied with
the regulatory framework / directions of the Bank or had failed to submit the prescribed
returns consecutively for two years could be published in regional newspapers.

4. Narasimha Committee (1991)

This committee was formed to examine all aspects relating to the structure, organization &
functioning of the financial system.

These were the committees which founded non- banking financial companies.

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3.NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy.
They are indispensible part in the Indian financial system because they supplement the activities
of banks in terms of deposit mobilization and lending. They play a very important role by
providing finance to activities which are not served by the organized banking sector. So, most the
committees, appointed to investigate into the activities, have recognized their role and have
recognized the need for a well-established and healthy non-banking financial sector.

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Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
1956

and

is

engaged

in

the

business

of

loans

and

advances,

acquisition of

shares/stock/bonds/debentures/securities issued by Government or local authority or other

securities of like marketable nature, leasing, hire-purchase, insurance business, chit business but
does not include any institution whose principal business is that of agriculture activity,
industrial activity, sale/purchase/construction of immovable property.
Non-banking institution which is a company and which has its principal business of receiving
deposits under any scheme of arrangement or any other manner, or lending in any manner
is also a non- banking financial company.

DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as:

(i)

A non-banking institution, which is a company and which has its principal business the
receiving of deposits under any scheme or lending in any manner.

(ii) Such other non-banking institutions, as the bank may with the previous approval of the
central government and by notification in the official gazette, specify.

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NBFCS provide a range of services such as hire purchase finance, equipment lease finance,
loans, and investments. NBFCS have raised large amount of resources through deposits from
public, shareholders, directors, and other companies and borrowing by issue of non-convertible
debentures, and so on.
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings
for rendering other financial services including investment. All such Institutions are financial
intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries
(NBFIs) or Investment Institutions:

UNIT TRUST OF INDIA.

LIFE INSURANCE CORPORATION (LIC).
GENERAL INSURANCE CORPORATION (GIC).

Factors contributing to the Growth of NBFCs:

According to A.C. Shah Committee, a number of factors have contributed to the growth of
NBFCs. Comprehensive regulation of the banking system and absence or relatively lower degree
of regulation over NBFCs has been one of the main reasons for their growth. During recent years
regulation over their activities has been strengthened, as see a little later.

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The merit of non-banking finance companies lies in the higher level of their customer
orientation. They involve lesser pre or post-sanction requirements, their services are marked with
simplicity and speed and they provide tailor-made services to their clients. NBFCs cater to the
needs of those borrowers who remain outside the purview of the commercial banks as a result of
the monetary and credit policy of RBI. In addition, marginally higher rates of interest on deposits
offered by NBFCs also attract a large number of depositors
Regulation of NBFCs
In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the
maximum amount of deposits, the period of deposits and rate of interest they could offer on the
deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid
assets, creation of reserve funds, and transfer thereto every year a certain percentage of profit,
and so on. These directions and norms were revised and amended from time to time.
In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers to
regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of
registration and have minimum net owned funds. Ceilings were prescribed for acceptance of
deposits, capital adequacy, credit rating and net-owned funds. T he Reserve Bank also developed
a comprehensive system to supervise NBFCs accepting/ holding public deposits.
4. CLASSIFICATION OF NBFCs:
This classification is in addition to the present classification of NBFCs into deposit-taking and
Non-deposit-taking NBFCs. Depending on the nature their major activity, the non-banking

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financial companies can be classified into the following categories, they are:

(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)

Equipment leasing companies.

Hire-purchase finance companies.
Housing finance-companies.
Investments companies.
Loan companies.
Mutual Fund Benefit Companies.
Chit fund companies.
Residuary companies.

Equipment Leasing Company:

(a)

Equipment leasing company means any company which is carrying on the activity of
leasing of equipment, as its main business, or the financing of such activity.

(b)

The leasing business takes place of a contract between the lessor (lessor means the leasing
company) and the lessee (lessee means a borrower).

(c)

Under leasing of equipment business a lessee is allowed to use particular capital equipment,
as a hire, against a payments of a monthly rent.

(d)

Hence, the lessee does not purchase the capital equipment, but he buys the right to use it.

(e)

There are two types of leasing arrangements, they are:

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(i)

Operating leasing: In operating leasing the producer of capital equipment offers his
product directly to the lessee on a monthly rent basis. There is no middleman in
operating leasing.

(ii)

Finance leasing: In finance leasing, the producer of the capital equipment sells the
equipment to the leasing company, then the leasing company leases it to the final user of
the equipment. Hence, there are three parties in finance leasing. The leasing company
acts as a middleman between the producer of equipment and the user of equipment.

