nbfc

Non-banking financial companyFrom Wikipedia, the free encyclopedia

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Non-bank financial companies (NBFCs) are financial institutions that

provide banking services without meeting the legal definition of a bank, i.e. one that does not

hold a banking license. Operations are, regardless of this, still exercised under bank regulation.

However this depends on the jurisdiction, as in some jurisdictions, such as New Zealand, any

company can do the business of banking, and there are no banking licenses issued.

Contents

 [hide]

1 Services provided

2 Regulation

3 Classification

4 See also

5 External links

[edit]Services provided

Non-bank institutions frequently

act as suppliers of loans and credit facilities

supporting investments in property

trade money market instruments

fund private education

provide wealth management such as managing portfolios of stocks and shares

underwrite stock and shares, TFCs and other obligations

provide retirement planning

advise companies in merger and acquisition

prepare feasibility, market or industry studies for companies

provide discounting services e.g., discounting of instruments

However they are typically not allowed to take deposits from the general public and have to find

other means of funding their operations such as issuing debt instruments.

[edit]Regulation

For European NBFCs the Payment Services Directive (PSD) is a regulatory initiative from the

European Commission to regulate payment services and payment service providers throughout

the European Union (EU) and European Economic Area (EEA). The PSD describes which type

of organisations can provide payment services in Europe (credit institutions (i.e. banks) and

certain authorities (e.g. Central Banks, government bodies), Electronic Money Institutions (EMI),

and also creates the new category of Payment Institutions). Organisations that are not credit

institutions or EMI, can apply for an authorisation as Payment Institution in any EU country of

their choice (where they are established) and then passport their payment services into other

Member States across the EU.

[edit]Classification

Depending upon their nature of activities, non- banking finance companies can be classified into

the following categories:

1. Development finance institutions

2. Leasing companies

3. Investment companies

4. Modaraba companies

5. House finance companies

6. Venture capital companies

7. Discount & guarantee houses

Non-Banking Financial Companies(NBFCs)30. Recent years have witnessed significantincrease in financial intermediation by the NBFCs.This is reflected in the proposal made by thelatest Working Group on Money Supply for anew measure of liquidity aggregate incorporatingNBFCs with public deposits worth Rs.20 croreand above (Box 3.1). For regulatory purposes,NBFCs have been classified into 3 categories:(a) those accepting public deposits, (b) thosenot accepting public deposits but engaged infinancial business and (c) core investmentcompanies with 90 per cent of their total assetsas investments in the securities of their group/holding/subsidiary companies. The focus ofregulatory attention is on NBFCs accepting publicdeposits.31. As per the NBFC Acceptance of PublicDeposits (Reserve Bank ) Directions, 1998, thequantum of public deposit in respect of NBFCswas linked to credit rating from an approvedagency so as to enable the depositor to makeinformed decision. The NBFCs were alsoencouraged to broad-base their resourcesthrough borrowings from banks and financialinstitutions, inter-corporate deposits/ loans,secured bonds/debentures, etc., which wereexempted from the definition of “public deposit”.However, the Associations of NBFCs and theapex trade bodies brought to the notice of boththe Government and the RBI the problem ofasset-liability mismatches caused by frequentdowngrading of the credit ratings of NBFCs andthe consequent reduction in quantum ofpermissible public deposits. They also suggestedthat smaller NBFCs could be exempted fromthe requirement of credit rating for having publicdeposits upto a particular limit while largerNBFCs could be allowed higher limits of publicdeposits subject to minimum investment gradecredit rating and higher capital adequacyrequirements. The Task Force on NBFCsappointed by the Government of India submittedits report in October, 1998, which recommendedrationalisation of regulations for NBFCs,improvement of the legislative framework forprotecting the interests of depositors anddevelopment of NBFCs on sound and healthylines (Box 3.4). The modified regulatoryframework for NBFCs based on therecommendations made by the Task Forceprovides for the following:—

l NBFCs with net owned fund (NOF) of lessthan Rs. 25 lakh (with or without credit rating)are not entitled to accept public deposits (ashitherto).l The unrated and underrated (rating below theminimum investment grade) NBFCs in thecategory of equipment leasing and hirepurchase finance companies with NOF of Rs.25 lakh and above are allowed to acceptpublic deposits upto 1.5 times of their NOF orRs. 10 crore, whichever is less, provided theirCRAR is 15 per cent or above as per theirlast audited balance sheet.l The unrated and underrated NBFCs in thecategory of loan and investment companies,irrespective of their NOF and CRAR, are notentitled to accept public deposits (as hitherto).l NBFCs in the category of equipment leasingand hire purchase finance companies withNOF of Rs. 25 lakh and above as well asminimum investment grade credit rating canaccept public deposits four times of NOFprovided they have CRAR of not less than 10per cent as on 31.3.1998 and shall have CRARof not less than 12 per cent as on 31.3.1999.l NBFCs in the category of loan and investmentcompanies with NOF of Rs. 25 lakhs and aboveas well as minimum investment grade creditrating can accept public deposits notexceeding 1.5 times of NOF provided theyhave CRAR of 15 per cent or above withimmediate effect.l NBFCs in the category of equipment and hirepurchase companies should endeavour toincrease their CRAR to 15 per cent as earlyas possiblel NBFCs in the category of loan and investmentcompanies which do not have minimum CRARof 15 per cent as on date but otherwisecomply with all the prudential norms and (a)have credit rating of AAA may accept or renewpublic deposits upto the level outstanding asat the close of business on December 18,1998 or 1.5 times of the NOF whichever ismore subject to the condition that they shouldattain CRAR of 15 per cent by March 31,2000 and bring down the excess deposits, ifany, by December 31, 2001 and (b) havecredit rating of AA/A may accept or renewpublic deposits as per the existing provisionsof Directions (0.5/1.0 time of their NOF) butBOX 3.4Major Recommendations of the Task Force on NBFCs

The Task Force on Non-banking Finance Companies (NBFCs) submitted its report on October 28, 1998. Themajor recommendations are as under:—l The rising number of defaulting NBFCs and the need for a quick redressal system call for change in the existinglegislative and regulatory framework for NBFCs.l Extension of the period for attaining minimum Net Owned Funds (NOF) beyond three years (January 2000)should be made conditional on adequate steps having been taken by the concerned NBFCs. Also, the minimumprescribed NOF of Rs. 25 lakh be considered for upward revision.l The Reserve Bank of India should draw up a time bound programme for disposal of applications for registrationof NBFCs and keep States informed of registration granted/rejected in respect of NBFCs in the respectiveStates.l Higher CRAR of 15 per cent for NBFCs seeking public deposits without credit rating be prescribed by RBI, asagainst existing 12 per cent for rated NBFCs.l Ceilings for exposures to real estate sector and investment in capital market, especially unquoted shares, beprescribed by the Reserve Bank of India.l The Reserve Bank of India may stipulate 25 per cent of reserves of NBFCs to be invested in marketablesecurities in addition to SLR securities already held by them.l The following ceilings may be prescribed for public deposits in respect of different categories of NBFCs.Type of NBFC Limit of Public DepositsNBFC with NOF No access to publicless than Rs. 25 lakh depositsEL/HP Company without 1.5 times NOF or Rs. 10 crore,credit rating whichever is lower, subject to 15 per cent CRAREL/HP Company with 4 times NOFinvestment grade credit ratingLoan/Investment Cos with 1.5 times NOFinvestment Grade credit rating (Higher CRAR of 15 per cent)l Prescription of a suitable ratio between secured and unsecured deposits for NBFCs to be preceded by measuresto ease flow of bank credit to them.l Liquid asset ratio to be increased from existing 12.5 per cent to 25 per cent of public deposit in a phasedmanner. Also, statutory provision be made to give to unsecured depositors first charge on liquid assets.l Depositors’ grievance redressal authority with specified territorial jurisdiction be appointed by the RBI with thehelp of the office of the Banking Ombudsman available in several states.l Separate instrumentality for regulation and supervision of NBFCs be set up under the aegis of the RBI andentrusted under one Executive Director/supervised by a Deputy Governor.l Strengthen the off-site surveillance mechanism to identify/control NPAs; sensititve market intelligence system bedeveloped to trigger on site inspection, to be followed by appropriate regulatory response.l Deposit taking by unregistered NBFCs be made a cognisable offence; State governments should set up specialinvestigation wings for enforcing this provisions.l Unauthorised deposit taking by unincorporated financial intermediaries should also be made a cognisableoffence. State Governments should quickly enact legislation on the lines of the Tamil Nadu legislation.they should attain the minimum CRAR of 15per cent on or before March 31, 2000 as pertheir audited balance sheet, failing which theyshould regularise their position by repaymentor otherwise by December 31, 2001.l The above benefit will not be available tothose companies whose CRAR is presently15 per cent and above but slips down belowthe minimum level of 15 per centsubsequently.l The disclosure norms for NBFCs acceptingpublic deposits have been widened so as toenable depositors to make an informeddecision.l Stipulations on prudential norms, ceiling oninterest rates, payment of brokerage on publicdeposits, etc. remain unchanged.l NBFCs have been advised not to invest morethan 10 per cent of their owned fund in land

and building except for their own use. Theceiling on investment in unquoted shares ofcompanies other than their group/subsidiarycompanies has been fixed at 10 per cent oftheir owned fund for equipment leasing andhire purchase finance companies and 20 percent of the owned fund for loan andinvestment companies. A time limit of 3 yearshas been given to the NBFCs to dispose offexcess of such assets, including the assetsacquired in satisfaction of their debts, wherevercompany surpasses the ceiling indicatedabove.l The unincorporated bodies engaged in thebusiness of a non-banking financial institutionare not allowed to accept deposits except fromrelatives specified and in the mannerprescribed in the provision of Section 45-S ofthe RBI Act. However, such entities are nowallowed to access loans from bodies with acorporate identity including NBFCs.Accordingly, the deposits from (a) thecompanies incorporated under the CompaniesAct; (b) Corporations established under anyStatue; and (c) the Cooperative Societiesregistered under any State Law, have beenexempted from the definition of 'deposit' underthe RBI Act. Individuals, firms, associations ofpersons, Hindu Undivided Families andPartnership firms may accept deposit fromthe above mentioned corporate entities alsofor the purpose of their financial business.

250Manual on Financial and Banking StatisticsThe activities of non-banking financial companies(NBFCs) in India have undergone qualitativechanges over the years through functionalspecialisation. The role of NBFCs as effectivefinancial intermediaries has been well recognisedas they have inherent ability to take quickerdecisions, assume greater risks, and customisetheir services and charges more according to theneeds of the clients. While these features, ascompared to the banks, have contributed to theproliferation of NBFCs, their flexible structuresallow them to unbundle services provided bybanks and market the components on acompetitive basis. The distinction between banksand non-banks has been gradually gettingblurred since both the segments of the financialsystem engage themselves in many similar typesof activities. At present, NBFCs in India havebecome prominent in a wide range of activitieslike hire-purchase finance, equipment leasefinance, loans, investments, etc. By employinginnovative marketing strategies and devisingtailor-made products, NBFCs have also been ableto build up a clientele base among thedepositors, mop up public savings and commandlarge resources as reflected in the growth of theirdeposits from public, shareholders, directors andother companies, and borrowings by issue ofnon-convertible debentures, etc. Consequently,the share of non-bank deposits in householdsector savings in financial assets, increased from3.1 per cent in 1980-81 to 10.6 per cent in 1995-96. In 1998, the definition of public deposits wasfor the first time contemplated as distinct fromregulated deposits and as such, the figuresthereafter are not comparable with those before.6. NON-BANKING FINANCIAL COMPANIESThe importance of NBFCs in delivering credit to theunorganised sector and to small borrowers at thelocal level in response to local requirements is wellrecognised. The rising importance of this segmentcalls for increased regulatory attention and focusedsupervisory scrutiny in the interests of financialstability and depositor protection (Box 6.1).In response lo the perceived need for betterregulation of the NBFC sector, the Reserve Bankof India (RBI) Act, 1934 was amended in 1997,providing for a comprehensive regulatoryframework for NBFCs. The RBI (Amendment) Act,1997 conferred powers on the RBI to issuedirections to companies and its auditors, prohibitdeposit acceptance and alienation of assets bycompanies and initiate action for winding up ofcompanies. The Amendment Act provides for

compulsory registration with the RBI of allNBFCs, irrespective of their holding of publicdeposits, for commencing and carrying onbusiness of a non-banking financial institution;minimum entry point norms; maintenance of aportion of deposits in liquid assets; and creationof reserve fund and transfer of 20 per cent ofprofit after tax but before dividend annually tothe fund. Accordingly, to monitor the financialhealth and prudential functioning of NBFCs, theRBI issued directions to companies on:acceptance of public deposits; prudential normslike capital adequacy, income recognition, assetclassification, provisioning for bad and doubtfulassets, exposure norms and other measures.Directions were also issued to the statutoryauditors to report non-compliance with the RBIAct and regulations to the RBI, and Board ofDirectors and shareholders of the NBFCs.Box 6.1: An Overview of Regulation of NBFCs(1) MissionTo ensure that_ the financial companies function on healthylines,these companies function in consonance(3) Basic Structure of Regulatory andSupervisory FrameworkPrescription of prudential norms akin to thoseapplicable to banks,Submission of periodical returns forthe purpose of off-site surveillance,251Non-Banking Financial Companies6.1. Non-Banking Financial EntitiesRegulated by the RBIThe developments in the NBFC sector in termsof policies and performance during 2001-02 andfor the subsequent periods (to the extentinformation is available) are discussed in thesubsequent paragraphs.Non-banking financial entities partially or whollyregulated by the RBI include: (a) NBFCscomprising equipment leasing (EL), hire purchasefinance (HP), loan (LC), investment (1C) (includingprimary dealers3 (PDs)) and residuary nonbanking(RNBC) companies; (b) mutual benefitfinancial company (MBFC), i.e. nidhi company;(c) mutual benefit company (MBC), i.e. potentialnidhi company; (d) miscellaneous non-bankingcompany (MNBC), i.e. chit fund company (Table6.1).Box 6.1: An Overview of Regulation of NBFCs (Concld.)with the monetary policy framework, so thattheir functioning does not lead to systemicaberrations,the quality of surveillance and supervision

exercised by the RBI over the NBFCs keepspace with the developments in this sector.comprehensive regulation and supervisionof Asset liability and risk managementsystem for NBFCs,(2) Amendments to the Reserve Bank ofIndia (RBI) Act, 1934RBI Act was amended in January 1997providing for, inter alia.Entry norms for NBFCs and prohibition ofdeposit acceptance (save to the extentpermitted under the Act) by unincorporatedbodies engaged in financial business,Compulsory registration, maintenance ofliquid assets and creation of reserve fund,Power of the RBI to issue directions to anNBFC or to the NBFCs in general or to aclass of NBFCs.Comprehensive regulation and Supervisionof deposit taking NBFCs and limitedsupervision over those not accepting publicdeposits.Supervisory framework comprising (a) on-siteinspection (CAMELS pattern) (b) off-sitemonitoring through returns (c) marketintelligence, and (d) exception reports bystatutory auditors,Punitive action like cancellation of Certificateof Registration (CoR), prohibition fromacceptance of deposits and alienation of assets,filing criminal complaints and winding uppetitions in extreme cases, appointment of theRBI observers in certain cases, etc.Co-ordination with State Governments to curbunauthorised and fraudulent activities, trainingprogrammes for personnel of NBFCs, StateGovernments and Police officials.(4) Other steps for protection ofdepositors’ interestPublicity for depositors’ education andawareness, workshops / seminars for trade andindustry organisations, depositors’ associations,chartered accountants, etc.252Manual on Financial and Banking Statistics6.2. RegistrationIn terms of the RB1 Act, 1934, registration ofNBFCs with the RBI is mandatory, irrespectiveof whether they hold public deposits or not. Theamended Act (1997) provides an entry pointnorm of Rs. 25 lakh as the minimum net ownedfund (NOF), which has been revised upwards toRs.2 crore for new NBFCs seeking grant of CoRon or after April 21, 1999. Certain types offinancial companies, viz., insurance companies,housing finance companies, stock broking

companies, chit fund companies, companiesnotified as ‘nidhis’ under Section 620A of theCompanies Act, 1956 and companies engagedin merchant banking activities (subject to certainconditions), however, have been exempted fromTable 6.1: Types of Non-Banking Financial Entities (Regulated by RBI)Non-Banking Financial Entity Principal Business1. Non-Banking Financial Company In terms of the Section 45-l(f) read with Section 45-i(c) of the RBIAct, 1934, as amended in 1997, their principal business is thatof receiving deposits or that of a financial institution, such aslending, investment in securities, hire purchase finance orequipment leasing.(a) Equipment leasing company (EL) Equipment leasing or financing of such activity.(b) Hire purchase finance company (HP) Hire purchase transactions or financing of such transactions.(c) Investment company (1C) Acquisition of securities. These include Primary Dealers (PDs) whodeal in underwriting and market making for government securities.(d) Loan company (LC) Providing finance by making loans or advances, or otherwise forany activity other than its own; excludes EL/HP/Housing FinanceCompanies (HFCs).(e) Residuary non-banking company Company which receives deposits under any scheme or(RNBC) arrangement by whatever name called, in one lump-sum or ininstalments by way of contributions or subscriptions or by sale ofunits or certificates or other instruments, or in any manner. Thesecompanies do not belong to any of the categories as stated above.II. Mutual Benefit Financial Company Any company which is notified by the Central Government as a(MBFC) i.e., Nidhi Company Nidhi Company under section 620A of the Companies Act, 1956(1 of 1956)III. Mutual Benefit Company A company which is working on the lines of a Nidhi company(MBC), i.e., potential Nidhi company but has not yet been so declared by the Central Government,has minimum net owned fund(NOF) of Rs.10 lakh, has appliedto the RB1 for CoR and also to Department of Company Affairs(DCA) for being notified as Nidhi company and has notcontravened directions/ regulations of RBI/DCA.IV. Miscellaneous non-banking company Managing, conducting or supervising as a promoter, foreman or(MNBC), Managing, Conducting or agent of any transaction or arrangement by which the companysupervising as a promoter, foreman enters into an agreement with a specified number of subscribersori.e., Chit Fund Company that every one of them shall subscribe a certain sum ininstalments over a definite period and that every one of suchsubscribers shall in turn, as determined by tender or in suchmanner as may be provided for in the arrangement, be entitledto the prize amount.253Non-Banking Financial Companiesthe requirement of registration under the RBIAct, as they are regulated by other agencies.Accordingly, as at the end of March 2006, RBIreceived 38214 applications of which 13873 wereapproved and 24134 were rejected. The rest ofthe applications are pending at different stagesof processing. Of the total approvals, only 434companies have been permitted to accept/ holdpublic deposits. Moreover, all NBFCs holdingpublic deposits, whose applications for Certificateof Registration (CoR) have been rejected or CoRshave been cancelled, have to continue repayingthe deposits on due dates and dispose of theirfinancial assets within three years from the dateof rejection of application/ cancellation ofcertificate or convert themselves into nonbanking

