What is a Non Banking Financial Company

A Non Banking Financial Company 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 ..contd

 is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

Distinction between a bank and NBFC

NBFCs do not hold banking license and that is why they are different from Banks (i) an NBFC cannot accept demand deposits, except for those who have this authorisation

(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; (iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available for NBFC depositors unlike in case of banks.

Registration / Regulation of NBFC

In 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.

 Certain categories of NBFCs which are regulated by other regulators as Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI Insurance Company holding a valid Certificate of Registration issued by IRDA Nidhi companies as notified under Section 620A of the Companies Act, 1956 Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 Housing Finance Companies regulated by National Housing Bank

Types of NBFCs
Originally, NBFCs registered with RBI were classified as: (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company. However, with effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)

 AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% total income

NBFC and Public Deposits

All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept. Public Deposits can accept/hold public deposits. NBFCs authorized to accept/hold public deposits besides having minimum stipulated Net Owned Fund (NOF) should also comply with the Directions such as investing part of the funds in liquid assets, maintain reserves, rating etc. issued by the RBI

 Under the present norms, the assets financed by NBFCs carry a uniform risk of 100% (regardless of whether the credit is secured or unsecured). Each lending institution (banks or NBFCs) have to allocate certain risk to the credit they extend. These companies have to make a provisioning according to the risk involved. A 100% risk means that the institution would have to make a provisioning of the mandated proportion of loan in their books. This mandated proportion is called the capital to risk weighted asset ratio (CRAR) or capital adequacy ratio (CAR).

 If the risk weight is low, NBFCs will be able to reduce the minimum capital requirement and extend more loans. The minimum money that is set aside is called the capital adequacy ratio (CAR). CAR= Tier One Capital + Tier Two Capital Risk Weighted assets

 Tier I capital is core capital, this includes equity capital and disclosed reserves Tier II capital is secondary bank capital that includes items such as undisclosed reserves, general loss reserves, subordinated term debt, and more. Tier 3 capital debts may include a greater number of subordinated issues, undisclosed reserves and general loss reserves compared to tier 2 capital

An NBFC maintaining required NOF Net Owned Funds /Capital to Risk Assets Ratio (CRAR) and complying with the prudential norms can accept public deposits as follows Finance Company , ** LC/IC = Loan company/Investment Company

* AFC

Asset

Category of NBFC having minimum NOF of Rs 200 lakhs

Ceiling on public deposit

AFC* maintaining CRAR of 15% without 1.5 times of NOF or Rs 10 crore credit rating whichever is less AFC with CRAR of 12% and having minimum investment grade credit rating LC/IC** with CRAR of 15% and having minimum investment grade credit rating

4 times of NOF

1.5 times of NOF

As has been notified on June 17, 2008 the ceiling on level of public deposits for NBFCs accepting deposits but not having minimum Net Owned Fund of Rs 200 lakh is revised as under:
Category of NBFC having NOF more than Rs 25 lakh but less than Rs 200 lakh AFCs maintaining CRAR of 15% without credit rating and AFCs with CRAR of 12% and having minimum investment grade credit rating LCs/ICs with CRAR of 15% and having minimum investment grade credit rating Revised Ceiling on public deposits

Equal to NOF

1.5 times l to NOF

Equal to NOF

NBFCs Regulations which the depositor may note at the times of investment
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:

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. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. NBFCs (except certain AFCs) should have minimum investment grade credit rating. The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI. Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.

 MERCHANT BANKING Merchant banking may be defined as an institution which covers a wide range of activities such as underwriting of shares, portfolio management, project counseling, insurance etcThey render all these services for a fee ORIGIN : The term merchant banking originated from the London who started financing foreign trade through acceptance of bills Later they helped government of under developed countries to raise long term funds Later these merchants formed an association which is now called Merchant Banking and Securities House Association

SERVICES OF MERCHANT BANKERS

PROJECT COUNSELLING : It includes preparation of project reports, deciding upon the financing pattern, appraising the project relating to its technical, commercial and financial viability. It includes filling up of application forms for obtaining funds from financial institutions. LOAN SYNDICATION : Assistance is rendered to raise loans for projects after determining promoters contribution. These loans can be obtained from a single institution or a consortium.

 ISSUE MANAGEMENT : Management of issues involves marketing of corporate securities such as equity shares, preference shares and debentures by offering them to public. Pre-issue activities: They prepare copies of prospectus and send it to SEBI and then file them to Registrar of Companies They conduct meetings with company representatives and advertising agencies to decide upon the date of opening issue, closing issue, launching publicity campaign etc.. They help the companies in fixing up the prices for their issues Post-issue activities: It includes collection of application forms, screening of applications, deciding allotment procedure, mailing of allotment letters, share certificates and refund orders

 UNDERWRITING OF PUBLIC ISSUES : Underwriting is an insurance to the company which makes public issues. Raising of external resources is easy for the issues backed by well known underwriters. MANAGERS,CONSULTANTS OR ADVISERS TO THE ISSUE : SEBI insist that all issues should be managed by at least one authorized merchant banker but not more than two. For an issue of 100 crores, upto a maximum of four merchant bankers shall be appointed. They help in listing of shares in stock exchange, completion of formalities under Companies Act etc..

 PORTFOLIO MANAGEMENT : Portfolio refers to investment in different kinds of securities such as shares, debenture issued by different companies. It is a combination of assets but a carefully blended asset combination. Portfolio management refers to maintaining proper combination of securities in a manner that they give maximum return Investors are interested in safety, liquidity and profitability of his investment but they cant choose the appropriate securities. So merchant bankers help their investors in choosing the shares. They conduct regular market and economic surveys.

 NRI INVESTMENT : NRIs has to follow lots of complicated rules for investing in the shares in India. Merchant bankers help them in choosing the shares and offer expert advice fulfilling government regulations thus mobilizing more resources for corporate sector. ADVISORY SERVICE RELATING TO MERGERS AND TAKEOVERS : Merger is a combination of two or more companies into a singe company where one survives and other loses its existence Takeover is the purchase by one company acquiring controlling interest in the share capital of another company Merchant banker acts as middlemen between offeror and offeree, negotiates mode of payment and gets approval from government.

MERCHANT BANKING REGULATIONS

Certificate from SEBI is a must. They are of four types: Category I merchant bankers : Can act as Issue managers Category II merchant bankers : can act only as co-managers Category III merchant bankers : can act as co-managers but cannot undertake portfolio management Category IV merchant bankers :can merely act as consultant or advisor to issue of capital CAPITAL ADEQUACY NORMS : Category I : Rs. 5 crores Category II : Rs.50 lakhs Category III : Rs.20 lakhs Category IV : Nil