Benefits/Advantages of Leasing:

(1)

100% finance:
They borrower in the equipment can get up to 100% finance for the use of capital through
leasing arrangement in the sense, that the leasing company provides the equipment
immediately and the borrower need not pay the full amount at once. Hence, the borrower
can use the amount for fulfilling other needs such as expansion development, etc.

(2)

Payment is easier:
Leasing finance is costlier. However, the borrower finds it convenient (easy) as he has to
pay in installments out of the return from the investment in the equipment. Hence, the

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borrower does not feel the burden of payment.

(3)

Tax concessions:
The borrower can get tax concessions in case of leasing equipments. The total amounts of
rent paid on leased equipment are deducted from the gross income. In case of immediate
purchase, interest on the loan and the depreciation are deducted from the taxable income.

Hire-purchase Finance Companies:

(a)

Hire purchase finance company means any company which is carrying on the main
business of financing, physical assets through the system of hire-purchase.

(b)

In hire-purchase, the owner of the goods hires them to another party for a certain period
and for a payment of certain installment until the other party owns it.

(c)

The main feature of hire-purchase is that the ownership of the goods remains with the
owner until the last installment is paid to him. The ownership of goods passes to the user
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only after he pays the last installment of goods.

(d)

Hire-purchase is needed by farmers, professionals and transport group people to buy

equipment on the basis of hire purchase.

(e)

It is a less risky business because the goods purchased on hire purchase basis serve as
securities till the installment on the loan is paid.

(f)

Generally, automobile industry needs lot hire-purchase finance.

(g)

The problem of recovery of loans does not occur in most cases, as the borrower is able to
pay back the loan out of future earnings through the regular generation of funds out of
the asset purchased.

(h)

In India, there are many individuals and partnership firms doing this business. Even
commercial banks, hire-purchase companies and state financial corporations provide
hire-purchase credit.

Housing Finance Companies:

(a)

A housing finance company means any company which is carrying on its main business
of financing the construction or acquisition of houses or development of land for housing
purposes.

(b)

Housing finance companies also accept the deposits and lend money only for housing
purposes.
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(c)

Even though there is a heavy demand for housing finance, these companies have not
made much progress and as on 31st March, 1990 only 17 such companies here reported
to the RBI.

(d)

The ICICI and the Canara Bank took the lead to sponsor housing finance companies,
namely, Housing Development Corporation Ltd. and the Can fin Homes Ltd.

(e)

All the information about the Housing finance companies is available with the National
Housing Bank. Housing finance companies also have to compulsorily to register
themselves with the Reserve Bank of India.

(f)

National Housing bank is the apex institution in the field of housing. It promotes housing
finance institutions, both on regional and local levels.

Investment Companies:

(a)

Investment company means any company which is carrying on the main business of
securities.

(b)

Investment companies in India can be broadly classified into two types:

(1) Holding Companies:

(i) In case of large industrial groups, there are holding companies which buy shares mainly
for the purpose of taking control over another institution.
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(ii) They normally purchase the shares of the institution with the aim of controlling it rather
than purchasing shares of different companies.
(iii) Such companies are set up as private limited companies.

(2) Other Investment Companies:

(i) Investment companies are also known as Investment trusts.
(ii) Investment companies collect the deposits from the public and invest them in securities.
(iii) The main aim of investment companies is to protect small investors by collecting their
small savings and investing than in different securities so that the risk can be spread.
(iv) An individual investor cannot do all this on his own, due to lack of expertise in
investing. Hence, investing companies are formed for collective investing. Companies
are formed for collective investments of money, mainly of small investors.
(v) Another benefit of an investment company is that it offers trained, experienced and
specialized management of funds.
(vi) It helps the investors to select a financially sound and liquid security.
Liquid security means a security which can be easily converted into cash.
(vii)In India investment trusts are very popular. They help in putting the savings of people
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into productive investments.

(viii)Some of the investment trusts also do underwriting, promoting and holding company
business besides financing.
(ix)These investments trusts help in the survival of business in the economy by keeping the
capital market alive, active and busy.

Loan company:

(a)

A loan company means any company whose main business is to provide finance through
loans and advances.

(b)

It does not include a hire purchase finance company or an equipment leasing company or
a housing finance company.

(c)

Loan company is also known as a Finance Company".

(d)

Loan companies have very little capital, so they depend upon public deposits as their
main source of funds. Hence, they attract deposits by offering high rates of interest.