non-financial companies within thesame period.6.3. SupervisionThe RBI has instituted a strong andcomprehensive supervisory mechanism forNBFCs. The focus of the RBI is on prudentialsupervision so as to ensure that NBFCs functionon sound and healthy lines and avoid excessiverisk taking. The RBI has put in place a fourpronged supervisory framework based on:i. On-site inspection;ii. Off-site monitoring supported by state-oftheart technology;iii. Market intelligence; andiv. Exception reports of statutory auditors ofNBFCs.The thrust of supervision is based on the assetsize of the NBFC and whether it accepts/ holdsdeposits from the public. The system of on-siteexamination put in place during 1997 isstructured on the basis of assessment andevaluation of CAMELS (Capital, Assets,Management, Earnings, Liquidity, and Systemsand Procedures) approach and the same is akinto the supervisory model adopted by the RBI forthe banking system. Market intelligence systemis also being strengthened as one of theimportant tools of supervision. This process ofcontinuous and on-going supervision is expectedto facilitate RBI to pick up warning signals,which can result in triggering supervisory actionpromptly. The returns being submitted by theNBFCs arc reviewed and re-looked at intervalsto widen the scope of information so as toaddress the requirements either for supervisoryobjectives or for furnishing the same to variousinterest groups on the important aspect of theworking of these companies. The companies notholding public deposits arc supervised in alimited manner with companies with asset sizeof Rs.100 crore and above being subjected toannual inspection and other non-public depositcompanies by rotation once in every 5 years.The exception reports, if any, from the auditorsof such companies coupled with adverse marketinformation and the sample check at periodicalintervals are the main tools for monitoring theactivities of such companies vis-à-vis the RBIregulations.6.4. Policy DevelopmentsThe RBI introduced a number of measures toenhance the regulatory and supervisorystandards of this sector, to bring them on parwith commercial banks over a period of time.The regulatory norms, applicable to NBFCs arepresented in Box 6.2. Regulatory measures

adopted during the year aim at aligning theinterest rates in this sector with the ratesprevalent in the rest of the economy, tighteningprudential norms, standardising operatingprocedures and aligning the RBI’s regulationswith the requirements of the amendedCompanies Act.Directions applicable to NBFCsThe RBI has issued comprehensive depositacceptance and asset side regulations as underfor the NBFCs.While all the prudential norms are applicable topublic deposit accepting/holding NBFCs only,some of the regulations are applicable to nondepositaccepting companies.254Manual on Financial and Banking StatisticsBox 6.2: Regulatory Norms and Directions for NBFCs A. Important Statutory Provisions ofChapter III B of the RBI Act as applicable to NBFCsSr.No. Subject Particulars1. Certificate of Registration No company, other than those exempted by the RBI, cancommence or ea the business of non-banking financial institutionwithout obtaining a CoR RBI. The pre-requisite for eligibility forsuch a CoR is that the NBFC f have a minimum NOF of Rs. 25lakh (since raised to Rs. 2 crore on and April 21, 1999 for anynew applicant NBFC). The RBI considers grant CoR after satisfyingitself about the company’s compliance with the c enumerated inSection 45-1A of the RBI Act2. Maintenance of Liquid Assets NBFCs have to invest in unencumbered approved securities,valued at a not exceeding current market price, an amount which,at the close of business on any day, shall not be less than 5.0per cent but not exceeding 25.0 per cent specified by RBI, of thedeposits outstanding at the close of business on the working dayof the second preceding quarter.3. Creation of Reserve Fund Every non-banking financial company shall create a reserve fundand transfer thereto a sum not less than 20.0 per cent of its netprofit every year as disi in the profit and loss account and beforeany dividend is declared. Such fund to be created by every NBFCirrespective of the fact whether it accepts] deposits or not. Further,no appropriation can be made from the fund ft purpose withoutprior written approval of RBI.(1) Deposit Acceptance Related Regulations1 Ceiling on quantum of public Loan and investment companies - 1.5 times of NOF if the companydeposits has NOF of Rs. 25 lakh, minimum investment grade (MIG) creditrating, complies with all the prudential norms and has CRAR of15 per cent.Equipment leasing and hire purchase financecompanies - if company has NOF of Rs. 25 lakh and complieswith all the prudential norms.i. with MIG credit rating and 12 per cent CRAR - 4 times ofNOFii. without MIG credit rating but CRAR 15 per cent or above -1.5 times of NOF, or Rs. 10 crore, whichever is less.2 Investment in liquid assets NBFCs - 15 per cent of outstanding public deposit liabilities asat the close of business on the last working day of the secondpreceding quarter, of whichi. not less than 10 per cent in approved securities andii. not more than 5 per cent in term deposits with scheduledcommercial banks.Directions for investments by RNBCs were rationalized in June2004 with a view to reducing the overall systemic risk in the

financial sector and safeguarding the interest of the depositors.In this regard the following roadmap was prescribed:a) From the quarter ended June 2005 and onwards, RNBCs werepermitted to invest only to the extent of 10% of the AggregatedLiabilities to Depositors (ALDs) as at the second precedingquarter or one time of their Net Owned Funds, whichever is255Non-Banking Financial Companieslower, in the manner which in their opinion of the companyis safe as per approval of its Board of Directors.b) From the quarter ended June 2006 onwards, this limit wouldstand abolished and RNBCs would not be permitted to investany amount out of ALDs as per their discretion. However, toavoid strain, in complying with 100% directed investmentsby companies, the same had been modified to 95% of ALDup to March 31, 2007 and 100% of ALD thereafter. Theseliquid asset securities are required to be lodged with one ofthe scheduled commercial banks or Stock Holding Corporationof India Ltd.. or a depository or its participant (registeredwith SEB1).Effective October 1, 2002, government securitiesare to be necessarily held by NBFCs either in Constituent’sSubsidiary General Ledger Account with a scheduledcommereial bank or in a demat account with a depositoryparticipant registered with SEBI.These securities cannot bewithdrawn or otherwise dealt with for any purpose other thanrepayment of public deposits.3 Period of Deposits No demand depositsNBFCs – 12 to 60 monthsRNBCs – 12 to 84 monthsMNBCs (chit Funds) – 6 to 36 months4 Ceiling of deposit rate NBFCs, MNBCs and Nidhis - 11.0 per cent per annum (effectiveMarch 4,2003)RNBCs - Minimum interest of 4.0 per cent on daily deposits and6.0 per cent on other than daily deposits.Interest may be paid orcompounded at periods not shorter than monthly rests.5 Advertisement methodology for Every company which accepts deposits by advertisement has toacceptance of deposits/public comply with the advertisement rules prescribed in this regard,deposits the deposit acceptance form should contain certain prescribedinformation ,issue receipt for deposits and maintain a depositregister. etc.6 Submission of returns All NBFCs holding or accepting public deposits have to submitperiodical returns to RBI at Quarterly, half yearly and annualintervals.(2) Prudential Norms applicable to only those NBFCs which are accepting/holding public deposits1 Capital to Risk Assets Ratio The NBFCs holding/accepting public deposits are required to(CRAR) maintain CRAR as under:i. Equipment leasing companies/hire purchase financecompanies (with MIG credit rating) 12 percentii. Equipment leasing companies/hire purchase financecompanies (without MIG credit rating) 15 percentiii. Loan/investment companies 15 percentiv. RNBCs 12 per centCRAR comprises – tier I and tier II capitalTo be maintained on adaily basis and not merely on the reporting dates.Tier I Capital –core capital or NOF but includes compulsorily convertiblepreference shares (CCPS) as a special case for CRAR purposes.TierII Capital – all quasi-capital like preference shares (other thanCCPS) subordinated debt, convertible debentures, etc.Tier III256Manual on Financial and Banking StatisticsCapital not to exceed tier I capitalGeneral provisions and lossreserves not to exceed 1.25 per cent of the risk – weighted

assets.Subordinated debt issued with original tenor of 60 monthsor more.2 Restrictive norms Acceptance of public deposits not allowed if the prudential normsare not complied with fully.Any NBFC defaulting in repayment of the matured depositsprohibited from creating any further assets until the defaults arerectifiedInvestments in real estate, except for own use, restricted to 10per cent of the owned fund.Investments in unquoted sharesrestricted as under:EL/HP Companies 10 percent of ownedfundLoan/investment companies 20 per cent of ownedfundNo further investments in real estate or unquoted shares in caseof excess position held till its regularisation.Sufficient adjustment period allowed - further extension on meritsof each case.3 Credit/investment concentration Single borrower exposure limits credit - 15 percent of ownednorms fundInvestments - 15 percent of ownedfundSingle group of borrower exposure 25 percent of ownedlimits credit - fundComposite (credit and investments) exposure limitsSingle borrower 25 percent of ownedfundSingle group of borrowers 40 percent of ownedfund_ Exposure norms also applicable to own group companies andsubsidiaries._ Includes all forms of credit and credit related and certainother receivables as also off balance sheet exposures._ Debentures/bonds to be treated as credit for the purpose ofprudential norms but as investments for the purpose ofbalance sheet and compliance with investment obligations.4 Reporting System: Half yearly Half-yearly returns to be submitted as at the end of March andreturn September every year,_ Time allowed for submission - 3 months from the due date,_ The return to be certified by the statutory auditors of thecompany. However, it need not wait for audit and the figuresfurnished therein could be the unaudited figures but mustbe certified by auditors(3) Prudential Norms applicable to all NBFCs irrespective of whether they accept/hold public deposits or not1 Income Recognition Norms The recognition of income on the NPA is allowed on cash basis only.Theunrealised income recognised earlier is required to be reversed.257Non-Banking Financial Companies2 NPA norms Recognition of income on accrual basis before the asset becomesNPA as under:Loans and Advances: Upto 6 months and 30 dayspast due period (past due period done away with effect from March31, 2003) Lease and Hire Purchase Finance: 12 months3 Restrictive Norms Loans against own shares not allowed4 Policy on demand/call loans Companies to frame a policy for demand and call loans relatingto cut-off date for recalling the loans, the rate of interest,periodicity of such interest, periodical reviews of such performance,etc.5 Accounting Standards All the Accounting Standards and Guidance Notes issued byInstitute of Chartered Accountants of India (ICAl) are applicableto all NBFCs in so far as They are not inconsistent with theguidelines of RBI.6 Accounting for investments All NBFCs to have a well defined investment policy.Investments classified into two categories - (1) long term and (ii)

current investments.Long term investments to be valued as per Accounting Standard,issued by ICAI.Current investments to be classified into - (a) quoted and (b)unquoted.Current quoted investments to be valued at lower of cost or marketvalue.Block valuation permitted - Notional gains or losses within theblock permitted to be netted - but not inter-block, net notionalgains to be ignored but notional losses to be provided for.Valuation norms for current unquoted investments are as under:i. Equity shares (at lower of cost or break up value or fair value)ii. Re I/- for the entire block of holding if the balance sheet ofthe investee company is not available for the last two yearsiii. Preference shares at lower of cost or face valueiv. Government securities at carrying costv. Mutual Fund units at net asset value (NAV) for each schemeandvi. Commercial paper (CP) at its carrying cost7 Asset Classification All forms of credit (including receivables) to be classified into fourcategories -_ Standard asset_ Sub-standard asset_ Doubtful asset_ Loss asset8 Provisioning for Non-Performing Standard assets - No provisionSub-Assets – Loans and Advances standard assets- 10 per cent of outstanding balanceDoubtful assets - on unsecured portion 100 per cent and onsecured portion 20, 30 and 50 per cent depending on the age ofthe doubtful assetsLoss asset - 100 per cent of the outstanding258Manual on Financial and Banking Statistics9 Provisioning for Non-Performing _ Unsecured portion to be fully provided forAssets – Equipment Lease and _ Further provisions on net book value (NBV) of EL/HP assetsHire Purchase accounts _ Accelerated additional provisions against NPAsNPA for 12months or more but less than 24 months 10 per cent ofNBVNPA for 24 months or more but less than 36 months 40per cent of NBVNPA for 36 months or more but less than 48months 70 per cent of NBVNPA for 48 months or more 100per cent of NBVValue of any other security considered onlyagainst additional provisions.Rescheduling in any manner willnot upgrade the asset upto 12 months of satisfactoryperformance under the new terms.Repossessed assets to betreated in the same category of NPA or own assets - optionlies with the company.10 Risk – Weights and Credit _ Risk - weights to be applied to all assets except intangibleConversion factors assets._ Risk - weights to be applied after netting off the provisionsheld against relative assets._ Risk - weights are 0, 20 and 100._ Assets deducted from owned fund like exposure to subsidiariesor companies in the same group or intangibles to be assigned0 per cent risk - weight._ Exposures to all-India financial institutions (AIFIs) at 20 percent risk -weight and all other assets to attract 100 per centrisk - weights._ Off-balance sheet items to be factored at 50 or 100 and thenconverted for risk - weight.11 Disclosure requirements 1. Every NBFC is required to separately disclose in its balancesheet the provisions made as outlined above without nettingthem from the income or against the value of assets.

2. The provisions shall be distinctly indicated under separateheads of accounts as under:i. provisions for bad and doubtful assets; andii. provisions for depreciation in investments.3. Such provisions shall not be appropriated from the generalprovisions and loss reserves held, if any, by the NBFC.4. Such provisions for each year shall be debited to the profitand loss account. The excess of provisions, if any, held underthe heads general provisions and loss reserves may be writtenback without making adjustment against them.5. Nidhis and Chit Fund companies exempted.6.5 Interest RatesKeeping in view interest rates prevalent in thefinancial sector, the ceiling on interest rates ondeposits payable by NBFCs, including chit fundcompanies and nidhi companies, was reducedfrom 16 per cent per annum to 14 per cent perannum effective April 1, 2001 and further to 12.5per cent per annum effective November 1, 2001and further to 11% effective from March 2003.6.6. Classification of NBFCs as EquipmentLeasing and Hire Purchase FinanceCompaniesIn response to representations from NBFCs, itwas decided to include loans and advancesagainst hypothecation of automobiles, aircraftsand ships registered with the specifiedauthorities in the aggregate of equipment leasingand hire purchase assets for the purpose of259Non-Banking Financial Companiesclassification of an NBFC into equipment leasingand hire purchase finance company.6.7. Alignment of the RBI’s Regulationswith Companies (Amendment)Act, 2000Changes were effected in the RBI directions toNBFCs to align with those contained in theCompanies Act, 1956, as amended by theCompanies (Amendment) Act, 2000. Accordingly,all NBFCs were advised to report to the CompanyLaw Board the defaults, if any, in repayment ofmatured deposits or payment of interest to smalldepositors within 60 days of such default. Inaddition to NBFCs with asset size of Rs.50 croreand more, those with paid up capital of not lessthan Rs.5 crore have to constitute AuditCommittees. Such committees would have thesame powers, functions and duties as laid downin Companies Act, 1956. Moreover, some NBFCs,which were hitherto private limited companiesholding public deposits, have now become publiclimited companies under the Companies Act.Such NBFCs have to approach the RBI afterobtaining a fresh certificate of incorporation fromthe Registrar of Companies, for change of namein the CoR to reflect their status as public limited

companies.6.8. Liquid Asset Securities of NBFCsEffective from October 1, 2002, all NBFCs shouldnecessarily hold their investments in governmentsecurities either in Constituent’s SubsidiaryGeneral Ledger Account (CSGL) with a scheduledcommercial bank or Stock Holding Corporationof India Ltd. (SHCIL) or in a dematerialisedaccount with depositories [National SecuritiesDepository Ltd. (NSDL)/ Central DepositoryServices (India) Ltd. (CDSL)] through a depositoryparticipant registered with SEBI. The facility ofholding government securities in physical form,therefore, stands withdrawn. Governmentguaranteed bonds, which have not beendematerialised may be kept in physical form tillsuch time these are dematerialised. Only oneCSGL or a dematerialised account can be openedby any NBFC. In case the CSGL account isopened with a scheduled commercial bank, theaccount holder has to open a designated fundsaccount (for all CSGL related transactions) withthe same bank. In case the CSGL account isopened with any of the non-banking institutionsindicated above, the particulars of the designatedfunds account (with a bank) should be intimatedto that institution. The NBFCs maintaining theCSGL/designated funds accounts will be requiredto ensure availability of clear funds in thedesignated funds accounts for purchases and ofsufficient securities in the CSGL account forsales before putting through the transaction. Nofurther transactions in government securitiesshould be undertaken by NBFCs with any brokerin physical form with immediate effect. All furthertransactions of purchase and sale of governmentsecurities have to be compulsorily throughCSGL/demat account. Government securitiesheld in physical form were to be dematerialisedby October 31, 2002.6.9. Accounting StandardsIn terms of Accounting Standard (AS) 19(Accounting for Leases) issued by the Instituteof Chartered Accountants of India (ICAI), it wasclarified that (i) the prudential norms applicableto hire purchase assets would, mutatis mutandis,be applicable to the financial leases written onor after April 1, 2001 and (ii) the leases writtenup to March 31, 2001 would continue to begoverned by the prudential norms relating toleased assets, as hitherto.6.10. Statutory AuditorsNBFCs have to reiterate in their letter ofappointment to statutory auditors their statutoryresponsibility to report directly to the RBI theviolations, if any, of the provisions of the RBI

Act or Directions issued thereunder, noticed bythem in the course of their audit.6.11. Prudential RegulationSome NBFCs were granting demand/call loanswith an open period or without any stipulationregarding the rate of interest and servicing,resulting in problems of compliance withprudential norms relating to income recognition,asset classification and provisioning in respectof such loans. Accordingly, guidelines wereissued to obviate such difficulties and to ensurethat all such loans are appropriately classifiedand the position of NPAs are truly reflected inthe financial statements of NBFCs. The concept260Manual on Financial and Banking Statisticsof ‘past due’ would be done away with in respectof the definition of NPA for NBFCs effective fromMarch 31, 2003, which would be reflected inthe half-yearly return on prudential norms andthe balance sheet as on March 31, 2003. Interms of NBFCs Directions on Prudential Norms,the NBFCs accepting/holding public depositshave to ensure maintenance of minimumprescribed capital to risk-weighted assets ratio(CRAR) at all times. The format for the report ofthe auditors has accordingly been amended. Inorder to obviate the probability of applyingdivergent yardsticks for identification of potentialthreat of non-recoverability of loans, RBI hasprescribed objective criteria for classification ofassets as loss assets.6.12. Submission of Returns by NBFCsSeveral NBFCs have been lax in timelysubmission of the returns to the RBI. Action hasbeen contemplated against such NBFCs - initiallythose with public deposits of Rs.50 crore andabove - for non-submission of returns. The actionmay include imposing penalties as provided inthe RBI Act, 1934 as also launching courtproceedings against the errant companies,besides considering rejection/ cancellation of theCoR. A list of returns submitted by NBFCs ispresented in Annex 6.1.6.13. Protection of Depositors’ InterestWith a view to protecting the interest ofdepositors, it was decided to issue pressadvertisements in cases where winding uppetitions filed by the RBI have been admitted inCourt and provisional liquidators have beenappointed or where criminal complaints havebeen filed by the RBI and summons have beenissued by the Court.6.14. Asset Liability ManagementBased on the guidelines issued in July 2001,effective March 31, 2002 asset liability

management system in all NBFCs with publicdeposits of Rs. 20 crore and above as also NBFCswith asset size of Rs. 100 crore and above hasbeen made operational. Instructions were alsoissued to the effect that the first return as onSeptember 30, 2002, should be submitted bythe NBFCs to the RBI latest by October 31, 2002.

