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Presentation on Non Banking Financial Companies Presented By:Ravi Agarwal Mahendra Purohit Ram Dayal Gehlot Shiv Prasad kankani Gajendra Singh Solanki

What is a non-banking financial company (NBFC)?

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NBFC is a company registered under the Companies Act, 1956

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It 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, hirepurchase, insurance business

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It does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property 2

NBFC  The

RBI (Amendment) Act, 1997 defines NBFC as an institution or company whose principle business is to accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner

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Difference between Banks & NBFCs 

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.)

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It is not a part of the payment and settlement system and as such cannot issue cheques to its customers

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Salient features of NBFCs regulations 

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NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11% per annum 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 There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits

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Contd…. 

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Minimum net owned funds of Rs.25 lacs (now 200 lacs) & RBI registration are the entry point norms. The RBI has power to cancel registration of NBFCs NBFCs have to maintain 10 & 15% of their deposits in liquid assets They have to create reserve fund & transfer fund not less than 20% of their net deposits in every year RBI can direct them on issues of disclosures, prudential norms, credit, investment etc. Unincorporated bodies engaged in financial activity cannot accept deposits from the public 6

Categories of NBFC  Equipment

Leasing Company  Hire-Purchase Company  Housing Finance Company  Investment Company  Loan Company  Mutual Benefit Financial Company  Miscellaneous Non Banking Company  Residuary Non Banking Company 7

NBFC registered with RBI

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Asset Finance Company means 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

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Loan companies give short term unsecured loans to wholesale & retail traders, small scale industries & self employed persons

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Hire – purchase credit is loan supplied for the purchases of consumer goods, services & sometimes producer goods & these are liquidated fractionally during the period

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Lease finance enables firms to acquire the economic use of assets for a stated period without owning them 9

NBFCs which are regulated by other regulators  Venture

capital banking  Merchant banking  Insurance companies  Nidhi companies  Housing Finance companies

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VCF are mutual funds or institutional investors which provide risk capital & management and marketing expertise to highly risky & new private businesses, especially in technology – oriented or knowledge intensive industries Function of Merchant Banking is origination, underwritings & distribution of industrial securities Nidhis or Mutual Benefit Funds offer various loan linked saving schemes. The sources of their funds usually come from share capital & fixed/recurring/demand deposits from the members & public 11

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The HUDCO, state housing finance societies, HDFC, commercial banks, housing finance subsidiaries of banks & financial institutions and housing finance companies in the private sector are the main supplier of funds in Housing finance field NHB has been set up as an apex level institution to develop base level housing finance institutions Factors manage the collection of accounts of the business firms & bears the credit risk associated with those accounts 12

Some facts about NBFCs 

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Only those NBFCs holding a valid certificate of registration with authorization to accept public deposits can accept/hold public deposits Nomination facility is available to the depositors of NBFCs If rating of a NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit If a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits 13

Credit Ratings  Credit

ratings are designed for grading debt instruments according to their investment quality  They help investors to manage risk/return trade off  They also help companies & other financial market intermediaries

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NBFCs accepting public deposits should furnish to RBI:

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Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors Statutory annual return on deposits Certificate from the auditors that the company is in a position to repay the deposits as and when the claims arise Quarterly return on liquid assets Half-yearly return on prudential norms 15

Cont…

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Half-yearly ALM return by companies having public deposits of Rs 20 crore and above or with assets of Rs 100 crore and above irrespective of the size of deposits Monthly return on exposure to capital market by companies having public deposits of Rs 50 crore and above A copy of the Credit Rating obtained once a year along with one of the Half-yearly Returns on prudential norms

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THANKS

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