(e)

Normally, the loan companies provide loans to wholesalers, retailers, small-scale

industries, self-employed people, etc.

(f)

Most of their loans are given without any security. Hence, they are risky.
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(g)

Due to this reason, the loan company charges high rate of interest on its loans. Loans are
generally given for short period of time but they can be renewed.

Mutual Benefit Financial Company:

(a)

They are the oldest form of non-banking financial companies.

(b)

A mutual benefit financial company means any company which is notified under section
620A of the Companies Act, 1956.

(c)

It is popularly known as "Nidhis".

(d)

Usually, it is registered with only very small number of shares. The value of the shares is
often Rs. 1 only

(e)

It accepts deposits from its members and lends only to its members against tangible
securities.
Chit-fund Companies:
History:

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The chit fund schemes have a long history in the southern states of India. Rural unorganized chit
funds may still be spotted in many southern villages. However, organized chit fund companies
are now prevalent all over India. The word is Hindi and refers to a small note or piece of
something. The word passed into the British colonial lexicon and is still used to refer to a small
piece of paper, a child or small girl

How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment. Money can be
readily drawn in an emergency or could be continued as an investment.
Interest rate is determined by the subscribers themselves, based on mutual decisions and varies
from auction to auction.
The money that you borrow is against your own future contributions.
The amount is given on personal sureties too; unlike in banks and other financial institutions
which demand a tangible security.
Chit funds can be relied upon to satisfy personal needs. Unlike other financial institutions, you
can draw upon your chit fund for any purpose - marriages, religious functions, medical expenses,
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just anything...
Cost of intermediation is the lowest.

(a)

Chit funds companies are one of the oldest forms of local non-banking financial
institution in India.

(b)

They are also known as "kuries".

(c)

These institutions have originated from south India and are very popular over there.

(d)

A chit fund organization is an organization of a number of people who join together and
subscribe (contribute) amounts monthly so that any members who is in need of funds can
draw the amount less expenses for conducting the chit. It is an organization run on cooperative basis for the benefit of the members who contribute money, the funds are used
by them as and when a particular member needs it.

(e)

It helps the persons who save money regularly to invest their savings with good chances
of profit.

(f)

Chit funds have many defects as the rate of return given to each member is not the same.

(g)

It differs from person to person, this leads in improper distribution of gains and losses.

(h)

Also, the promoters of these funds do everything for their own benefit to get maximum

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income.
(I)

Hence, the banking commission has made suggestions to pass uniform chit funds laws
for the whole of India.

Residuary Non-banking Companies:

(a)

The term "residue" means a small part of something that remains. As the meaning of the
term shows, a residuary company is one which does not fall in any of the above
categories.

(b)

It generally accepts deposits by operating different schemes similar to recurring deposit

schemes of banks.

(c)

Deposits are collected from a large number of people by promising them that their
money would be invested in banks and government securities

(d)

The collection of deposits is done at the doorsteps of depositors through bank staff, who
is paid commission.

(e)

These companies get the funds at low cost for longer terms, at they invest them in

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investments which generates good amount of return.

(f)

Many of these companies operate with very small amount of capital.

(g)

They have some adverse (bad) features, such as:

(ii)

Some do not submit periodic returns to the regulatory authority.

(iii)

Some of them do not appoint banks, etc.

5. ROLE OF NON- BANKING FINANCIAL COMPANIES.

(1)

Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the utilization of
savings among public. NBFCs are able to reach certain deposit segments such as unorganized
sector and small borrowers were commercial bank cannot reach. These companies encourage
savings and promote careful spending of money without much wastage. They offer attractive
schemes to suit needs of various sections of the society. They also attract idle money by offering
attractive rates of interest. Idle money means the money which public keep aside, but which is
not used. It is surplus money.
(2)

Provides easy, timely and unusual credit:

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NBFCs provide easy and timely credit to those who need it. The formalities and procedures in
case of NBFCs are also very less. NBFCs also provides unusual credit means the credit which
is not usually provided by banks such as credit for marriage expenses, religious functions, etc.
The NBFCs are open to all. Every one whether rich or poor can use them according to their
needs.
(3)

Financial Supermarket:

NBFCs play an important role of a financial supermarket. NBFCs create a financial

supermarket for customers by offering a variety of services. Now, NBFCs are providing a
variety of services such as mutual funds, counseling, merchant banking, etc. apart from their
traditional services. Most of the NBFCs reduce their risks by expanding their range of products
and activities.
(4)

Investing funds in productive purposes:

NBFCs invest the small savings in productive purposes. Productive purposes mean they invest
the savings of people in businesses which have the ability to earn good amount of returns. For
example In case of leasing companies lease equipment to industrialists, the industrialists can
carry on their production with less capital and the leasing company can also earn good amount of
profit.
(5)

Provide Housing Finance:

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NBFCs, mainly the Housing Finance companies provide housing finance on easy term and
conditions. They play an important role in fulfilling the basic human need of housing finance.
Housing Finance is generally needed by middle class and lower middle class people. Hence,
NBFCs are blessing for them.
(6)

Provide Investment Advice:

NBFCs, mainly investment companies provide advice relating to wise investment of funds as
well as how to spread the risk by investing in different securities. They protect the small
investors by investing their funds in different securities. They provide valuable services to
investors by choosing the right kind of securities which will help them in gaining maximum rate
of returns. Hence, NBFCs plays an important role by providing sound and wise investment
advice.

(7)

Increase the Standard of living:

NBFCs play an important role in increasing the standard of living in India. People with lesser
means are not able to take the benefit of various goods which were once considered as luxury but
now necessity, such as consumer durables like Television, Refrigerators, Air Conditioners,
Kitchen equipments, etc. NBFCs increase the Standard of living by providing consumer goods
on easy installment basis. NBFCs also facilitate the improvement in transport facilities through
hire- purchase finance, etc. Improved and increased transport facilities help in movement of

Page 31

goods from one place to another and availability of goods increase the standard of living of the
society.
(8)

Accept Deposits in Various Forms:

NBFCs accept deposits forms convenient to public. Generally, they receive deposits from public
by way of depositor a loaner in any form. In turn the NBFCs issue debentures, units certificates,
savings certificates, units, etc. to the public.
(9)

Promote Economic Growth:

NBFCs play a very important role in the economic growth of the country. They increase the rate
of growth of the financial market and provide a wide variety of investors. They work on the
principle of providing a good rate of return on saving, while reducing the risk to the maximum
possible extent. Hence, they help in the survival of business in the economy by keeping the
capital market active and busy. They also encourage the growth of well- organized business
enterprises by investing their funds in efficient and financially sound business enterprises only.
One major benefit of NBFCs speculative business means investing in risky activities.. NBFCs
play a very positive and active role in the development of our country.
6. FUCTION OF NON BANKING FINANCIAL COMPANIES:(1)

Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various ways such as issue
of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of nbfcs
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are made up of money received from public by way of deposit or loan or investment or any other
form.
(2)

Lending money:

Another important function of nbfcs is lending money to public. Non- banking financial
companies provide financial assistance through.
(a) Hire purchase finance:
Hire purchase finance is given by nbfcs to help small important operators, professionals,
and middle income group people to buy the equipment on the basis on Hire purchase.
After the last installment of Hire purchase paid by the buyer, the ownership of the
equipment passes to the buyer.
(b) Leasing Finance:
In leasing finance, the borrower of the capital equipment is allowed to use it, as a hire,
against the payment of a monthly rent. The borrower need not purchase the capital
equipment but he buys the right to use it.

(c) Housing Finance:

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NBFCs provide housing finance to the public, they finance for construction of houses,
development of plots, land, etc.

(d) Other types of finance provided by NBFCs include:

Consumption finance, finance for religious ceremonies, marriages, social activities,
paying off old debts, etc. NBFCs provide easy and timely finance and generally those
customers which are not able to get finance by banks approach these companies.
(e) Investment of surplus money:
NBFCs invest their surplus money in various profitable areas.

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7.COMMERCIAL BANK VERSUS (V/S) NON-BANKING FINANCIAL COMPANIES

While commercial banks and non-banking financial companies are both financial intermediaries
(middleman) receiving deposits from public and lending them. Commercial bank is called as
Big brother while the NBFC is called as the Small brother. But there are some important
differences between both of them, they are as follows:

No.

Commercial Banks.

Issue of cheques:

Non Bank Financial companies.

In case of commercial banks, a cheque

In case of NBFCs there is no facility to

can be issued against bank deposits.

issue cheques against bank deposits.

Rate of interest:
Commercial bank offer lesser rate of

NBFCs offer higher rate of interest on

interest on deposits and charge less rate

deposits and charge higher rate of interest

of interest on loans as compared to

on loans as compared to Commercial

NBFCs.

banks.

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Facilities provided by them:

Commercial banks can enjoy the benefit

NBFCs are not given such facilities.

of certain facilities like deposit insurance

cover facilities, refinancing facilities, etc.