Why is NBFC a House Divided unto Itself?

Arijit Chakraborty - ALG India Law Offices

INBFC’s (Non Banking Financial Companies) are reported periodically to be under the RBI (Reserve Bank of India) lens for one reason or the other. Under the circumstances, any effort by RBI to rationalize the regulatory framework of NBFC’s is highly welcome. Of particular concern to RBI appears to be the exposure of those NBFC’s that even while not accepting deposits from the public are still raising resources banks and financial institutions and diverting to the stock market. The evolution of RBI as the banking sector regulator to also being the regulator for NBFC’s has not been well planned. A particularly manifest evidence of this is the confusion in legislation and in policy reflected in the multiplicity of overlapping and irrational classifications of the various types of NBFC’s. The most apt illustration of this is the fact that whereas the ‘Reserve bank of India Act 1934’ does itself define the term NBFC, there is a different definition of the same term viz. NBFC in the ‘Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1988’ that the RBI itself has issued under sections 45 J, 45K, 45M and 45MA of the aforesaid Act of 1934. Why has RBI made NBFC a house divided unto itself by adopting an incongruous definition of an already defined term in its own parent statute?

NBFC under the RBI ActUnder section 45-I(a) of the RBI Act,1934 ‘business of non banking financial institution ’, is defined in terms of the business of a financial institution and NBFC.

Sec: 45-I(a) : "business of a non-banking financial institution" means carrying on of the business of a financial institution referred to in clause (c) and includes business of a non-banking financial company referred to in

clause (f);]

The Act defines ‘Financial Institution’ (FI) u/s 45-I(c) as

"financial institution" means any non-banking institution which carries on as its business or part of its business any of the following activities, namely :-(i) the financing, whether by way of making loans or advances or otherwise, of any activity other than its own;(ii) the acquisition of shares, stock, bonds, debentures or securities issued by a government or local authority or other marketable securities of a like nature;(iii) letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause (c) of section 2 of the Hire-Purchase Act, 1972 (26 of 1972);(iv) the carrying on of any class of insurance business;(v) managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto;(vi) collecting, for any purpose or under any scheme or arrangement by whatever name called monies in lump sum or otherwise, by way of subscriptions or by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or kind, or disbursing monies in any other way, to persons from whom monies are collected or to any other person,

The definition of FI uses the definition of a Non Banking Institution. (NBI) and NBI has been defined under the Act as follows:Sec.45-I(e) : "non-banking institution" means a company, corporation or co-operative society.

‘NBFC’, itself is defined under sec. 45-I(f) of the Act, as under

Sec. 45-I(f): ) "non-banking financial company" means-(i) a financial institution which is a company;(ii) a non banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or lending in any manner;(iii) such other non-banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify.]

An analysis of forgoing provisions reveals that except for specifically notified categories, a company that is a FI, or a NBI receiving deposits, alone would qualify as an NBFC. A further reading of the definitions of FI and NBI reveals that for a company to be an NBFC it should either carry on any of the businesses as enumerated in (i) to (vi) of Sec. 45-I(c) or it should otherwise receive public deposits in any manner.

Regulatory Framework of NBFC’sSection 45-IA of the Act requires registration of NBFC with RBI and maintenance of minimum NOF.

Sec 45-IA : (1) Notwithstanding any thing contained in this chapter or any other law for the time being in force, no non-banking financial company shall commence or carry on the business of non-banking financial institution without-(a) obtaining a certificate of registration issued under this chapter ; and (b) having the net owned fund of twenty-five lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the Bank may, by notification in the official Gazette, specify ;

(2) Every non-banking financial company shall make an application for registration to the Bank in such form as the Bank may specify.

RBI is entrusted with the responsibility of regulating and supervising NBFC by virtue of powers vested in Chapter IIIB and by sections 45J, 45K and 45 MA of the RBI Act, 1934 (2 of 1934). The regulatory and supervisory

objective is to;# ensure healthy growth of financial companies;# ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systematic aberration; and that# the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with developments that take place in this sector of the financial system.

Accordingly, the RBI has issued directions from time to time. Of particular relevance to NBFCs is the APD direction, where the RBI has adopted another definition of NBFC.

NBFC under Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (APD Directions)Para 2(1)(xi) of APD directions defines NBFC as

Non-banking financial company means only the non-banking institution which is a loan company or an investment company or a hire-purchase finance company or an equipment leasing company or a mutual benefit financial company.

The terms used in the above cited provisions are also defined in the APD directions, as under:

Loan company [ para 2(1)(viii) of APD directions]Loan company means a company which is a financial institution carrying on as it’s principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but doesnot include an equipment leasing company or a hire-purchase finance company.

Investment company [ para 2(1)(vi) of APD directions]Investment Company is a company which is a financial institution carrying on as it’s principal business the acquisition of securities.

Hire-purchase Finance Company [ para 2(1)(iv) of APD directions]any company which is a financial institution carrying on as its principal business the activity of hire purchase transactions.

Equipment Leasing Company [ para 2(1)(ii) of APD directions]means a company which is a financial institution carrying on as it’s principal business, the activity of leasing of equipment.

Mutual Benefit Financial Company [ para 2(1)(ix) of APD directions]means a company which is a financial institution notified by The Central Government under section 620A of The Companies Act 1956

Each category of above notified companies is an NBFC for the APD Directions. As per the definition given in the APD directions, these companies are a kind of ‘financial institution’. APD directions do not define financial institution. Therefore ‘financial institution’ mentioned under the APD directions imports its meaning from the definition in section 45-I(c) of the RBI Act. This is consequent to Para 2(2) of APD direction which states

Words or expressions used but not defined herein are defined in The Reserve Bank of India Act, 1934 (2 of 1934), or in Companies Act, 1956 (1 of 1956) [ or Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions 1998 or Residuary Non-Banking Companies (Reserve Bank) Directions, 1987], shall have the same meaning as assigned to them in those Acts

As a consequence, each of these four categories of NBFC’s under the APD Directions are also within the statutory meaning under the Act of the term NBFC. Thus, NBFC’s under the APD Directions are a subset of the

NBFC’s under the Act.

Comparison of the two definitionsAPD directions cater to a certain type of NBFCs. It is not clear as to why RBI has chosen to define NBFC in a way different from the definition in the RBI Act. It is clear that NBFC as defined in the APD directions is subsumed fully in the statutory definition of NBFC in the Act. In this scenario, it would have been easy and simple enough for the RBI to refer to the statutory definition of NBFC as in the Act and then narrow it down for its purposes. In framing of the APD directions, RBI defines NBFC’s anew and thereupon goes on to identify subcategories such as Loan company , Investment company, Hire-purchase, Finance company or Equipment leasing company and Mutual benefit financial company, so as to attract different paragraphs of the Directions. Needless confusion has been created by RBI as it would have been simpler easier and more rational to use the definition already available in the Act

NBFC Registration in IndiaThe reserve bank of India regulates the working and operations of NBFC within the framework of the Reserve

Bank of India Act, 1934 and the directions issued by it under the act. According to RBI act, NBFC is Non-

banking financial company, which is registered under the Companies Act, 1956 of India and is engaged in the

business of loans and advances, acquisition of shares/ debentures /stock/bonds/securities issued by government

or local authority.

Under the Act, it is compulsory for a NBFC to get itself registered with the RBI as a deposit taking company.

This NBFC registration authorizes it to conduct its business as an NBFC. For the registration with the RBI, a

company incorporated under the Companies Act, 1956 and eager of commencing business of non-banking

financial institution, should have a minimum net owned fund of Rs 25 lakh.The NBFC registration in India

involves submission of an application by the company in the prescribed format along with the compulsory

documents for RBI's consideration. If the bank is satisfied that the conditions enumerated in the RBI Act, 1934

are fulfilled, it issues a 'Certificate of Registration' to the company. Only those NBFCs holding a valid

Certificate of Registration can hold public deposits. The NBFCs accepting public deposits should comply with

the Non-Banking Financial Companies Acceptance of Public Deposits Directions, 1998, as issued by the

bank. 

Business Query Form

NBFC Registration Requirements

Non-banking financial companies (NBFCs) are fast emerging as an important segment of Indian financial system, which is a heterogeneous group of institutions performing financial intermediation in a variety of ways, like accepting deposits, leasing, making loans and advances and hire purchase. NBFC registration requires the name, address and the documents to be submitted to RBI by NBFCs for obtaining certificate and Registration from RBI. 

Non Banking Finance Companies(NBFC) have emerged as the most

preferred vehicle for MFI’s in India and most of the MFI’s intend to convert

into aNBFC in the coming years.To better understand what NBFC’s are we

are posting the FAQ’s about NBFC’s from the RBI Website

The information given in the FAQ is of general nature for the benefit of

depositors/public and the clarifications given do not substitute the extant

regulatory directions/instructions issued by the Bank to the NBFCs.

Reserve Bank of India

Frequently Asked Questions on NBFCs

QUES -1 What is a Non-Banking Financial Company (NBFC)?

ANS -1 A 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.

A non-banking institution which is a company and which has its principal

business of receiving deposits under any scheme or arrangement or any

other manner, or lending in any manner is also a non-banking financial

company (Residuary non-banking company).

QUES 2. NBFCs are doing functions similar to banks. What is

difference between banks & NBFCs ?

ANS 2. NBFCs are doing functions akin to that of banks; however there are

a few differences:

(i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of

the payment and settlement system and as such an NBFC cannot issue

cheques drawn on itself; and (iii) deposit insurance facility of Deposit

Insurance and Credit Guarantee Corporation is not available for NBFC

depositors unlike in case of banks.

QUES-3. Is it necessary that every NBFC should be registered with RBI?

ANS 3. 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.

However, to obviate dual regulation, certain categories of NBFCs which are

regulated by other regulators are exempted from the requirement of

registration with RBI viz. 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

or Housing Finance Companies regulated by National Housing Bank.

QUES 4. What are the different types of NBFCs registered with RBI?

ANS 4. 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 therefrom is not less than 60% of its total assets and total income

respectively.

The above type of companies may be further classified into those accepting

deposits or those not accepting deposits.

QUES 5. Updated on February 10, 2009 What are the requirements /

is the procedure for registration with RBI?

ANS 5. A company incorporated under the Companies Act, 1956 and

desirous of commencing business of non-banking financial institution as

defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum

net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).

NBFC & MFI in IndiaFrom Wikipedia, the free encyclopedia

This article is an orphan, as few or no other articles link to it. Please introduce links to this page from related articles;suggestions are available. (February 2009)

To comply with Wikipedia's guidelines, the introduction of this article may need to be rewritten. Please discuss this issue on the talk page and read the layout guide to make sure the section will be inclusive of all essential details. (September 2009)

This article may require copy editing for grammar, style, cohesion, tone or spelling. You can assist by editing it. (November 2008)

NBFC means Non-banking financial company.[1] A non-banking financial company (NBFC) is a

company registered under the Companies Act, 1956 of India 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.[2]

Contents

 [hide]

1 Difference between NBFCs & Banks

2 MFI

3 MFIs go for NBFC licences

4 Exemptions granted to NBFCs engaged in microfinance activities

5 MFIs & SHG-Bank linkage programme

6 RBI relaxes norms for NBFCs

7 MFIs of India

8 References

[edit]Difference between NBFCs & Banks

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) an NBFC cannot accept demand deposits;

(ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot

issue cheque drawn on itself; and

(iii) deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not

available for NBFC depositors unlike in case of banks.

[edit]MFI

Microfinance institutions, also known as MFIs[3], offer financial services to undeserved,

impoverished communities.

[edit]MFIs go for NBFC licences

An Increasing number of microfinance institutions (MFIs) are seeking non-banking finance

company (NBFC) status from RBI to get wide access to funding, including bank finance.[4]

[edit]Exemptions granted to NBFCs engaged in microfinance activities

The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up

by NABARD in 1999 gave various recommendations. Accordingly, it was decided to exempt

such NBFCs which are engaged in (i) micro financing activities, (ii) licensed under Section 25 of

the Companies Act, 1956 and (iii) which are not accepting public deposits from the purview of

Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer of profits

to Reserve Fund) of the RBI Act, 1934.[5]

[edit]MFIs & SHG-Bank linkage programme

In a joint fact-finding study on microfinance conducted recently by Reserve Bank and a few

major banks, the following observations have been made:

(i) Some of the microfinance institutions (MFIs) financed by banks or acting as their

intermediaries/partners appear to be focusing on relatively better banked areas, including areas

covered by the SHG-Bank linkage programme. Competing MFIs were operating in the same

area, and trying to reach out to the same set of poor, resulting in multiple lending and

overburdening of rural households.

(ii) Many MFIs supported by banks were not engaging themselves in capacity building and

empowerment of the groups to the desired extent. The MFIs were disbursing loans to

thenewly formed groups within 10–15 days of their formation, in contrast to the

practice obtaining in the SHG - Bank linkage programme which takes about 6–7 months

for group formation / nurturing / hand holding. As a result, cohesiveness and a sense of

purpose were not being built up in the groups formed by these MFIs.

(iii) Banks, as principal financiers of MFIs, do not appear to be engaging them with regard

to their systems, practices and lending policies with a view to ensuring better

transparency and adherence to best practices. In many cases, no review of MFI operations

was undertaken after sanctioning the credit facility.[6]

[edit]RBI relaxes norms for NBFCs

NBFCs (Non Banking Finance Companies)registered with the Reserve Bank of India may take

up insurance agency business on fee basis and without risk participation and the need to seek

the bank's approval.

In a notification issued, the RBI said such NBFCs should obtain permission from the Insurance

Regulatory and Development Authority and comply with the IRDA regulations for acting as

"composite corporate agent with insurance companies.[7][8]

[edit]MFIs of India

Magazine Forbes ,has named seven microfinance institutes of India in the list of world's top 50

microfinance institutes.

Bandhan, as well as two other Indian MFIs—Microcredit Foundation of India (ranked 13th) and

Saadhana Microfin Society (15th) - have been placed even above Bangladesh-based Grameen

Bank, which along with its founder Mohammed Yunus was awarded Nobel Prize last year.

Besides Bandhan, Microcredit Foundation of India and Saadhana Microfin Society, other Indian

entries include Grameen Koota (19th), Sharada's Women's Association for Weaker Section

(23rd), SKS Microfinance Private Ltd (44th) and Asmitha Microfin Ltd (29th).[9][10]

MFIs go for NBFC licences for better access to fundsAn Increasing number of microfinance institutions (MFIs) are seeking non-banking finance company (NBFC) status from RBI to get wide access to funding, including bank finance. This is happening at a time when banks are looking to increase their exposure to microcredit. 

In addition, MFIs and NGOs are looking at broad-basing their sources of funds. These include raising funds through equity investments, debt funds, external commercial borrowings (ECBs), venture capital funds, grants and contributions. 

In the last couple of months, the central bank has granted fresh licences to around 10 such organisations. MFIs such as Biswa in the East, Grameen Kuta in Bangalore, Bandhan in West Bengal have already received NBFC licences from RBI, while start-up institutions like Ujivan in Bangalore and Opportunity International in Chennai have also been granted approvals. 

Following the crisis in Andhra Pradesh wherein the state government had asked local MFIs to close down operations as they competed with the state lending programme called Velagu, banks are becoming increasingly skeptical to lend to non-NBFC MFIs. 

An NGO and an MFI could operate in the form of a trust, registered under the Commissioner of Trusts and Charity or a Section 25 company, registered with the Registrar of Companies or else an NBFC under RBI norms. 

It cannot have access to public deposits and cannot lend more than Rs 50,000 to a single borrower/group of borrowers. Mathew Titus, Sadhan's executive director, said, "Banks find it difficult to lend to MFIs in the absence of sufficient collateral. Hence, they ask MFIs to widen their capital base, which is possible only by transforming themselves into NBFCs.” 

Also, with MFIs ramping up their scalability, they will also need to increase their capital base so that costs per borrower are lowered. The central bank tightened the noose on banks lending to NBFCs in its latest set of guidelines but industry sources feel that this is unlikely to have an impact on banks funding NBFCs functioning as MFIs. 

This is because not many banks would have breached their lending limits. As per the recent guidelines, the exposure of a bank to a single NBFC cannot exceed 10% of the bank’s capital funds as per its last audited balance sheet. 

Having an NBFC status, according to Veena Mankar, director of Mumbai-based urban MFI, Swadhaar Finaccess, will allow them to be regulated by RBI rather than facing accountability issues from other quarters. Corporate governance norms also lend a great deal of transparency and credibility to the prospective lending institutions, she added. 

When MFIs don the role of an NGO, there is a sizeable limitation to accessibility of capital. The other option proposed by MFIs and NGOs is to buy out those NBFCs which are not functioning virtually but still have their licences. Here again, MFIs need to be careful of promoters' credentials and other risks involved. 

Sandeep Farias, vice-president and country director of Unitus, said most MFIs are looking to acquire those NBFCs which were established prior to 1999 because they can benefit from lower cost of acquisition. These companies need to have a capital base of Rs 25 lakh, whereas the ones set up after 1999 will invite a minimum capital requirement of Rs 2 crore. 

Also, with Ujivan procuring a licence within 50 days of putting in an application, it shows signs of RBI being more proactive in this regard. Previously, RBI had notified that companies would need to provide a 90-day notice prior to acquiring an NBFC. However, this time limit has now been reduced to 30 days.

Financial sector and Banking:Continuing reforms in the banking sector were aimed at improving the efficiency and financial

strength of commercial banks. Aggregate deposits of the scheduled commercial banks stood at dols

1.48 billion in IFY1997-98, an increase of 15.1 percent. 

Net profits of commercial banksNet profits of scheduled commercial banks rose sharply from dols 24 million in 1995-96 to1.2 billion

in 1996-97, an increase of 387 percent. Much of the increase was due to marking government

securities to market prices, following significant declines in prevailing interest rates. Three public

sector banks received capital restructuring loans from the government totaling dols 68 million in

1997-98, enabling those banks to reach a capital adequacy ratio of 8 percent. 

Autonomy package

In November 1997, the Indian government announced an autonomy package for financially stronger

public sector banks to help them compete more efficiently in a liberalized environment and to

accelerate credit creation. Eleven banks qualified for the autonomy package.

The criteria for administrative autonomy are: capital adequacy of at least 8 percent;

net non-performing assets of less than 9 percent;

minimum net owned funds of more than dols 2.5 million (Rs 100 crore);

and a net profit for the last three years.

Banks that meet the four criteria will be given operational freedom in most administrative matters.RBI norms for NBFC'sThe RBI has relaxed its norms for non-bank finance   companies  (NBFCs) with regard to taking

deposits from the public. It has allowed equipment leasing and hire-purchase finance companies

with investment-grade ratings to access public deposits, raised the ceiling on the amount of public

deposits these NBFCs may accept and extended the deadline for full compliance on its regulations

by two years, until December 2000. The financial viability of many NBFCs continues to be of concern

to the government and RBI regulators. There is considerable consolidation activity in this sector as

NBFCs adjust to the tougher standards they are being required to meet.

WTO negotiations on financial   services :India made a number of new commitments in the WTO Financial Services agreement concluded in

Geneva in December 1997. These modest commitments will come into effect in January 1999. 

Major features of India's offer include: granting most favored nation (MFN) status to all foreignbanks and financial services companies

(including insurance),

dropping a previous MFN exemption on banking;

granting 12 new bank branch licenses per year to foreign banks (up from the present commitment of

8 per year);

ifting the 10 percent ceiling on reinsurance by Indian insurance companies;

allowing 51 percent foreign investment in financial consulting, factoring, leasing,venture capital,

merchant banking and non-banking finance companies.Insurance sectorIn addition, 49 percent foreign equity will be allowed in stock brokerages; and foreign financial

services companies, including banks, will be allowed to invest venture capital in India up to 51

percent of a company's equity.Insurance. 

LegalityAs part of his 1998-99 budget presentation to Parliament on June 1, the Finance Minister announced

his intention to open the insurance sector to competition from Indian private sector companies. He

also proposed to convert Insurance Regulatory Authority (IRA) into an independent, statutory body.

Both actions will require Parliament to adopt new legislation, including amendments to two Acts

which reserve life   insurance  and general insurance for government owned monopolies.

Foreign insurance companies The government has not yet clarified whether foreign insurance companies will be allowed to

participate as minority joint venture partners when the sector is opened up. Many observers believe

that the government will allow foreign participation to compensate for a lack of capital and expertise

among likely participants in the Indian private sector.

LIC and GICThe government has granted substantial operational autonomy to the Life Insurance Corporation

(LIC) and General Insurance Corporation (GIC), both of which have monopoly positions in their

respective sectors under current law. LIC can now appoint fund managers/investment advisors both

in India and abroad and is allowed to invest 60 percent of its insurance funds in approved market

investments. New measures also provide more lenient investment norms, permission to trade in

securities subject to prescribed limits and more delegation of operational powers to the

four general   insurance  subsidiaries of GIC.

Capital Account ConvertibilityThe Tarapore Committee report on Capital Account Convertibility, released in June 1997,

recommended a three-year time-frame for complete capital account convertibility of the rupee. The

Committee set out the following preconditions for full convertibility:

reduction of the fiscaldeficit to 3.5 percent of GDP by 1999-2000;

an average inflation rate of 3-5 percent for the period 1997-2000;

complete deregulation of all interest rates in 1997-98;

a reduction in the cash reserve ratio (CRR) to about 3 percent;

reduction in the level of banks' non-performing assets from an estimated 13.7 percent of total loans

in March 1997 (actual NPAswere 17.8 percent of total loans) to 5 percent in 1999-2000; and

the adoption of a transparent exchange rate policy by 2000.There is a general consensus in government and business community that India should not move to capital account convertibility until these conditions have been met, lest India suffer the kind of currency crisis which hit other Asian countries in 1997. 

What is a Non-Banking Financial Company?

Non-banking financial company is an obscure term for many people. Let's understand what a non-bank financial company in detail is and understand functions associated with it. Non-bank financial companies (NBFCs) are referred as the fiscal organizations which grant banking services but nowhere acts like an authorized bank. NBFCs do not possess a banking certificate. Still, it processes and practices are implemented as per the bank bylaw. Hence, NBFCs practices as a bank with no bank regulation. Nonetheless, this relies on the authority, for instance in New Zealand, any corporation can carry out the trade of banking, and requires no banking certificates.

NBFCs offer various types of services which may be financially useful. Non-bank organizations often operate as loan brokers and credit services and helps investments in assets and belongings. NBFCs deals in capital market instruments and finances private edification. It also helps in assets administration such as handling portfolios of stocks and shares and covering stock and shares, and other responsibilities and retirement planning. NBFCs suggest corporations in union and achievement organize feasibility, studies market or industry for companies and reducing services such as cut rate of instruments.

On the other hand, NBFCs are characteristically not permitted to acquire down payments from the common people. Hence they are required to stumble on different ways of financial supporting their processes, for instance supplying liability instruments.

A non- banking investment corporation can be categorized into the following groups depending upon their characteristic of actions which are development investment organizations, rental corporations, investment business, modaraba companies, house business companies, venture capital companies, and discount & assurance addresses.

What are functions of NBFC?functions of non banking financial companies

9 months ago

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abhiBest Answer - Chosen by Voters

A 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. 

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (residuary non-banking company).

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ? 

NBFCs are doing functions akin to that of banks, however there are a few differences: 

(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. Is it necessary that every NBFC should be registered with RBI? 

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. 

However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. 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 or housing finance companies regulated by National Housing Bank. 

What are the different types of NBFCs registered with RBI? 

The NBFCs that are registered with RBI are: 

(i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company. 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 therefrom is not less than 60% of its total assets and total income respectively. 

The above type of companies may be further classified into those accepting deposits or those not accepting deposits. 

Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank. 

Category of NBFC Ceiling on public deposits AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating 1.5 times of NOF or Rs 10 crore whichever is less 4 times of NOF LC/IC with CRAR of 15% and having minimum investment grade credit rating 1.5 times of NOF Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rests not shorter than monthly rests. 

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. 

The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet. 

What are the salient features of 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: 

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. 

iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. i

 The Year 2009 for Non Banking Financial Companies in India 

January 11, 2010 14:28 IST  A developing economy like India always craves for financial resources. Demand for credit is great and often organized traditional financing institutions (like banks and financial institutions) do not meet such demand thus creating a space for other types of financing. Money lender is an age old institution filling such space. Opening up of

economy gave a further boost to the demand for credit. At this juncture, NBFCs (Non-Banking Financial Company), which basically were better organized money lenders happened in large number. A NBFC is a company that is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities, leasing, hire-purchase, insurance business and chit business. NBFCs do not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.   

        NBFCs in India have played a useful role in financing various sectors of the economy,

particularly those that have been underserved by the banks. In fact, many banks are forming NBFCs to take advantage of their greater flexibility in dealing with customers. There are, of course, some persistent problems for NBFCs, apart from deposit-taking. These relate to flexible handling of their capital issues. Both SEBI and the RBI need to revisit their case for relaxations with sympathy, especially since they are rated and supervised. These specific relaxations are more a matter of confidence-building.

        The Year 2009 - Not so promising for NBFCs:

       The major class of NBFCs, the Asset Financing NBFCs reported a fall in growth this year. The fall in demand for loans from the automobile sector and increased levels of asset quality slippages, have reduced the profit growth of most non-banking financial services (NBFC) players.  

       Bajaj Auto Finance, Cholamandalam DBS Finance, Sundaram Finance, M&M Financial Services and Shriram Transport Finance, the five prominent NBFCs, have aggregately seen net profit grow by 32 per cent over FY08. The profit picture may look skewed due to much higher profit growth registered by Shriram (57 per cent) and Bajaj (64 per cent). Chola DBS saw a decline in profit growth (-28%).  

       The automobile slowdown that became pronounced between October 2008 and March 2009 may have negative effects on the NBFCs’ books for the next couple of quarters. However, the Reserve Bank’s recent relaxation in asset repossessing norms may benefit the NBFCs. An auto sector revival (supported by encouraging sales data in over the last couple of months) may boost the disbursements of loans. 

       Change in policies - the need of the hour:

        FDI policy

       Given the recent economic turmoil, the FDI regulations in the NBFC space might need a little bit of fine tuning. Under the existing FDI policy, investment in an NBFC is permitted subject to $50 million capitalisation to be brought within a period of 24 months.

       Considering the overall slowdown, the sector could do well with contracting this cap to, say, $30 million or by extending the period to, say, 36 months. This might encourage flow of capital in NBFCs. Further, the list of 18 permitted activities falling under the

automatic route does not include investment activity; investment advisory activities are however included. It is urged that investment activity be also included, as it is anyway a permitted classification under the RBI regulations. 

        Parity with banks

       One of the most repeated pleas of NBFCs on the direct taxes front is the issue of parity with banks and housing finance companies in the areas of allowing provision on non-performing assets as a deduction. This provision, made in accordance with the prudential norms of the RBI, can be claimed as a deduction for tax purposes under Section 36(1)(viia) of the Income-Tax Act, subject to overall limits. The banking industry is independently representing that these limits be freed.  

       Similarly, income deferred in respect on non-performing assets of NBFCs is unjustly subject to tax on the basis of ‘accrual’. However, banks in general are well protected by Section 43D of the I-T Act. This dichotomy is drawing the attention of the courts, including the apex court. A concrete solution is clearly an amendment to the tax laws to ensure parity.  

       Tax deduction at source (TDS) is an effective machinery to collect taxes in advance, also results in litigation. Interest paid to an NBFC on borrowings is subject to a 22.44 per cent tax deduction at source. Banks, cooperative societies, public financial institutions, etc., are given shelter under Section 194A of the I-T Act, which does not extend to NBFCs. While tax laws provide for a nil or lower withholding, the tax department has shown resistance in granting this relief. As a result, the yields on lending have dropped significantly.  

       With some NBFCs still actively engaged in leasing of passenger cars, office equipment, etc., the TDS on the rentals paid by the lessee to the leasing company is a dampener. The rate of deduction in accordance with Section 194-I of the I-T Act erodes the entire margins on the transaction.

       Leasing as a product has its own sets of complexities like accounting guidelines, deferred tax, etc., and the TDS hurdle imposed from 2007 has virtually knocked the oxygen out of the what was a revival of sorts to this product in the recent years.  

        An authority for NBFCs:

       The Government should come forward to set up an authority exclusively to take charge of the development of the industry. The authority could set itself as an objective that over a specified period of time, (say) ten per cent of financial assets (which today would be Rs 4 lakh crore) should be under the management of NBFCs. Such an initiative would revive the performance of NBFCs. 

        The year Ahead for NBFCs

        As Mr. T. T. Srinivasa Raghavan, Managing Director, Sundaram Finance Ltd. pointed out, “we fail to realize that what we need here in the financial services sector is an Indian model, given our diversity and the fact that our challenges are very different from anywhere else in the world. With the turn of events over the last 12-18 months, it can be expected that we will finally realize that we must seek Indian solutions to our challenges.” 

       Banks should look at their relationship with NBFCs as a wholesaler-retailer relationship and not as competitors. While NBFCs are only a small number, if this business model of a wholesaler-retailer evolves, it will certainly help in expanding the reach of credit delivery to the far corners of the country, especially to the under-served markets. The success of the last mile delivery depends on the various players working as a continuum.

Company - Meaning

Practically the most credible form of business, a company is

registered in accordance with the Companies Act and is a

separate legal entity, distinct from both its shareholders,

directors and managers. The liability of the shareholders is

limited to the amount paid or unpaid on issued share capital. A

company has unlimited life and no limit is placed on the number

of shareholders. The Companies Act, 1956 does, however,

place many restrictions on the company. It must maintain certain

  Check Out

Companies Act 1956

Compare with other business forms

Incorporation Requirement & Procedure

Management & Accounts

Dissolution & winding up

Compliances

How companies are taxed?

books of accounts, appoint an auditor and file an annual return with the registrar of companies which

includes the accounts as well as details of directors and mortgages.

Types of Companies 

There are three types of companies keeping in view their nature, which is outlined below:

1. Companies with Limited Liability

2. Companies with Unlimited Lliability

3. Company limited by Guarantees

The aforesaid companies are further classified into the following:

1. Public Limited Company

2. Private Limited Company

For some specific business purposes, Public & Private Companies takes the form of the following:

1. Producer Company

2. Non Banking Financial Company

3. Non Profit Associations

Company with Limited Liability

Companies, where the liability of its members is limited to the extent of amount unpaid on the

shares, held by them in the Company. For e.g. A has purchased 10 shares of Rs 10/each and

therefore his total liability towards the company is limited only upto Rs 1000. Generally, more than

90% of the companies are incorporated with limited liability.

Company with unlimited Liability

Company with unlimited liability is just like partnerships, where the liability of partners is unlimited

and may extend to their personal assets. In case of such companies, the liability of its member is

unlimited for the purpose of all the liabilities. This type of company is generally, not popular form of

business organization.

Company limited by Guarantees Company

where liability of its members is limited to the amount , which he had agreed at the time of

incorporation to pay on wounding up of the Company. Under this type of company, generally no

amount is put in by the members at the time of incorporation and they agree to pay the same at the

time of wounding up of the affairs of the Company.

Public Limited Company

Public Limited Company means a Company which is not a private limited Company and has a

minimum Authorized Capital of Rs 5 Lakhs. It does not carry the word `private’ in its name and also

do not have the restrictions as carried out in the private limited companies. A Private Company

which is subsidiary of Public Company also functions as Public Companies.

Basic Features are as follows:

Minimum Authorized Capital of Rs. 5 Lakhs

No restriction on number of members

Shares are easily transferable.

Can access Public in case of need of funds

Advantages:

Better Governed due to large number of compliances

No limit to Memberships

More financing options in form of Public Issue or Deposits

Better Creditworthiness

Disadvantages:

Number of legal Compliances are too large

Approvals of Government for large number of purposes

Restrictions on payment of salaries and loans to Directors

Not suitable for closely held business.

Private Limited Company

Private Limited Company means a Company formed with the word ‘private’ in its name and the

Articles of Association of whom contains the following restrictions

Restricts the right to transfer its shares

Limitation to the number of shareholders to 50 (excluding employees and former employees)

Prohibition towards invitation to the public to subscribe to shares and debentures

Prohibits acceptance of deposits from persons other than shareholders, directors and their

relatives.

The minimum paid up capital for a private Company would be Rs. 100,000.

Advantages:

Suitable for closely held groups

Less Legal Formalities

Less Government Intervention

Better Creditworthiness

Disadvantages:

Limited financing avenues i.e. no public offer or acceptance of deposits

Limited Membership

Private Companies are also relieved from complying a large number of provisions of the Companies

Act, click here to see the same.

Producer Company

The Companies has prescribed separate set of provisions for companies which are engaged in

activities related to agriculture and all companies registered as per these provisions are called as

Producer Company. Producer Company can engage in any of the following activities:

Production, harvesting, procurement, pooling handling, marketing, selling, export and import

of primary produce of the Members and services for their benefit,

Processing including reserving, drying, distilling, brewing etc of produce of its members

Rendering technical services, consultancy services, training, research and development and

promotion of interest of its Members,

Generation, transmission and distribution of power, revitalization of land and water

resources, their use, conservation and communication relatable to primary produce,

Insurance of producers or their primary produce

Promoting techniques of mutual assistance

Distilling packaging of produce of its Members

Activities ancillary or incidental to any of the above activites

Any ten or more individuals, each of them being a producer or any two or more producer institutions,

or a combination of ten or more individuals and producer institutions may form a Producer Company

Producer means a person engaged in any of the activity connected with the following:

Produce of farmers, arising from agriculture (including animal husbandry, horticulture,

floriculture, pisiculture, viticulture, forestry, forest products, re-vegetation, bee raising,

farming planation product)

Person engaged in handloom, handicraft and other cottage industries

By product arising from above activities

By product arising from any activity which is ancillary to the above activity

Producer Institution means a Producer company or any other institution having only producer or

producers or producer company (s) as its member whether incorporated or not and have the objects

of producer company and which agrees to make use of services provided in articles of Producer

Company

Non Banking Financial Company

Following types of companies are called as Non Banking Financial Companies and are regulated as

per the regulations prescribed under Non Banking Financial Companies Acceptance of Public

Deposits (Reserve Bank) Directions 1998:

Company which is 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 equipment, moving on won

power and general purpose industrial machines.