Law which governs them:

Commercial banks are regulated by

NBFCs are regulated by different

Banking Regulation Act 1949 and RBI.

regulation such as SEBI, Companies Act,

National Housing Bank, Unit Fund Act and
RBI.

Types of assets:
commercial banks hold a variety of

NBFCs specialize in one types of asset.

assets in the form of loans, cash credit,

For e.g.: Hire purchase companies

bill of exchange, overdraft etc.

specialize in consumer loans while

Housing Finance Companies specialize in
housing finance only.

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8. RBI GUIDELINES FOR ASSET-LIABILITY MANAGEMENT (ALM) SYSTEM IN

NBFCS.
This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFCs which form part of the Asset Liability Management
(ALM) function.

This is applicable to all NBFCs and Residuary non-banking companies

meeting the criteria of asset base of Rs.100 crores, whether accepting deposits or not, or
holding public deposits of Rs.20 crores or more. Sl.No. Description / Compliance requirement
Comments.

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As we are aware, the guidelines for introduction of ALM system by banks and all India financial
intuitions have already been issued by Reserve Bank of India and the system has become
operational. Since the operations of financial companies also give rise to Asset Liability
mismatches and interest rate risk exposures, it has been decided to introduce an ALM system for
the NON- Banking Financial Companies (NBFCs) as well, as part of their overall system for
effective risk management in their various portfolios. A copy of the guidelines for Asset Liability
Management (ALM) system in NBFCs is enclosed.
Is

there

an Asset

Liability Committee (ALCO) consisting of the companys senior

management to decide the business strategy of the NBFC.

1.

In the normal course, NBFC'S are exposed to credit and market risks in view of the
asset-liability transportation. With liberalization in Indian financial markets over the last
few years and growing integration of domestic with external markets and entry of MNC's
for meeting the credit needs of not only the corporate but also the retail segments, the
risks associated with NBFC's operations have become complex and large, requiring
strategic management. NBFCs are now operating in a fairly deregulated environment
and are required to determine on their own, interest rates on deposits, subject to the
ceiling of maximum rate of interest on deposits they can offer on deposits prescribed by
the Bank; and advances on a dynamic basis. The interest rates on investments of NBFC's
in Government and other securities are also now market related. Intense pressure on the
management of NBFC's to maintain a good balance among spreads, profitability and
long-term viability. Imprudent liquidity management can put NBFC's earnings and

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reputation at great risk.

2.

NBFC's need to address these risks in a structured manner by upgrading their risk
management and adopting more comprehensive Asset-Liability Management (ALM)
practices than has been done hitherto. ALM, among other function, is also concerned
with risk management and provides a comprehensive and dynamic framework for
measuring, monitoring and managing liquidity and interest rate equity and commodity
price risks of major operators in the financial system that needs to be closely integrated
with the NBFC's business strategy. It involves assessment of various types of risks and
altering the asset-liability portfolio in a dynamic way in order to manage risks.

3.

This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFC's which form part of the Asset-Liability Management
(ALM) function. The initial focus of the ALM function would be to enforce the risk
management discipline i.e. managing business after assessing the risks involved. The
objective of good risk management systems should be that these systems will evolve into
a strategic tool for NBFC's management.

4.

The ALM process rests on three pillars:

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ALM Information Systems

Management Information Systems

Information availability, accuracy, adequacy and expediency

ALM Organization

Structure and responsibilities

level of top management involvement

Risk parameters

Risk identification

Risk management

Risk policies and tolerance levels.

ALM INFORMATION SYSTEMS

ALM has to be support by a management philosophy which clearly specifies the risk policies and
tolerance limits. This framework needs to be built on sound methodology with necessary
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information system as back up. Thus, information is the key to the ALM process. It is, however,
recognized that varied business profiles of NBFC's in the public and private sector do not make
the adoption of a uniform ALM System for all NBFC's feasible.

NBFC's have heterogeneous organizational structures, capital base, asset sizes management
profile, business activities and geographical spread.
ALM ORGANISATION

(a)

Successful implementation of the risk management process would require strong

commitment on the part of the senior management in the NBFC, to integrate basic
operations and strategic decision making with risk management.

(b)

The Asset-Liability Committee (ALCO) consisting of the NBFC's senior management

including Chief Executive Officer (CEO) should be responsible for ensuring adherence
to the limits set by the Board as well as for deciding the business strategy of the NBFC
(on the assets and liabilities sides) in line with the NBFC's budget and decided risk
management objectives.

(c)

The ALM Support Groups consisting of operating staff should be responsible for
analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should also
prepare forecasts (simulations) showing the effects of various possible changes in market
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conditions related to the balance sheet and recommended the action needed to adhere to
NBFC's internal limits.

9. LIQUIDITY RISK MANAGEMENT

Measuring and managing liquidity needs are vital for effective operation of NBFCs. By ensuring
an NBFC's ability to meet its liabilities as they become due, liquidity management can reduce the
probability of an adverse situation developing. The importance of liquidity transcends individual
institution, as liquidity shortfall in one institution can have repercussions on the entire system.
NBFCs management should measure not only the liquidity positions of NBFCs on an ongoing

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basis but also examine how liquidity requirements are likely to involve under different
assumptions.
Experience shows that assets commonly considered as liquid, like Government securities and
other money market instruments, could also become illiquid when the market and players are
unidirectional.

NBFCs holding public deposits are required to invest up to a prescribed percentage (15% as on
date) of their public deposits in approved securities in terms of liquid asset requirement of
section 45-IB of the RBI Act,1934. Residuary Non-Banking Companies (RNBCs) are required to
invest up to 80% of their deposits in a manner as prescribed in the Directions issued under the
said Act. There is no such requirements for NBFCs which are not holding public deposits. Thus
various NBFCs including RNBCs would be holding in their investments portfolio securities
which could be broadly classifiable as 'mandatory securities' (under obligation of law) and other
'non-mandatory securities'.

10.FINANCIAL COMPANIES REGULATION BILL, 2000.

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The Government of India framed the Financial Companies Regulation Bill, 2000 to Consolidate
the law relating to NBFCs and unincorporated bodies with a view to ensured position or
protection. The salient features of this Bill are:
All NBFCS will be known as Financial Companies instead of NBFCs; NBFCs holding public
deposits would not be allowed to carry on any non-Financial business without the prior approval
of RBI; RBI would have the powers to prescribe minimum net-worth norms; unsecured
depositors would have first charge on liquid assets and assets created out of deployment of part
of the reserve fund.
Financial Companies would require prior approval of RBI for any change in name, management
or registered office; Regulation of unincorporated bodies would be in the hands of the respective
State Governments; Penalties have been rationalized with the objective that they should serve as
a deterrent and investigative powers have been vested with District Magistrates and
Superintendents of Police; RBI would be empowered to appoint Special Officer(s) on delinquent
financial companies; Any sale of property in violation of RBI order would be void; The
Company Law Board will continue to be the authority to adjudicate the claims of depositors.
Financial companies would have no recourse to the CLB to seek deferment of the depositors
dues. The Bill has been introduced in Parliament in 2000 and has since been referred to the
Standing Committee on Finance. 8.0 Anomalies in the NBFC regulations.

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11. AN APPRAISAL OF FINANCIAL COMPANIES REGULATION BILL, 2000:

THE UNION Government's move to enact a separate law to regulate and control the nonbanking finance companies (NBFC) sector is indeed laudable, after a large number NBFCs had
failed to repay public deposits, ruining thousands of gullible investors, drawn mainly from the
middle class strata of the society. However, a careful perusal of the new bill, introduced in the
Lok Sabha on December 13, shows that this legislation seeks largely to consolidate into a single
stand-alone enactment the regulatory provisions concerning the NBFC sector already existing in
Chapters 111-B and C of the Reserve Bank of India Act, 1934, (RBI Act), as amended in 1997.
Thus the new law, when enacted, will just be old wine in new bottle.
It was in the wake of the CRB scam that left several thousands of depositors high and dry that
the RBI Act was amended in 1997 to empower, inter alia, the Company Law Board (CLB) to
hear and decide complaints from depositors on defaults committed by financial companies.
However, an objective study will reveal that the RBI (Amendment) Act, 1997, which added
Chapter IR-B to the parent Act, has hardly benefited the depositor fraternity. The winding-up
petition filed against CRB by the RBI under the new provisions in 1997 is still pending with the
Delhi High Court. The perpetrators of the CRB fraud have been bailed out and are scot-free.
Many depositors have been devastated. Justice delayed is indeed justice denied.

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12. NORMS for NBFCS.

In public interest and to regulate the credit system in the best interest of India, the RBI has laid
down the following important norms or rules to be followed by NBFCs accepting public
deposits:
(1)

What constitutes public deposits?

Public deposit includes fixed or recurring deposits which are received from friends, relative,
shareholders of a public limited company and money raised in issued of unsecured debentures or
bond. It does not include money raised from issue of secured debentures and bond or from
borrowings of banks or financial institutions, deposits from directors or inter- corporate deposits
received from foreign national citizens and from shareholders of private limited companies.
(2)

Who is allowed to accept deposits from public?