Company which is financial institution carrying on as its principal business the providing if

finance whether by making loans or advances or otherwise for any activity other than its own.

Company which is a financial institution carrying on as its principal business the acquisition

of securities.

Non Profit Association

Under the Companies Act , 1956 you can also register a company for carrying on business , not for

the purpose of earning profit but to serve mankind at large. Such type of company is generally called

as Association not for profit or section 25 Company.

Association not for profit or section 25 company can only be formed for the purpose with the

following objectives

For promoting commerce, art, science, religion, charity or any other useful objects ; and

The Company prohibits payment of any dividend to its members but intends to apply its profit

and other income in promotion of its objects

It is necessary to take the approval of Government of India, to form such type of company

Due to their nature of business, the Government of India has relaxed the application of various

provisions of the Companies Act on such companies

Mahindra Group

Mahindra Group is one of the largest corporate groups of India. It is a US $4.5 billion conglomerate with employee strength of over 40,000. The group has diverse business interests such as automotive, farm equipments, infrastructure, information technology, hospitality, and financial services. Mahindra Group has global presence and it is ranked amongst Forbes Top 200 list of the World's Most Reputable Companies and in the Top 10 list of Most Reputable Indian companies. 

The origins of Mahindra Group can be traced back to October 2, 1945 when Mahindra brothers J.C. Mahindra & K.C. Mahindra joined hands with Ghulam Mohammad, and Mahindra & Mohammad was set up as a franchise for assembling jeeps from Willys, USA. After India's independence in 1947, Mahindra & Mohammad changed its name to Mahindra & Mahindra. Ghulam Mohammad migrated to Pakistan post-partition and became the first Finance Minister of Pakistan. Since then, Mahindra Group has gone from strength to strength and today it has evolved into a giant group. 

Business Interests of Mahindra Group

Automotive Sector: Mahindra Group is the market leader in utility vehicles in India since inception. Mahindra also manufactures and markets utility vehicles and light commercial vehicles, including three-wheelers. Some of the famous automobile brands of Mahindra are: Scorpio and Bolero.

Recently, Mahindra joined hands with French automobile major Renault to enter passenger car segment. It has launched a car called Mahindra Renault Logan. 

Farm Equipment Sector: Mahindra is the largest producer of tractors in India and is among the top five tractor brands in the world. It has its own state-of-the-art plants in India, USA, China and Australia, and a capacity to produce 1,50,000 tractors a year. 

Trade & Financial Services: Mahindra Intertrade Limited and its subsidiaries have specialized domain knowledge in imports and exports of commodities, domestic trading, marketing and distribution services. Mahindra Finance is one of the largest Non Banking Finance Companies in India with an asset base of about Rs. 5000 crores. Mahindra Insurance Brokers offer Life and Non-life Insurance plans to retail and corporate customers. Mahindra Steel Service Centre is the first steel service centre in the organised sector in India. 

Infrastructure Development: Mahindra Group has interests in real estate, special economic zones, hospitality industry, infrastructure development, project engineering consultancy and design. Mahindra Holidays & Resorts is the leader in the lifetime holiday market in India. Mahindra Gesco is fastest growing Construction Company in India. Mahindra World City is developing and promoting India's first Integrated Business City. Mahindra Acres Consulting Engineers is a multidisciplinary engineering consultancy organization. 

Information Technology: Mahindra Group entered into IT sector in 1986 when it formed a joint venture with British Telecommunications plc. The company was called Mahindra-British Telecom. The Company has recently changed its name to Tech Mahindra. Tech Mahindra is a leading provider of telecommunication solution and service industry world-wide. It is India's 8th largest software exporter.

Speciality Businesses: Mahindra Group companies such as Mahindra AshTech, Mahindra Defence, Spares Business Unit and Mahindra Logistics are into Speciality Businesses. Mahindra AshTech undertakes turnkey contract execution for Ash Slurry System and Travelling Water Screens. Mahindra Defence Systems looks after the requirements of India's defence and security forces. Mahindra Logistics provide complete logistics solutions to complex transportation needs of clients across the world.

Major Achievements of Mahindra Group

Mahindra & Mahindra made the first indigenous Jeep in the country in 1949.

Fourth largest tractor company in the world.

Largest manufacturer of tractors in India.

Largest manufacturer of MUVs, offering over 20 models

What is a non-banking financial company (NBFC)? How does it differ from a bank? Get the

answers to these and many more questions on NBFCs.

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

A 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.

A non-banking institution which is a company and which has its principal business of receiving

deposits under any scheme or arrangement or any other manner, or lending in any manner is also a

non-banking financial company (residuary non-banking company).

NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?

NBFCs are doing functions akin to that of banks, however there are a few differences:

(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.

Is it necessary that every NBFC should be registered with RBI?

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.

However, to obviate dual regulation, certain category of NBFCs which are regulated by other

regulators are exempted from the requirement of registration with RBI viz. 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 or housing finance companies regulated by National Housing Bank.

What are the different types of NBFCs registered with RBI?

The NBFCs that are registered with RBI are:

(i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company.

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 therefrom is not less than 60% of its total assets

and total income respectively.

The above type of companies may be further classified into those accepting deposits or those not

accepting deposits.

Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as

NBFC with the Bank.

What are the requirements for registration with RBI?

A company incorporated under the Companies Act, 1956 and desirous of commencing business of

non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a

minimum net owned fund of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999).

The company is required to submit its application for registration in the prescribed format alongwith

necessary documents for bank's consideration. The bank issues certificate of registration after

satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

Where one can find a list of registered NBFCs and instructions issued to NBFCs?

The list of registered NBFCs is available on the web site of Reserve Bank of India [ Get Quote ] and

can be viewed at www.rbi.org.in. The instructions issued to NBFCs from time to time are also hosted

at the above site. Besides, instructions are also issued through Official Gazette notifications. Press

releases are also issued to draw attention of the public/NBFCs.

Can all NBFCs accept deposits and what are the requirements for accepting public deposits?

All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of

registration with authorisation to accept public deposits can accept/hold public deposits. The NBFCs

accepting public deposits should have minimum stipulated net owned fund and comply with the

directions issued by the bank.

Is there any ceiling on acceptance of public deposits? What is the rate of interest and period

of deposit which NBFCs can accept?

Yes, there is ceiling on acceptance of public deposits. An NBFC maintaining required NOF/CRAR

and complying with the prudential norms can accept public deposits as follows:

Category of NBFC Ceiling on public deposits AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating 1.5 times of

NOF or Rs 10 crore whichever is less 4 times of NOF LC/IC with CRAR of 15% and having minimum investment grade credit rating 1.5 times of

NOF

Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or

compounded at rests not shorter than monthly rests.

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.

The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this

booklet.

What are the salient features of 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:

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.

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.

What is 'deposit' and 'public deposit'? Is it defined anywhere?

The term 'deposit' is defined under Section 45 I(bb) of the RBI Act, 1934. 'Deposit' includes and shall

be deemed always to have included any receipt of money by way of deposit or loan or in any other

form but does not include:

amount raised by way of share capital, or contributed as capital by partners of a firm; amount received from scheduled bank, co-operative bank, a banking company, State

Financial Corporation, IDBI or any other institution specified by RBI; amount received in ordinary course of business by way of security deposit, dealership

deposit, earnest money, advance against orders for goods, properties or services; amount received by a registered money lender other than a body corporate; amount received by way of subscriptions in respect of a 'Chit'. Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits

( Reserve Bank) Directions, 1998 defines a ' public deposit' as a 'deposit' as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following: amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;

any amount received from financial institutions; any amount received from other company as inter-corporate deposit;

amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;

amount received from shareholders by private company; amount received from directors or relative of the director of a NBFC; amount raised by issue of bonds or debentures secured by mortgage of any immovable

property or other asset of the company subject to conditions; the amount brought in by the promoters by way of unsecured loan; amount received from a mutual fund; any amount received as hybrid debt or subordinated debt; any amount received by issuance of Commercial Paper.

Thus, the directions have sought to exclude from the definition of public deposit amount raised from

certain set of informed lenders who can make independent decision.

Are Secured debentures treated as Public Deposit? If not who regulates them?

Debentures secured by the mortgage of any immovable property or other asset of the company if the

amount raised does not exceed the market value of the said immovable property or other asset are

excluded from the definition of 'public deposit' in terms of Non-Banking Financial Companies

Acceptance of Public Deposits (Reserve Bank) Directions, 1998. Secured debentures are debt

instruments and are regulated by Securities & Exchange Board of India.

Whether NBFCs can accept deposits from NRIs?

Effective from April 24, 2004, NBFCs cannot accept deposits from NRI except deposits by debit to

NRO account of NRI provided such amount do not represent inward remittance or transfer from

NRE/FCNR (B) account.

However, the existing NRI deposits can be renewed.

Is nomination facility available to the Depositors of NBFCs?

Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are

provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial

Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made

under Section 45ZA of the Banking Regulation Act, 1949.

Accordingly, depositor/s of NBFCs are permitted to nominate, one person to whom, the NBFC can

return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept

nominations made by the depositors in the form similar to one specified under the said rules, viz

Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination

and variation of nomination, respectively.

What else should a depositor bear in mind while depositing money with NBFCs?

While making deposits with a NBFC, the following aspects should be borne in mind:

(i) Public deposits are unsecured. (ii) A proper deposit receipt which should, besides the name of the depositor/s state the date

of deposit, the amount in words and figures, rate of interest payable and the date of maturity should be insisted. The receipt shall be duly signed by an officer authorised by the company in that behalf.

(iii) The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.

It is said that rating of NBFCs is necessary before it accepts deposit? Is it true? Who rates

them?

An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits.

An exception is made in case of unrated AFC companies with CRAR of 15% which can accept

public deposit up to 1.5 times of the NOF or Rs 10 crore whichever is lower without having a credit

rating. A NBFC may get itself rated by any of the four rating agencies namely, CRISIL, CARE, ICRA

and FITCH Ratings India Pvt. Ltd.

What are the symbols of minimum investment grade rating of different companies?

The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating agencies : Level of minimum investment grade credit rating (MIGR)

CRISIL: FA- (FA MINUS) ICRA: MA- (MA MINUS) CARE: CARE BBB (FD) FITCH Ratings India Pvt. Ltd: tA-(ind)(FD) It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not

equivalent to AAA.

Can a NBFC which is yet to be rated accept public deposit?

No, a NBFC cannot accept deposit without rating except an EL/HP company complying with

prudential norms and having CRAR of 15%, though not rated, may accept public deposit up to 1.5

times of NOF or Rs 10 crore whichever is less.

When a company's rating is downgraded, does it have to bring down its level of public

deposits immediately or over a period of time?

If rating of a NBFC is downgraded to below minimum investment grade rating, it has to stop

accepting public deposit, report the position within fifteen working days to the RBI and reduce within

three years from the date of such downgrading of credit rating, the amount of excess public deposit

to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial

Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998; however such NBFC

can renew the matured public deposits subject to repayment stipulations specified above and

compliance with other conditions for acceptance of deposits.

In case a NBFC defaults in repayment of deposit what course of action can be taken by

depositors?

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.

What is the role of Company Law Board in protecting the interest of depositors? How one can

approach it?

Where a non-banking financial company fails to repay any deposit or part thereof in accordance with

the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or

on an application from the depositor directs, by order, the non-banking financial company to make

repayment of such deposit or part thereof forthwith or within such time and subject to such

conditions as may be specified in the order.

As explained above the depositor can approach CLB by mailing an application in prescribed form to

the appropriate bench of the Company Law Board according to its territorial jurisdiction with the

prescribed fee.

We hear that in a number of cases official liquidators have been appointed on the defaulting

NBFCs. What is their role and how one can approach them?

Official Liquidator is appointed by the court after giving the company reasonable opportunity of being

heard in a winding up petition. The liquidator performs duties of winding up and such duties in

reference thereto as the court may impose.

Where the court has appointed an official liquidator or provisional liquidator, he becomes custodian

of the property of the company and runs the day-to-day affairs of the company.

He has to draw up a statement of affairs of the company in prescribed form containing particulars of

assets of the company, its debts and liabilities, names/residences/occupations of its creditors, the

debts due to the company and such other information as may be prescribed. The scheme is drawn

up by the liquidator and same is put up to the court for approval.

The liquidator realises the assets of the company and arranges to repay the creditors according to

the scheme approved by the court. The liquidator generally inserts advertisement in the newspaper

inviting claims from depositors/investors in compliance with court orders. Therefore, the

investors/depositors should file the claims within due time as per such notices of the liquidator.

The Reserve Bank also provides assistance to the depositors in furnishing addresses of the official

liquidator.

Consumer courts play a useful role in attending to depositors problems. Can one approach

consumer forum, civil court, CLB simultaneously?

Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or

CLB.

Is there an Ombudsman for hearing complaints against NBFCs?

No, there is no Ombudsman for hearing complaints against NBFCs.

What are various prudential regulations applicable to NBFCs?

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial

Companies Prudential Norms (Reserve Bank) Directions, 1998. The directions interalia, prescribe

guidelines on income recognition, asset classification and provisioning requirements applicable to

NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet,

requirement of capital adequacy, restrictions on investments in land and building and unquoted

shares.

Please explain the terms 'owned fund' and 'net owned fund' in relation to NBFCs?

'Owned Fund' means aggregate of the paid-up equity capital and free reserves as disclosed in the

latest balance sheet of the company after deducting therefrom accumulated balance of loss,

deferred revenue expenditure and other intangible assets.

The amount of investments of such company in shares of its subsidiaries, companies in the same

group and all other NBFCs and the book value of debentures, bonds, outstanding loans and

advances made to and deposits with subsidiaries and companies in the same group is arrived at.

The amount thus calculated, to the extent it exceeds 10% of the owned fund, is reduced from the

amount of owned fund to arrive at 'Net Owned Fund'.

What are the responsibilities of the NBFCs accepting/holding public deposits with regard to

submission of Returns and other information to RBI?

The NBFCs accepting public deposits should furnish to RBI:

i. 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;

ii. Statutory Annual Return on deposits - NBS 1; iii. Certificate from the Auditors that the company is in a position to repay the deposits as and

when the claims arise;

iv. Quarterly Return on liquid assets; v. Half-yearly Return on prudential norms; vii. Half-yearly ALM Returns 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 ; viii. Monthly return on exposure to capital market by companies having public deposits of Rs

50 crore and above; and ix. A copy of the Credit Rating obtained once a year along with one of the Half-yearly

Returns on prudential norms as at (v) above.

What are the documents or the compliance required to be submitted to the Reserve Bank of

India by the NBFCs not accepting/holding public deposits?

The NBFCs having assets size of Rs 100 crore and above but not accepting public deposits are

required to submit a Monthly Return on important financial parameters of the company. All

companies not accepting public deposits have to pass a board resolution to the effect that they have

neither accepted public deposit nor would accept any public deposit during the year.

However, all the NBFCs (other than those exempted) are required to be registered with RBI and also

make sure that they continue to be eligible to remain Registered. Further, all NBFCs (including non-

deposit taking) should submit a certificate from their Statutory Auditors every year to the effect that

they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the

RBI Act, 1934.

RBI has powers to cause Inspection of the books of any company and call for any other information

about its business activities.

For this purpose, the NBFC is required to furnish the information in respect of any change in the

composition of its board of directors, address of the company and its directors and the name/s and

official designations of its principal officers and the name and office address of its auditors. With

effect from April 1, 2007 non-deposit taking NBFCs with assets size of Rs 100 crore and above have

been advised to maintain minimum CRAR of 10% and shall also be subject to single/group exposure

norms.

The NBFCs have been made liable to pay interest on the overdue matured deposits if the

company has not been able to repay the matured public deposits on receipt of a claim from

the depositor. Please elaborate the provisions.

As per Reserve Bank's directions, overdue interest is payable to the depositors in case the company

has delayed the repayment of matured deposits, and such interest is payable from the date of

receipt of such claim by the company or the date of maturity of the deposit whichever is later, till the

date of actual payment. If the depositor has lodged his claim after the date of maturity, the company

would be liable to pay interest for the period from the date of claim till the date of repayment. For the

period between the date of maturity and the date of claim it is the discretion of the company to pay

interest.

Can a company pre-pay its public deposits?

A NBFC accepts deposits under a mutual contract with its depositors.

In case a depositor requests for pre-mature payment, Reserve Bank of India has prescribed

Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public

Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan

against a public deposit or make premature repayment of a public deposit within a period of three

months (lock-in period) from the date of its acceptance, however in the event of death of a depositor,

the company may, even within the lock - in period, repay the deposit at the request of the joint

holders with survivor clause / nominee / legal heir only against submission of relevant proof, to the

satisfaction of the company.

An NBFC subject to above provisions, if it is not a problem company, may permit after the lock-in

period premature repayment of a public deposit at its sole discretion, at the rate of interest

prescribed by the Bank.

A problem NBFC is prohibited from making premature repayment of any deposits or granting any

loan against public deposits/deposits, as the case may be. The prohibition shall not, however, apply

in the case of death of depositor or repayment of tiny deposits i.e. up to Rs 10,000 subject to lock-in

period of 3 months in the latter case.

What is the liquid asset requirement for the deposit taking companies? Where these assets

are kept? Does Depositors have any claims on them?

In terms of Section 45-IB of the RBI Act, 1934 the minimum level of liquid asset to be maintained by

NBFCs is 15 per cent of public deposits outstanding as on the last working day of the second

preceding quarter.

Of the 15%, NBFCs are required to invest not less than 10% in approved securities and the

remaining 5% can be in unencumbered term deposits with any scheduled commercial bank. Thus,

the liquid assets may consist of government securities, government guaranteed bonds and term

deposits with any scheduled commercial bank.

The investment in government securities should be in dematerialised form which can be maintained

in Constituents' Subsidiary General Ledger (CSGL) Account with a scheduled commercial bank

(SCB) / Stock Holding Corporation of India Limited (SHICL). In case of Government guaranteed

bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account

with depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India)

Ltd. (CDSL)] through a depository participant registered with Securities & Exchange Board of India

(SEBI). However in case there are Government bonds which are in physical form the same may be

kept in safe custody of SCB/SHCIL.

NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form

with the entities stated above at a place where the registered office of the company is situated.

However, if a NBFC intends to entrust the securities at a place other than the place at which its

registered office is located, it may do so after obtaining in writing the permission of RBI. It may be

noted that the liquid assets in approved securities will have to be maintained in dematerialised form

only.

The liquid assets maintained as above are to be utilised for payment of claims of depositors.

However, deposit being unsecured in nature depositors do not have direct claim on liquid assets.

Please tell us something about the companies which are NBFCs, but are exempted from

registration?

Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies

engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi

Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been

exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to

certain conditions.

Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture

Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and

Exchange Board of India, Insurance companies are regulated by Insurance Regulatory and

Development Authority. Similarly, Chit Companies are regulated by the respective State

Governments and Nidhi Companies are regulated by Ministry of Company Affairs, Government of

India.

There are some entities (not companies) which carry on activities like that of NBFCs. Are they

allowed to take deposit? Who regulates them?

Any person who is an individual or a firm or unincorporated association of individual cannot accept

deposit except by way of loan from relatives, if his/its business wholly or partly includes business

that of loan, investment, hire-purchase or leasing company or principal business is that of receiving

of deposits under any scheme or arrangement or in any manner or lending in any manner.

What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other

NBFCs?

Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal

business the receiving of deposits, under any scheme or arrangement or in any other manner and

not being investment, asset financing, loan company.

These companies are required to maintain investments as per directions of RBI, in addition to liquid

assets. The functioning of these companies is different from those of NBFCs in terms of method of

mobilisation of deposits and requirement of deployment of depositors' funds. However, Prudential

Norms Directions are applicable to these companies also.

We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is

deposit with them?

It is true that there is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that

the amounts deposited and investments made by the company are not less that the aggregate

amount of liabilities to the depositors.

To secure the interest of depositor, such companies are required to invest in a portfolio comprising

of highly liquid and secured instruments viz. Central/State Government securities, fixed deposit of

scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual Funds, etc.

Can RNBC forfeit deposit if deposit installments are not paid regularly or discontinued?

No Residuary Non-Banking Company shall forfeit any amount deposited by depositor, or any

interest, premium, bonus or other advantage accrued thereon.

Please tell us something on rate of interest payable by RNBCs on deposits and maturity

period of deposits?

The amount payable by way of interest, premium, bonus or other advantage, by whatever name

called by a residuary non-banking company in respect of deposits received shall not be less than the

amount calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump

sum or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on the

amount deposited under daily deposit scheme.

Further, an RNBC can accept deposits for a minimum period of 12 months and maximum period of

84 months from the date of receipt of such deposit. They cannot accept deposits repayable on

demand.

Procedure of NBFC Formation

A 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. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). Section 45-IA provides that no NBFC shall commence or carry on the business of Non- Banking Financial Institution without obtaining a Certificate of Registration issued under this Chapter (Chapter –IIIB) and not having a Net Owned Fund of rupees two hundred lakhs. Steps Required For

Formation Of New NBFC: Step-1 Formation of Company: The first step is to form a new Company registered under the Companies Act, 1956. The name must reflect the character of an NBFC. Words such as Investment, Finvest, Finstock, Finance etc. may be used as part of the name. In general, RBI does not allow names which are not reflecting the characteristics of NBFC. Step-2 Minimum Net Owned Fund: After the incorporation of a new company the Paid up Equity Capital of the Company should suitably rose either at par or premium so as to attain a minimum Net Owned Fund of Rs. 2 crores. The Capital to be raised here should be Equity Share Capital and not Preference Share Capital. Step-3 Opening of a Bank Account: The entire sum of Rs. 2 crores should be kept in a bank in a Deposit Account free from all liens. Normally funds are kept in Fixed Deposit. The RBI at the time of considering the application for the grant of Certificate of Registration verifies the deposits held by the Company with the Bankers. Step-4 Apply for Certificate of Registration to RBI alongwith Required Documents: The NBFC Company is required to submit its application online for registration by accessing RBI’s secured website https://secweb.rbi.org.in/COSMOS/rbilogin.do (the applicant companies do not need to log on to the COSMOS application and hence user ids for these companies are not required). The company can then download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the application form (indicating the Company Application Reference Number of its on-line application) in duplicate, along with the supporting documents as prescribed in the form, to the concerned Regional Office. The company can then check the status of the application based on the acknowledgement number. The Bank would issue Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. The following documents are required to be filed alongwith the application form: Annexure-I, Annexure-II and Annexure-III to the application. Annexure-III is submitted in respect of all the directors of the applicant company. Certified copy of up-to-date Memorandum and Articles of Association of the company. The Memorandum of Association of the applicant company should have enabling clause/s for conducting of NBFI business by the company Certified copy of Certificate of Incorporation (bearing the signature of the Registrar of Companies) Banker’s Report in a sealed cover. A copy of the same should be send to the General Manager, RBI, DNBS, Kolkata by the bank at the request of the company Banker’s Reports in respect of companies in which the directors have substantial interest as indicated against items Nos. 14 & 15 of Annexures-III. Registration number and nature of business activities of the companies in which the Directors have substantial interest should also be furnished Banker’s

Report in respect of group/subsidiary/holding companies if any, of the applicant company. Details of the interest held by Directors in such companies are to be furnished Certified copy of Board Resolution approving the submission of application for COR Certified copy of the audited balance sheet and profit & loss account of the company for the last three years (in case of existing companies intending to commence NBFI business) and proforma balance sheet and profit & loss account as on the date on which the statement of capital funds and risk assets is furnished in Annexure-II to the application is submitted. Brief history of Company along with summary of financial for last five years Business Plan of the company for the next three years giving details of its thrust of business, market segment and projection of investments and income together with projected Balance Sheet and Profit & Loss Account for the next three years. Auditors’ Certificate and extracts of Bank statement regarding receipt of share premium, if any. Certified copy of Board Resolution that the company has not accepted any public deposits in the past/does not hold any public deposits as on date and will not accept the deposits in future without prior approval of the Bank Certified copy of Board Resolution that the company has not conducted/commenced NBFI business and also shall not conduct/commence NBFI business without obtaining Certificate of Registration from the Bank Auditors’ Certificate to the effect that the Auditors’ Certificate to the effect that the Company has not accepted/is not holding any public deposits as on date and will not accept such deposits in future without prior approval of the Bank Company is not carrying on any NBFI activity as on date Company has an NOF of Rs.200 lakh as on date A certificate of Chartered Accountant regarding details of group/associate/subsidiary/holding companies along with details of investments in other NBFCs as shown in the Proforma Balance Sheet Details of Book Value of bonds/debentures/outstanding loans and advances (including hire purchase & lease finance) made to and deposits with § Subsidiaries § Group companies as on the Proforma Balance Sheet (Annexure-II) duly certified by the Auditor Details of cost and market/Break Up Value of Quoted/unquoted investments including current investments as on the Proforma Balance Sheet (Annexure-II) duly certified by the Auditor The details of experience of directors in NBFI business as indicated against Item No. 12 of Annexure-III are to be submitted Name of the companies indicated against Item No. 9 of Annexure-III, in which the directors of the applicant company are the directors, are NBFC registered with the Reserve Bank The Declarations of the directors regarding their non-association with the unincorporated bodies under Section 45S of the Reserve Bank of India Act, 1934 are submitted The particulars of approval of Foreign Exchange Department (FED) if any obtained/copies of Foreign Inward Remittance Certificates in respect of Foreign Direct Investment if any, received by the applicant company are to be furnished A Board Resolution to the effect that the company has formulated a

Fair Practise Code and copy whereof should be enclosed and the same would be implemented on grant of COR If Company does not have a website it can submit information through e-mail or any other mode through internet – a statement in this regard Documentary evidence like certified Xerox copy of electric bill/telephone bill in the name of the applicant company. Whether the Company is regulated by other regulators like SEBI, IRDA etc Income Tax PAN in respect of the company as well as all the directors. Copies of Form 2,5,18,23,29 & 32 and Annual Return filed with Registrar of Companies, West Bengal with Registrar of Companies money receipt. In case of amalgamation with other companies, copy of High Court Order allowing the above amalgamation together with copies of Form No 21 filed with Registrar of Companies, West Bengal including Registrar of Companies money receipt Reason for setting up NBFC. The current Net Owned Fund (NOF) of all the NBFCs subscribing to the capital of the applicant company, the computation being duly certified by the Statutory Auditor Documents called by this Deptt. In respect of § NBFCs having common Directors with the applicant company and § subscriber/investor NBFCs, must be submitted to the satisfaction of Company Monitoring Division Step-5 Filing of some additional Documents: In addition to the documents required to be enclosed along with Application Form the following should also be enclosed: Copy of Form-32 of all present directors with receipt Copy of Form-18 of present situation of Registered Office, with receipt. Copy of Form-2 Return of allotment of Shares, with receipt. Experience Certificate or Details of Experience of Directors, if any, in NBFC Business. Bankers Report in the format prescribed by RBI with the request to Bank that original should be directly sent to RBI. Bankers Report of all the Firms/Company/ Proprietorship Concern in which director holds substantial interest Board Resolutions in the matter of Application for granting Certificate of Registration, Non- Acceptance of Public Deposits and Non Carrying business of Non-Banking Financial Institution without Certificate of Registration. Board Resolution adopting a Fair Practices Code and a copy of the said Code. Declaration from Directors to give affect that they are not associated with unincorporated bodies U/s 45-S of RBI Act, 1934 Specimen declaration is enclosed herewith marked The application is to be filed with the Regional Office of RBI whose jurisdiction, the registered office of the Company falls. Step-6 Granting of Certificate: After the application is filed, the same is examined by RBI and further documents and clarifications may be sought from time to time. Finally if RBI considers that the application is complete in all respects and all required documents and information is furnished to its satisfaction , it may grant Certificate of Registration to carry on the business of NBFC not accepting public deposits or else the application is returned. It may be noted that when applications are filed at the Regional Office, they vet the application and if everything is found by them in order they send the same to

Central Office for further examination and approval. However if the application is not in order they send back the application and pointing out the defects. At this stage the applicant should not be disheartened and the defects should be cured and the application should again be filed. Finally if Central Office approves the Application, the Regional Office will issue certificate of Registration. Post Comment

Functions of non banking financial institutions in india? 4 years ago

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coolguyBest Answer - Chosen by Voters

Initially, there were four different categories of companies for the purpose of acceptance of deposits by Non Banking Financial Companies ("NBFCs") namely:

Equipment Leasing company - any financial institution which carried on the activity of leasing equipment, as its principal business;

Hire Purchase company - any financial institution which carried on the activity of hire purchase transactions, as its principal business;

Investment Companies - any financial institution which carried on the acquisition of

securities, as its principal business; and

Loan Companies - any financial institution which provided finance whether by making loans or advances or otherwise for any activity other than its own but does not include an equipment leasing company or a hire purchase finance company.

Earlier companies engaged in financing real/physical assets supporting economic activity such as automobile, general-purpose industrial machinery etc would generally come within the purview of "Asset Finance Companies" ("AFCs").

However, with a view to provide a separate classification for NBFCs engaged in financing tangible assets, the Reserve Bank of India ("RBI"), has vide its circular dated 6th December 2006 now re -classified companies financing real/physical assets for productive/ economic activity as AFCs. The remaining companies would continue to be classified as loan/investment companies. 

AFCs would accordingly 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".

Such principal business of an AFC being that the aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively. 

Companies satisfying the above conditions would be required to approach the Regional Office in the jurisdiction of which their registered office is located, along with the original Certificate of Registration, issued by the Bank for recognition of their classification as AFCs.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances

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Chapter V

Non-Banking Financial Companies1 Registration of NBFCs2 Supervision of NBFCs3 Policy Developments Relating to NBFCs4 Implementation of Recommendations of Task Force on NBFCs (1998)5 Business of the NBFC Sector6 Region-wise Composition of Deposits held by NBFCs7 Interest Rate and Maturity Pattern of Deposits with NBFCs8 Asset Profile of NBFCs9 Distribution of Assets of NBFCs according to Activity10 Analysis of Borrowings by NBFCs11 Net Owned Funds of NBFCs12 Income Expenditure Statement of NBFCs13 Capital Adequacy Ratio14 Other DevelopmentsNon-banking financial companies (NBFCs) have been the subject of focussed attention duringthe nineties. In particular, the rapid growth of NBFCs, especially in the nineties, has led to agradual blurring of dividing lines between banks and NBFCs, with the exception of the exclusiveprivilege that commercial banks exercise in the issuance of cheques (Chart V.1). Simplifiedsanction procedures, orientation towards customers, attractive rates of return on deposits andflexibility and timeliness in meeting the credit needs of specified sectors (like equipment leasingand hire purchase), are some of the factors enhancing the attractiveness of this sector. The totalregulated deposits1 of NBFCs aggregated Rs.17,390 crore, as at end of March 1994, equivalentto 4.0 per cent of bank deposits. The quantum of regulated deposits grew more than three-foldand as at end-March 1997, at Rs.53,116 crore constituted 7.9 per cent of bank deposits.5.2 In the year 1998, a new concept of public deposits meaning deposits received from publicincluding shareholders in the case of public limited companies and unsecured debentures/ bondsother than those issued to companies, banks and financial institutions, was introduced for thepurpose of focussed supervision of NBFCs accepting such deposits. The amount of such publicdeposits held by NBFCs, which as at end of March 1998 was Rs.23,820 crore, declined toRs.19,341 crore as at end of March 2000.5.3 Owing to certain disquieting developments in the NBFC sector, the RBI Act wasamended in 1997, providing for a comprehensive regulatory framework for NBFCs. The RBI(Amendment) Act, 1997 provides for compulsory registration with the Reserve Bank of allNBFCs, irrespective of their holding of public deposits, for commencing and carrying onbusiness, minimum entry point norms, maintenance of a portion of deposits in liquid assets,creation of Reserve Fund and transfer of 20 per cent of profit after tax annually to the Fund. TheAmendment Act also conferred powers on Reserve Bank to issue directions to companies and itsauditors, prohibit deposit acceptance and alienation of assets by companies and effect winding upof companies.5.4 Accordingly, the Reserve Bank issued directions to companies on acceptance of publicdeposits, prudential norms like capital adequacy, income recognition, asset classification,provision for bad and doubtful debts, exposure norms and other measures to monitor the

financial solvency and reporting by NBFCs. Directions were also issued to auditors to reportnon-compliance with the RBI Act and regulations to the Reserve Bank, Board of Directors andshareholders.1. Registration of NBFCs5.5 The registration is compulsory for all NBFCs, irrespective of their holding of publicdeposits. The types of NBFCs regulated by the Reserve Bank are indicated in Table V.1. Theamended Act, which introduced comprehensive changes in Chapter III-B, III-C and V, providesfor an entry point norm of Rs.25 lakh as the minimum net owned fund (NOF). Subsequently, fornew NBFCs seeking registration with the Reserve Bank to commence business on or after April21, 1999, the requirement of minimum level of NOF was revised upwards to Rs.2 crore. NoNBFC can commence or carry on business of a financial institution including acceptance ofpublic deposit without obtaining a Certificate of Registration (CoR) from the Reserve Bank.Table V.1: Non-Banking Financial Entities Regulated by Reserve BankNon-Banking Financial Companies Principal BusinessI. Non-Banking Financial Company In terms of the Section 45-I(f) read with Section 45-I(c) of theRBI Act, 1934, as amended in 1997, their principal business isthat of receiving deposits or that of a financial institution, suchas lending, investment in securities, hire purchase finance orequipment leasing.Equipment leasing company (EL) Equipment leasing or financing of such activity.Hire purchase finance company (HP) Hire purchase transaction or financing of such transactions.Investment company (IC) Acquisition of securities and trading in such securities to earn aprofit.Loan company (LC) Providing finance by making loans or advances, or otherwise forany activity other than its own; excludes EL/HP/HousingFinance Companies (HFCs).Residuary non-banking company (RNBC) Company which receives deposits under any scheme orarrangement, by whatever name called, in one lump-sum or ininstalments by way of contributions or subscriptions or by saleof units or certificates or other instruments, or in any manner.These companies do not belong to any of the categories as statedabove.II. Mutual benefit financial company (MBFC) i.e.Nidhi CompanyAny company which is notified by the Central Governmentunder Section 620A of the Companies Act1956 (1 of 1956).III. Mutual Benefit Company (MBC), i.e.,potential Nidhi companyA company which is working on the lines of a Nidhicompany.However, it has not yet been so declared bythe CentralGovernment, has minimum NOF of Rs.10 lakh, has applied tothe Reserve Bank for CoR and also to Department of CompanyAffairs (DCA) for declaration as nidhi company and has notcontravened direction/ regulation of Reserve Bank/DCAIV. Miscellaneous non-bankingcompany(MNBC), i.e., Chit Fund CompanyManaging, conducting or supervising as a promoter, foreman oragent of any transaction or arrangement bywhich the companyenters into an agreement with aspecified number of subscribersthat every one of them shall subscribe a certain sum ininstalments over a definite period and that every one of suchsubscribers shall in turn, as determined by lot or by auction or bytender or in such manner as may be provided for in the