The NBFCs which have net owned capital of less than Rs. 25 Lakhs will not be permitted to
accept deposit from public. In order to raise funds the NBFC can borrow from some other
sources also.
(3)

NBFCs have to submit financial statements:

All NBFCs will have to submit their annual financial statements and returns if they accept public
deposits.

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(4)

Certain deposits are not regulated by RBI:

The RBI has given directions to NBFCs accepting public deposits to regulate the amount of
deposit, rate of interest, time period of deposits, brokerage and borrowings received by them.
The directions do not include amount received or generated by central bank or state government.
Amount received from IDBI, ICICI Nabard, Electricity Board and IFCI are also not included in
directions of RBI. Amount received from mutual funds, directors of firm and shareholders also
do not come under the category of amount received for regulation from RBI.
(5)

Ceiling (limits on interest):

There is a maximum limit on the rate of interest of deposits. The limit charges with the RBI
directions.
(6)

Period of deposits:

The deposits can be accepted for a minimum period of 12 months and a maximum period of 2
year.
(7)

Register of depositors:

The NBFCs have to maintain a register of depositors with details like name, address, amount,
date of each deposit, maturity period and other details according to the required by RBI.
(8)

Credit rating:

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To protect the public NBFCs are required to get themselves approved by the RBI through credit
rating agencies. The NBFCs which have not owned funds of Rs 25 Lakhs can obtain public
deposits if they are credit rated and they receive a minimum investment grade for their fixed
deposits from an approved rating agency.

13. The current status of Non- Banking Financial Companies.

PRUDENTIAL NORMS:

The Reserve Bank put in place in January 1998 a new regulatory framework involving
prescription of prudential norms for NBFCs which deposits are taking to ensure that these
NBFCs function on sound and healthy lines. Regulatory and supervisory attention was focused
on the deposit taking NBFCs (NBFCs D) so as to enable the Reserve Bank to discharge its
responsibilities to protect the interests of the depositors. NBFCs - D are subjected to certain bank
like prudential regulations on various aspects such as income recognition, asset classification
and provisioning; capital adequacy; prudential exposure limits and accounting / disclosure
requirements. However, the non-deposit taking NBFCs (NBFCs ND) are subject to minimal
regulation.

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The application of the prudential guidelines / limits is thus not uniform across the banking and
NBFC sectors and within the NBFC sector. There are distinct differences in the application of the
prudential guidelines / norms as discussed below:
i)

Banks are subject to income recognition, asset classification and provisioning norms;
capital adequacy norms; single and group borrower limits; prudential limits on capital
market exposures; classification and valuation norms for the investment portfolio; CRR /
SLR requirements; accounting and disclosure norms and supervisory reporting
requirements.

ii)

NBFCs D are subject to similar norms as banks except CRR requirements and
prudential limits on capital market exposures. However, even where applicable, the
norms apply at a rigour lesser than those applicable to banks. Certain restrictions apply
to the investments by NBFCs D in land and buildings and unquoted shares.

iii)

Capital adequacy norms; CRR / SLR requirements; single and group borrower limits;
prudential limits on capital market exposures; and the restrictions on investments in land
and building and unquoted shares are not applicable to NBFCs ND.

iv)

Unsecured borrowing by companies is regulated by the Rules made under the Companies
Act. Though NBFCs come under the purview of the Companies Act, they are exempted
from the above Rules since they come under RBI regulation under the Reserve Bank of
India Act. While in the case of NBFCs D, their borrowing capacity is limited to a

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certain extent by the CRAR norm, there are no restrictions on the extent to which NBFCs
ND may leverage, even though they are in the financial services sector.

14. FINANCIAL LINKAGES BETWEEN BANKS AND NBFC:

Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs offer
products/services which include leasing and hire-purchase, corporate loans, investment in nonconvertible debentures, IPO funding, margin funding, small ticket loans, venture capital, etc.
However NBFCs do not provide operating account facilities like savings and current deposits,
cash credits, overdrafts etc.

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NBFCs avail of bank finance for their operations as advances or by way of banks subscription to
debentures and commercial paper issued by them.
Since both the banks and NBFCs are seen to be competing for increasingly similar types of some
business, especially on the assets side, and since their regulatory and cost-incentive structures are
not identical it is necessary to establish certain checks and balances to ensure that the banks
depositors are not indirectly exposed to the risks of a different cost-incentive structure. Hence,
following restrictions have been placed on the activities of NBFCs which banks may finance:
i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by
NBFCs arising from the sale of
a) Commercial vehicles (including light commercial vehicles); and
b) Two-wheeler and three-wheeler vehicles, subject to certain conditions;
c) Investments of NBFCs both of current and long term nature, in any company/entity by way
of shares, debentures, etc. with certain exemptions;
ii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.
iii) All types of loans/advances by NBFCs to their subsidiaries, group companies/entities.
iv) Finance to NBFCs for further lending to individuals for subscribing to Initial Public
Offerings (IPOs).

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v) Bridge loans of any nature, or interim finance against capital/debenture issues and/or in the
form of loans of a bridging nature pending raising of long-term funds from the market by
way of capital, deposits, etc. to all categories of Non-Banking Financial Companies, i.e.
equipment leasing and hire-purchase finance companies, loan and investment companies,
Residuary Non-Banking Companies (RNBCs).
vi) Should not enter into lease agreements departmentally with equipment leasing companies
as well as other Non-Banking Financial Companies engaged in equipment leasing.

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15. LIST OF NON-BANKING FINANCIAL COMPANIES:

A. R. T. LEASING PRIVATE LIMITED.

ADOR FINANCE LTD.

144, M.C.ROAD, CHENGANNUR.

ADOR HOUSE, 6 K DUBASH MARG

ALAPUZHA DISTRICT

MUMBAI - 400 023

KERALA
AL BARR FINANCE HOUSE LTD

AD-MANUM FINANCE LTD

(FORMERLY KNOWN AS ALBARAKA

5, YESHWANT COLONY,

FINANCE HOUSE LIMITED),

INDORE 452 003 (MP)
INDIA HOUSE NO. 2,
KEMPS CORNER,
MUMBAI 400 036.
ADAYAR FINANCE & LEASING LTD.,

ALPIC FINANCE LTD.,

208, BHARATHI SALAI,

NEW EXCELSIOR BLDG.,

ROYAPETTAH,

6TH FLOOR,

CHENNAI 600 014

WALLACE STREET, FORT,

MUMBAI - 400 001

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ALTA LEASING & FINANCE LTD.

ANMOL FINANCIAL SERVICES LTD

ALTA BHAVAN,

A -66, IST FLOOR,

532, SENAPATI BAPAT MARG DADAR,

GURU NANAK PURA , VIKAS MARG,

MUMBAI - 400 028

DELHI - 110092

ANNA FINANCE LIMITED

ABIRAMI FINANCIAL SERVICES (INDIA)

LTD

16 B/9, DEV NAGAR,

157, HABIBULLAH ROAD, T. NAGAR,

CHENNAI - 600 017

D.B. GUPTA ROAD,

KAROL BAGH,

16. CONCLUSION:
NBFCs are gaining momentum in last few decades with wide variety of products and services.
NBFCs collect public funds and provide loan able funds. There has been significant increase in
such companies since 1990s. They are playing a vital role in the development financial system of
our country. The banking sector is financing only 40 per cent to the trading sector and rest is
coming from the NBFC and private money lenders. At the same line 50 per cent of the credit
requirement of the manufacturing is provided by NBFCs. 65 per cent of the private construction

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activities was also financed by NBFCs. Now they are also financing second hand vehicles.
NBFCs can play a significant role in channelizing the remittance from abroad to states such as
Gujarat and Kerala.
NBFCs in India have become prominent in a wide range of activities like hire purchase finance,
equipment lease finance, loans, investments, and so on. NBFCs have greater reach and flexibility
in tapping resources. In desperate times, NBFCs could survive owing to their aggressive
character and customized services. NBFCs are doing more fee-based business than fund based.
They are focusing now on retailing sector-housing finance, personal loans, and marketing of
insurance. Many of the NBFCs have ventured into the domain of mutual funds and insurance.
NBFCs undertake both life and general insurance business as joint venture participants in
insurance companies. The strong NBFCs have successfully emerged as Financial Institutions in
short span of time and are in the process of converting themselves into Financial Super Market.
The NBFCs are taking initiatives to establish a self-regulatory organization (SRO). At present,
NBFCs are represented by the Association of Leasing and Financial Services (ALFS), Federation
of India Hire Purchase Association (FIHPA) and Equipment Leasing Association of India (ELA).
The Reserve Bank wants these three industry bodies to come together under one roof.
17. BIBLIOGRAPHY
BOOKS:1) Statutory guidances for non- banking financial companies. Taxman.
WEBSITES:-

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www.NBFC.com
www.RBI.com
www. How Stuff Works.com

www. Wikipedia.com

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