arrangement, be entitled to the prize amount5.6 The Reserve Bank received applications for CoR from 36,505 NBFCs, of which, 13,815applications were approved and 18,355 were rejected, as at end-August 2001. Out of the totalapprovals of 13,815 applications, only 776 companies have been permitted to accept publicdeposits.2. Supervision of NBFCs5.7 The supervisory framework for NBFCs is based on three criteria, viz., (a) the size ofNBFC, (b) the type of activity performed, and (c) the acceptance or otherwise of public deposits.Towards this end, a four-pronged supervisory strategy comprising (a) on-site inspection based onCAMELS (capital, assets, management, earnings, liquidity, systems and procedures)methodology, (b) computerised off-site surveillance through periodic control returns, (c) aneffective market intelligence network, and (d) a system of submission of exception reports byauditors of NBFCs, has been put in place. The regulation and supervision is comprehensive forcompanies accepting or holding public deposits to ensure protection of interests of depositors.5.8 Companies holding or accepting public deposits are required to comply with all thedirections on acceptance of public deposits, prudential norms and liquid assets, and shouldsubmit periodic returns to the Reserve Bank. They are supervised using all the supervisory toolsindicated above.5.9 Companies not holding or accepting public deposits are regulated and supervised in alimited manner. They are required to comply only with prudential norms relating to incomerecognition, accounting standards, asset classification and provisioning against bad and doubtfuldebts. They are less frequently inspected. Such companies are presently not required to submitany returns to the Reserve Bank. Thus, market intelligence and auditors’ exception reportsconstitute the important supervisory tools in respect of these companies.3. Policy Developments Relating to NBFCs(a) NBFCs Registered and Regulated by Reserve BankMonetary and Credit Policy Statements5.10 The Mid-Term Review of Monetary and Credit Policy for the year 2000-01 announced inOctober 2000 and the Monetary and Credit Policy for 2001-02 announced in April 2001 finetunedthe policy environment governing NBFCs. Policy changes, inter alia, included changes ininterest rate on public deposits and introduction of asset-liability management system for certaincategories of NBFCs. A half-yearly Financial Stability Review using Macroprudential Indicators(MPI) data as relevant for NBFCs was also prepared. The chronology of major policydevelopments is presented in the Annexure.Reduction in Interest Rate on Deposits5.11 Effective from April 1, 2001, taking into account the market conditions and changes inother interest rates in the financial system, the maximum rate of interest that NBFCs can pay ontheir public deposits was reduced from 16 per cent to 14 per cent per annum. The ceiling oninterest rate on the deposits accepted by Miscellaneous Non-Banking Companies (Chit Fundcompanies) and Mutual Benefit Financial Companies (Nidhi companies) was also brought downto 14 per cent. Effective November 1, 2001, the ceiling on rate of interest has been furtherbrought down to 12.5 per cent.Issuance of Commercial Paper by NBFCs5.12 On October 10, 2000, the Reserve Bank issued guidelines for issue of commercial paperby companies, inter alia, exempting money received by NBFCs by issue of commercial paper(CP) in accordance with this guidelines, from the purview of public deposits.

Asset Liability Management (ALM) System for NBFCs5.13 The Reserve Bank announced ALM guidelines for NBFCs for effective risk management.All NBFCs with asset size of Rs.100 crore or above or with public deposits of Rs.20 crore orabove, as per their balance sheet as on March 31, 2001, were instructed to have ALM systems inplace. These NBFCs were advised to constitute an ALM Committee, under the charge of ChiefExecutive Officer or other Senior Executive and other specialist members, for formalising ALMsystems. The number of companies likely to be covered by the guidelines is about 70 and theyaccount for 75-80 per cent of total public deposits held by reporting NBFCs. The ALM system isrequired to be implemented by NBFCs by March 31, 2002. In the case of NBFCs holding publicdeposits of Rs.20 crore or above, the first ALM return, comprising of statements on structuralliquidity, short-term dynamic liquidity and interest rate sensitivity, as on September 30, 2002,should be submitted to the Reserve Bank by October 31, 2002. NBFCs not holding publicdeposits, but having asset size of Rs.100 crore or above would be advised of the supervisoryframework in due course of time. The companies have been advised to conduct trial runs duringthe half-year ending September 30, 2001 and half-year beginning October 1, 2001, and reportoperational difficulties in implementing the system for rectification. The Chit Funds and Nidhicompanies have, for the present, been kept out of the purview of these guidelines. NBFCs notqualifying presently have also been advised to put in place an ALM system, as it is theendeavour of the Reserve Bank to extend these guidelines to all NBFCs in future.Rationalisation of the Requirement of Introduction for Depositors of NBFCs5.14 To rationalise requirements of introduction for depositors stipulated earlier in June 2000,it was clarified that requirement of introduction was for purpose of identification of depositors,so that deposits are not made in fictitious names. NBFCs were advised to obtain and keep onrecord copies of identification of depositors, viz., passport, ration card, election identity card,identification by an existing depositor, as proof of identity of the prospective depositors.Entry of NBFCs into Insurance Business5.15 Consequent upon issue of final guidelines for entry of NBFCs into insurance business inJune 2000, the Reserve Bank permitted five NBFCs to undertake insurance business as jointventure participants in insurance companies. Of these, while two NBFCs were grantedpermission to undertake both life and general insurance business, three NBFCs were permitted toundertake only life insurance business with risk participation. One company was permitted bothto engage in insurance agency business as well as to make strategic investment in equity ofinsurance company upto 10 per cent of its owned fund. Another company was grantedpermission to conduct only insurance agency business while a third company could only makestrategic investment in equity of insurance company.Rationalisation of Returns Submitted by NBFCs5.16 In order to improve the reporting of supervisory information and facilitate electronicprocessing, the formats of all returns prescribed in terms of Directions issued under RBI Act,submitted by the NBFCs and Chit Fund companies at quarterly, half-yearly and annual intervalswere rationalised. Such a step was also necessitated by the twin concerns of the Reserve Bank totake expeditious steps, wherever necessary, as also to intensify off-site monitoring procedure ofthe deposit-taking/ holding NBFCs. A monthly return on repayment of deposits was prescribedfor NBFCs holding public deposits, whose applications for CoR under Section 45-IA of RBI Act,1934 were rejected or CoR was cancelled, if it was granted earlier.Focus on Large NBFCs with Public Deposit exceeding Rs. 20 crore5.17 For addressing supervisory concerns and for picking up early warning signals of

deterioration in financial health of companies (especially those holding a substantial quantum ofpublic deposits), the quarterly return for compiling monetary aggregates, calling for informationon asset-liability position from NBFCs holding public deposits of Rs.20 crore and above, wasexpanded to include certain critical supervisory information. The return prescribes companies tofurnish information on net owned fund, public deposits, NPA position, credit rating, cash flow,certain key ratios, etc. This is expected to enable closer monitoring of large NBFCs holdingpublic deposits of Rs.20 crore and above.Residuary Non-Banking Companies (RNBCs)5.18 RNBCs are a class of NBFCs which cannot be classified as equipment leasing, hirepurchase, loan, investment, nidhi or chit fund companies, but which tap public savings byoperating various deposit schemes, akin to recurring deposit schemes of banks. The depositacceptance activities of these companies are governed by the provisions of Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. These directions include provisionsrelating to the minimum (not less than 12 months) and maximum period (not exceeding 84months) of deposits, prohibition from forfeiture of any part of the deposit or interest payablethereon, disclosure requirements in the application forms and the advertisements solicitingdeposits and periodical returns and information to be furnished to the Reserve Bank.5.19 In the absence of any linkage of deposits to their NOF, to safeguard the depositors'interests, these companies have been directed to invest not less than 80 per cent of aggregatedeposit liabilities as per the investment pattern prescribed by the Reserve Bank, and to entrustthese securities to a public sector bank to be withdrawn only for repayment of depositors. Subjectto compliance with the investment pattern, they can invest 20 per cent of aggregate liabilities orten times its net owned fund, whichever is lower, in a manner decided by its Board of Directors.5.20 The RNBCs are the only class of NBFCs which are enjoined to pay a minimum rate ofinterest on their deposits. The floor rate of interest for deposits are specified by the Reserve Bankin terms of RNBC Directions, 1987. There is no upper limit prescribed for RNBCs unlike otherNBFCs, which can pay any rate of interest subject to the maximum ceiling prescribed by theReserve Bank. The floor interest rate payable by RNBCs was revised downwards from 6 per centto 4 per cent per annum (to be compounded annually) on daily deposit schemes and from 8 percent to 6 per cent per annum (to be compounded annually) on other deposit schemes of higherduration or term deposits. The provisions of prudential norms were extended to RNBCs, underthe provisions of the NBFC Prudential Norms (RB) Directions, 1998 and compliance withprudential norms is mandatory and a prerequisite for acceptance of deposits.5.21 Monitoring and inspection of these companies, from time to time, revealed continuanceof many unsatisfactory features like non-compliance with the core provisions of the Directions,forfeiture of the depositors' money on one pretext or the other, diversion of depositors' money toassociate concerns and/or investment in illiquid assets, violation of investmentrequirements/pattern, etc., thus jeopardising the interests of depositors. The Reserve Bank wasissuing prohibitory orders on a case-by-case basis restraining erring RNBCs from acceptingdeposits. Some of the ingenious promoters floated new companies and started accepting depositsthrough new entities or shifted their area of operations to other States. The requirement ofcompulsory registration before commencing business of RNBC and concerted action takenagainst such companies has curbed such practices to a large extent.5.22 The Reserve Bank received 106 applications for Certificate of Registration (CoR) fromNBFCs which were functioning as RNBCs by accepting deposits under some scheme orarrangement. While 12 companies subsequently converted themselves to NBFCs, applications of

84 companies have been rejected. Ten NBFCs are still functioning as RNBCs, the total depositsof which amounted to nearly Rs. 11,000 crore, constituting about 57.0 per cent of the totaldeposits of all reporting NBFCs.(b) NBFCs not Registered with the Reserve BankMutual Benefit Companies5.23 Mutual Benefit financial companies (Nidhis) are NBFCs notified under Section 620A ofthe Companies Act, 1956 and primarily regulated by Department of Company Affairs (DCA)under the directions / guidelines issued by them under Section 637 A of the Companies Act,1956. These companies are exempt from the core provisions of the RBI Act viz., requirement ofcompulsory registration, maintenance of liquid assets and transfer of profits to Reserve Fund.These companies are also exempted from the core provisions of NBFC directions relating toacceptance of public deposits. Directions relating to ceiling on interest rate, maintenance ofregister of deposits, furnishing receipt to depositors and submission of returns to Reserve Bankare however applicable to these companies.5.24 The Government of India constituted an Expert Committee in March 2000 (Chairman:Shri P.Sabanayagam) to examine various aspects of the functioning of the Nidhi companies andsuggest an appropriate policy framework for overall improvement of these companies. This wasdone with a view to facilitate their healthy functioning and restore the confidence of theinvesting public. The salient features of the recommendations of the Committee are detailed inBox V.1.Miscellaneous Non-Banking Companies (MNBCs)5.25 MNBCs are mainly engaged in the Chit Fund business. The term 'deposit' as definedunder Section 45 I(bb) of the Reserve Bank of India Act, 1934 does not include subscription toChit Funds. The Chit Fund companies have been exempted from all the core provisions ofChapter IIIB of the RBI Act including registration. In terms of Miscellaneous Non-BankingCompanies (RB) Directions, the companies can accept deposits upto 25 per cent and 15 per centof the NOF from public and shareholders, respectively, for a period of 6 months to 36 months,but cannot accept deposits repayable on demand/notice.5.26 The Reserve Bank only regulates the deposits accepted by these companies, but it doesnot regulate their Chit Fund business, which is administered by the respective State Governmentsthrough the offices of Registrars of Chits. The Chit Funds Act, 1982 was enacted as a CentralAct for ensuring uniformity in the provisions applicable to Chit Fund institutions throughout thecountry, and all State Governments are required to frame rules for extending the provisions ofthis Act to their respective jurisdictions. At present, 16 States and 6 Union Territories haveadopted the Central Act and the Reserve Bank is pursuing with the State Governments of AndhraPradesh, Arunachal Pradesh, Gujarat, Haryana, Kerala, Maharashtra, Mizoram and Nagaland forearly formulation of rules under the Central Act2 .Box V.1: Recommendations of the Expert Committee on NidhisThe Expert Committee on Nidhis, comprising members from the Government as well as the Reserve Bank,submitted its Report to the Government on September 28, 2000. The Committee observed that although Nidhisessentially operate on the principle of 'mutual benefit' (i.e., they accept deposits only from members and lend only tomembers), given the large number of failures in this sector, the regulatory framework governing such companiesshould be on the same lines as that applicable to NBFCs, without stifling the basic principle on which they areformed or disturbing their local character. Accordingly, the regulatory framework for such companies recommendedby the Committee encompassed entry point barriers, minimum capital funds, debt-equity ratio, liquid assetrequirements, restrictions on dividend, ceiling on interest rates on deposits and loans, regulations of variousmanagerial aspects, disclosure norms, prudential norms, adequate supervisory framework, role of auditors and othermeasures for protection of depositors' interests.

The statutory regulatory framework for Nidhis suggested by the Committee encompass the following stipulations:I. Entry Point Norms(i) Entry point barriers of minimum members of 500 and minimum capital fund of Rs.10 lakh,(ii) Use of 'Nidhi' as part of the name of the company to distinguish between a NBFC and a Nidhi company, restrictions onopening branches by Nidhi companies,(iii) Regulation over issue of equity and preference share capital,II. Prudential Norms(iv) Prudential norms on income recognition, asset classification, credit concentration, provisioning for bad and doubtfuldebts,(v) Restrictions over voting rights and other managerial aspects including remuneration and loans to Directors, norms forconduct of affairs of the Board of Directors, prohibition of grant of loans to Directors, etc.(vi) Sectoral exposure ceilings for aggregate loans against each type of collateral security,III. Regulatory Stipulations(vii) Ceiling on interest rates on deposits and loans,(viii) Minimum and maximum period of deposits,(ix) Advertisement and disclosure norms for deposit acceptance, (x) Net owned fund to deposit ratio of 1:20,(xi) Liquid asset requirements of not less than 10 per cent of deposits,(xii) Adequate reporting system and supervisory framework, submission of quarterly and other periodical returns by theNidhis to the regulatory authority after certification by the auditor,(xiii) Appointment of auditors by the company out of the three names suggested by the regulatory authority,IV. Other Measures(xiv) Dividend not to exceed 25 per cent per annum, subject to transfer of equivalent amount to the Reserve Fund,(xv) Penal provisions for various violations, and,(xvi) Other depositors' protection measures like contingency fund, insurance cover, if possible.At present, Nidhis are governed under the provisions of the Companies Act in force. However, the Reserve Bank isalso empowered to issue directions in matters relating to deposit acceptance activities. The Committee, therefore,suggested that the dual regulatory control over Nidhis should be done away with and that the sole responsibility forregulating and supervising of Nidhis could be under the DCA, Government of India and the Reserve Bank couldtender advice from time to time. The Report is presently under consideration of the Government.4. Implementation of Recommendations of Task Force on NBFCs (1998)Financial Companies Regulation Bill, 20005.27 The Task Force constituted by Government of India (Chairman: Shri C.M. Vasudev) toreview the regulatory and supervisory framework for NBFCs and unincorporated bodies andaddress the shortcomings in dealing with the investors' complaints submitted its report onOctober 28, 1998. The recommendations, which have since been accepted by the Government,can be stratified into four broad strands, according to their status of implementation, viz.,recommendations which (a) were implemented with immediate effect (on December 18, 1998)by modifying the existing notification/Directions; (b) required statutory amendments, (c)required amendments to the Directions under the RBI Act, and (d) needed to be implementedover a period of time through administrative action. The Government of India framed theFinancial Companies Regulation Bill, 2000 to implement the recommendations requiringstatutory changes, as also consolidate the law relating to NBFCs and unincorporated bodies witha view to ensure depositor protection, (Box V.2).State Acts for Protection of Interests of Depositors5.28 The Task Force on NBFCs had recommended that State Governments should beempowered to initiate penal action against those NBFCs which function illegally or accept publicdeposits without any authorisation. It emphasized that such legislation should be expeditiouslyenacted. As a move towards this process, Tamil Nadu Protection of Interests Depositors (in

Financial Establishments) Act, 1997, which contains penal provisions for promoters of financialestablishments defaulting on repayment of deposits and interest payments, and for attachment ofassets of defaulters to ensure payment to depositors was passed. It also provides for setting up ofspecial Courts to which the pending cases against financial companies could be transferred. TheReserve Bank also advised State Governments / Union Territories to enact such legislations.Eleven State Governments / Union Territories have since taken substantial steps in this regard.Box V.2: Financial Companies Regulation Bill, 2000The Government of India framed a new legislation to amend and consolidate the provisions contained in Chapter IIIB,III-C and V of the RBI Act, 1934 relating to the regulation and supervision of financial companies, hithertoknown as non-banking financial companies (NBFCs). This included prohibition of acceptance of deposits byunincorporated bodies and incorporating the recommendations of the Task Force on NBFCs, which had madecertain recommendations to this effect. The salient features of the proposed legislation, which are materiallydifferent from the corresponding provisions of RBI Act or are new provisions are as follows:I. Basic Stipulations(i) The draft bill has been named as 'Financial Companies Regulations Bill, 2000'. All the NBFCs will beknown as Financial Companies instead of NBFCs.(ii) The term 'public deposit' has been defined in the Bill for the first time and the definition would meanthe same as at present in the NBFC Directions.(iii) There would be a nine member Advisory Council for Financial Companies under the Chairmanship ofDeputy Governor, drawing on members from the representatives of Associations of FinancialCompanies and other experts in related areas to advise the Reserve Bank.(iv) NBFCs holding /accepting public deposits would be prohibited from carrying on any non-financialbusiness without the prior approval of the Reserve Bank and the non-financial business presentlycarried on by them would have to be wound up or transferred to a subsidiary within three years. Anyother business or fee-based activity like insurance agency business, portfolio management, etc., wouldrequire prior approval of the Reserve Bank.II .Entry Point Norms(v) The requirement of obtaining the CoR from the Reserve Bank would be compulsory for all financialcompanies, irrespective of whether the companies accept public deposits or not. However, the nonpublicdeposit taking financial companies would require minimum owned fund of Rs.25 lakh, whereasthe public deposit taking financial companies would require minimum net owned fund (NOF) of Rs.2crore and a specific authorisation from the Reserve Bank to accept public deposits.(vi) There would be powers with the Reserve Bank to (a) prescribe different capital for different classes offinancial companies, (b) raise the requirement of minimum owned fund (entry norm) from Rs.25 lakh toRs.200 crore for new financial companies not accepting public deposits, (c) raise the minimum NOF(entry norm) from the present ceiling of Rs.2 crore to Rs.10 crore in the case of new financialcompanies intending to accept public deposits, and (d) raise the minimum NOF from the present levelof Rs.25 lakh to Rs.2 crore for the existing financial companies accepting public deposits. However,sufficient time would be allowed to such financial companies to attain the enhanced capitalrequirement.(vii) The requirement of creation of reserve fund would be applicable only to the financial companiesaccepting public deposits, as against the earlier requirement applicable to all NBFCs.(viii) Unsecured depositors would have first charge on liquid assets and assets created out of the deploymentof the part of the reserve fund.(ix) The financial companies would require prior approval of the Reserve Bank for any change in the name,change in the management or change in the location of the registered office.(x) Any sale of property in violation of order for prohibition from alienation of any property or assetswould be void and that such order could be extended by the Reserve Bank in tranches of one year eachon each occasion upto a period of five years.III Regulatory and Supervisory Issues(xi) The Reserve Bank would be empowered to appoint Special Officer(s) on a delinquent financialcompany and a duty has been cast on such company to cooperate with such Special Officer(s).(xii) The Company Law Board (CLB) would continue to be authority to adjudicate the claims of depositors

against the delinquent companies with powers to order initial payment of a part of deposit, attach assetsof fraudulent financial company and appoint Recovery Officer(s) for management of such asset. Thefinancial company would have no recourse to the CLB to seek deferment of the depositors' dues.(xiii) The prohibitory provisions for unincorporated bodies would continue in the Financial CompaniesRegulations Bill, but the role of exercising the powers for enforcement of these provisions have beenexclusively entrusted to State Governments, in addition to the powers under the respective State Lawsfor protecting the interests of investors in financial establishments.(xiv) There would be powers vested in the District Magistrates to call for information and to proceed againstdelinquent unincorporated bodies.(xv) There would be a ban on the issue of advertisement for soliciting deposits by all unincorporated bodies,irrespective of whether they are conducting financial business or not.(xvi) Unauthorised deposit-taking by companies (a) whose applications for Certificate of Registration havebeen rejected, (b) whose registration has been cancelled, (c) who have been prohibited from acceptingpublic deposits would be a cognisable offence. The same would be the case for unregistered financialcompanies as well as unincorporated bodies.(xvii) Powers would be vested with a police officer of the rank not below that of the Superintendent of Policeof any State to order investigations into the alleged violations of requirement of registration by financialcompanies and prohibition from acceptance of deposits by unincorporated bodies.(xviii) Penalties have been rationalised in accordance with the severity of defaults, with the objective that thepenalty should serve as a deterrent to others.The Bill has been introduced in the Parliament in 2000 and has since been referred to the Standing Committee onFinance.5. Business of the NBFC Sector5.29 The broad profile of the NBFC sector for 1998-99 and 1999-2000, based on theregulatory returns submitted by deposit holding/accepting companies is presented in Table V.2.In view of the difference in the number of reporting companies in the two years, the data are notstrictly comparable. As at end-March 1999, the total outstanding public deposits of the 1,547deposit holding companies (both registered and unregistered) aggregated Rs.20,429 crore,equivalent to 2.6 per cent of the outstanding deposits (Rs.7,71,129 crore) of scheduledcommercial banks (excluding Regional Rural Banks). In the case of 1,005 reporting companies,as at end-March 2000, the total quantum of outstanding public deposits reported by them wasRs.19,342 crore, equivalent to 2.2 per cent of the aggregate deposits (Rs.8,96,696 crore) ofscheduled commercial banks.Table V.2: Profile of the NBFC Sector(As at end-March)(Amount in Rs. crore)Item 1999 2000NBFCs of which RNBCs NBFCs of which RNBCs1 2 3 4 5Number of reporti ng companies 1,547 11 1,005 9Total Assets 47,048.50 11,080.50 51,324.26 11,317.31Public Deposits 20,428.93 10,644.27 19,341.72 11,003.77(52.1) (56.9)Net Owned Funds 9,118.27 -666.39 6,222.89 -442.82Notes: 1. Figures are provisional.2. Figures in brackets indicate percentages to total outstanding deposits of NBFCs.5.30 The aggregate assets of the NBFC sector increased to Rs.51,324 crore as on March 31,2000, from Rs.47,049 crore, as on March 31, 1999.5.31 The break-up of public deposits within the different categories of NBFCs is provided inTable V.3. Some of the companies have converted themselves into non deposit-holdingcompanies by repaying the deposits held by them. At the disaggregated level, public depositswith the hire purchase companies and RNBCs increased by 22.3 per cent and 3.4 per cent,

respectively (Chart V.2).6. Region-wise Composition of Deposits held by NBFCs5.32 The region-wise analysis is based on the number of deposit-holding/accepting NBFCs thatreported data to the Reserve Bank for the years ending March 1999 and March 2000 (Table V.4and Chart V.3). The NBFCs based in the southern region continued to account for a significantshare of the reporting NBFCs in both years although their share fell sharply from 23.7 per cent oftotal public deposits at end-March 1999, to 16.4 per cent at end-March 2000. Of the NBFCslocated in the southern region, the major quantum of public deposits was held by the NBFCslocated in Chennai. The deposits of NBFCs located in the western region declined from 14.0 percent at end-March 1999 to 12.6 per cent at end-March 2000. The share of deposits of the NBFCsbased in the northern region to the total deposits of all NBFCs, recorded an increase from 2.4 percent at March 1999 to 2.7 per cent at March 2000, mainly due to an increase in the share ofpublic deposits held in New Delhi. The share of deposits in the eastern region increased from37.7 per cent of total deposits to 49.5 per cent mainly on account of mobilisation of nonconvertibledebentures (NCDs) to the tune of Rs. 1,668 crore by one Government-owned NBFCbased in West Bengal. The public deposits reported by NBFCs in four metropolitan centres ofMumbai, New Delhi, Kolkata and Chennai accounted for Rs.14,403 crore (70.5 per cent) andRs.14,920 crore (77.1 per cent), respectively, of the total deposits for the years ending March1999 and March 2000.Table V.3 : Activity–wise Profile of Public Deposits of NBFCs(As at end-March)(Amount in Rs. crore)Nature of Business Public Deposits Percentage VariationCol. (3) over Col. (2)1999 20001 2 3 41. Equipment Leasing (EL) 1,172. 91 1,021.20 -12.9(5.7) (5.2)2. Hire Purchase (HP) 3,339.78 4,083.54 22.3(16.3) (21.2)3. Investment and Loan (IL) 4,455.80 2,517.46 -43.5(21.8) (13.0)4. RNBCs 10,644.27 11,003.77 3.4(47.8) (56.9)5. Other NBFCs* 816.17 715.75 -12.3(4.0) (3.7)Total 20,428.93 19,341.72 -5.3(100.0) (100.0)* includes Miscellaneous Non-Banking Companies, unregistered and unnotified Nidhis etc.Note: Figures in brackets indicate percentages to total.7. Interest Rate and Maturity Pattern of Deposits with NBFCs5.33 The maturity-wise analysis of deposits held by NBFCs together with the interest raterange on the deposits is presented in Table V.5 and Table V.6.5.34 The broad trends indicate that NBFCs (other than RNBCs) had outstanding publicdeposits of Rs.9,785 crore as at end-March 1999, which declined to Rs. 8,338 crore by end-March 2000. The decline of Rs.1,447 crore (14.8 per cent) in public deposits was observed in 1-2year, 2-3 year and 3-5 year maturities. However, the quantum of public deposits in the maturitybucket exceeding 5 years witnessed a significant jump, from Rs.168 crore at end-March 1999 toRs.1,718 crore by end-March 2000. This is mainly due to mobilisation of non-convertible

debentures (NCDs) to the tune of Rs. 1,668 crore by one Government-owned NBFC based inWest Bengal. In 1999, around 90 per cent of the deposits were in the maturity bucket of 1-5years, while as at end-March 2000, most deposits were in the maturity bucket '1-2 years', '2-3years' and 'exceeding 5 years'; the last category comprising over one-fifth of the public depositsas at end-March 2000.5.35 Interest rate-wise, there was a rise in the quantum and percentage of deposits in theinterest rate range of 12-14 per cent. The deposits in this range increased from Rs. 2,337 crore(23.9 per cent) in 1999 to Rs. 3,702 crore (44.4 per cent) (Chart V.4). Deposits with interest ratesof over 16 per cent declined from Rs. 3,645 crore to Rs. 1,144 crore, over the year.8. Asset Profile of NBFCs5.36 The information on the asset profile of NBFCs (excluding RNBCs) based on reportingcompanies reveals that out of 1,536 companies, 30 NBFCs with an asset size exceeding Rs.50crore accounted for 92 per cent of the total assets. By end-March 2000, the number of suchcompanies increased to 66 and these accounted for 91 per cent of the total assets of NBFC sector(Table V.7). Perceptible reduction in the number of small companies was evidenced during theyear 2000. The number of companies in the asset range of Rs.25 lakh to Rs.10 crore declinedfrom 1,442 in 1999 to 840 companies in 2000.Table V.4: Region-wise break-up of Public Deposits held by Registered and Unregistered NBFCs(As at end-March)(Amount in Rs. crore)1999 2000Public Deposits Public DepositsRegion NBFCs NBFCsNo. Amount Per cent of which RNBCs No Amount Per cent of which RNBCsNo Amount Per cent No. Amount Per cent1 2 3 4 5 6 7 8 9 10 11 12 13Northern 204 484.07 2.4 - - - 251 529.04 2.7 - - -North-Eastern 30 0.89 Neg. - - - 4 7.02 Neg. 1 5.55 0.1Eastern 64 7,711.91 37.7 5 7,068.26 66.4 32 9,573.05 49.5 6 7,506.62 68.2Central 244 4,533.94 22.2 4 3,574.73 33.6 124 3,623.41 18.7 2 3,491.64 31.7Western 180 2,851.08 14.0 1 0.27 Neg. 86 2,441.17 12.6 - - -Southern 825 4,847.04 23.7 1 1.01 Neg. 508 3,168.07 16.4 - - -Total 1,547 20,428.93 100.0 11 10,644.27 100.0 1,005 19,341.76 100.0 9 11,003.81 100.0Memorandum Items:Mumbai 123 2,405.04 11.8 - - - 68 2,381.21 12.3 - - -Chennai 408 3,843.13 18.8 - - - 340 2,577.56 13.3 - - -Kolkata 38 7,702.53 37.7 5 7,068.26 66.4 28 9,508.53 49.2 5 7,446.67 67.5New Delhi 90 452.17 2.2 - - - 122 452.65 2.3 - - -Neg.- NegligibleTable V.5: Maturity Pattern of Deposits held by NBFCs @(As at end-March)(Amount in Rs. crore)Maturity Period Amount of Deposits Variation of Col. 2 over Col.31999 2000 Amount Per cent1 2 3 4 5Less than 1 year 1,694.59 1,323.45 -371.14 -21.9(17.3) (15.9)1-2 years 2,904.34 1,615.94 -1,288.40 -44.4(29.7) (19.4)2-3 years 2,895.80 2,462.48 -433.32 -15.0(29.6) (29.5)3-5 years 2,122.16 1,218.45 -903.71 -42.6(21.7) (14.6)5 years and above 167.77 1,717.63 1,549.86 923.8(1.7) (20.6)Total 9,784.66 8,337.95 -1,446.71 -14.8

(100.0) (100.0)@ On the basis of residual maturity of outstanding deposits (excluding RNBCs).Table V.6: Distribution of NBFC Deposits according to Rate of Interest @(As at end-March)(Amount in Rs. crore)Interest Range Amount of deposits Per cent to total deposits(per cent)1999 2000 1999 20001 2 3 4 5Upto10 52.38 22.96 0.5 0.310-12 87.49 588.50 0.9 7.112-14 2,336.67 3,702.08 23.9 44.414-16 3,662.74 2,880.79 37.4 34.6More than16 3,645.38 1,143.62 37.3 13.6Total 9,784.66 8,337.95 100.0 100.0@ Excluding RNBCs.9. Distribution of Assets of NBFCs according to Activity5.37 The major portion of the assets of NBFCs (excluding RNBCs) are in the form of hirepurchase and equipment leasing assets. These two portfolios constituted 42.9 per cent of the totalassets of NBFCs as at end-March 2000. The loans and inter-corporate deposit (ICD) portfoliosaccounted for 26.4 per cent of the assets of the NBFCs (Table V.8).10. Analysis of Borrowings by NBFCs5.38 The borrowings by NBFCs (excluding RNBCs) for the years ended March 1999 and2000 are presented in Table V.9. As evident from the Table, total borrowings registered amarginal decline of 0.8 per cent, the decline is more pronounced in inter-corporate borrowings(40.1 per cent), money raised through convertible bonds or secured debentures (16.3 per cent)and borrowings from financial institutions (10.4 per cent). Money raised through commercialpaper increased from Rs.465 crore to Rs.554 crore and borrowings through other sourcesincreased from Rs. 4,130 crore to Rs. 6,480 crore (Chart V.5).11. Net Owned Funds of NBFCs5.39 Net owned fund (NOF) of NBFCs is the aggregate of paid-up capital and free reserves,netted by (i) the amount of accumulated balance of loss, (ii) deferred revenue expenditure andother intangible assets, if any, and further reduced by investments in shares and loans andadvances to (a) subsidiaries, (b) companies in the same group and (c) other NBFCs, in excess of10 per cent of owned fund.5.40 The data on NOF of NBFCs for the years 1999 and 2000 presented in Table V.10,reveals that the number of companies having NOF upto Rs. 25 lakh have declined from 736 as atend-March 1999 to 205 as at end-March 2000. This reduction, to an extent, is reflected in thedecline of number of reporting companies by 540 during the same period.Table V.7: Asset Profile of NBFCs*(As at end-March)Range of Assets No. of reporting Assets Percentage(Rs. crore) companies (Rs. crore) Variation of Col.1999 2000 1999 20001 2 3 4 5 61. Less than 0.25 736 82 30.15 7.86 -73.92. 0.25 - 0.50 319 95 49.15 36.36 -26.03. 0.50 - 2 332 397 307.41 434.32 41.34. 2 - 10 55 266 961.49 1,142.02 18.85. 10 - 50 64 90 1,701.31 1,921.11 12.96. 50 - 100 11 16 1,709.95 1,114.35 -34.8

7. 100 - 500 18 28 8,122.76 7,825.22 -3.78. Above 500 1 22 23,085.78 27,525.71 19.2Total 1,536 996 35,968.00 40,006.95 11.2* The 996 reporting NBFCs (excluding RNBCs) have been regrouped on the basis of their asset size as onend-March1999 and end-March 2000.12. Income Expenditure Statement of NBFCs5.41 The profitability analysis of the NBFCs indicates that the net profits of these institutionsregistered an increase during the year 1999-2000. While income witnessed a decline of 0.6 percent, largely due to a drop in fund-based income, the decline in expenditure was morepronounced, with the result that the net profits of NBFCs increased by 14.2 per cent fromRs.120 crore in 1998-99 to Rs.137 crore in 1999-2000. The fee-based income of the reportingNBFCs has registered an increase of Rs. 213 crore (Table V.11).13. Capital Adequacy Ratio5.42 The capital adequacy norms were made applicable to NBFCs in 1998. The norms relatingto capital adequacy ratio (CAR) stipulate that every NBFC shall maintain a minimum capitalratio consisting of tier I and tier II capital that shall not be less than (a) 10 per cent on or beforeMarch 31, 1998; and (b) 12 per cent on or before March 31, 1999, of its aggregate risk-weightedassets and of risk-adjusted value of off-balance sheet items. The total of tier II capital, at anypoint of time, shall not exceed 100 per cent of tier I capital. Table V.12 presents CAR of thereporting companies for the years ended March 1999 and March 2000, respectively.14. Other DevelopmentsRole of BFS in Monitoring NBFCs5.43 Considering the manifold growth of the non-banking financial companies in the earlynineties and with a view to having an integrated approach to the entire financial sector, thesupervision of NBFC sector was brought under the jurisdiction of the Board for FinancialSupervision (BFS) with effect from July 1, 1995. Since then, the BFS has been serving as animportant supervisory body for direction, formulation and overseeing the implementation ofpolicy as well as supervision of NBFCs. Approval of BFS is obtained before any importantpolicy change and amendments in the regulatory framework of NBFCs are carried out. BFS alsoserves as an important forum for deciding the course of action against problem companies andmonitoring their status on an on-going basis. In addition to information notes on specificcompanies, quarterly reports on the status of large, weak and problem companies are discussed inBFS meetings. Furthermore, half-yearly reports on the performance of the NBFC sector are alsoput up for information of BFS.Table V.8: Activity-wise Distribution of Assets of NBFCs @(As at end-March)Activity Amount in Rs.crore Per cent1999 2000 1999 20001 2 3 4 5Loans & ICD 2,158.11 10,561.35 6.0 26.4Investments 4,352.13 5,578.65 12.1 13.9Hire Purchase 13,128.29 12,016.79 36.5 30.0Equipment & Leasing 3,165.18 5,146.70 8.8 12.9Bills 1,095.56 1,280.09 3.0 3.2Other assets 12,068.73 5,423.37 33.6 13.6Total 35,968.00 40,006.95 100.0 100.0@ excluding RNBCs.The share under Loans & ICD has increased because of appropriate classification of assets in 2000, which wereearlier booked under the head ‘Other Assets’.Table V.9: Classification of Borrowings by NBFCs (excluding RNBCs)

(As at end-March)(Amount in Rs. crore)Item 1999 20001 2 3Money borrowed from Central/State Government @ 2,739.59 2,603.60(12.1) (11.6)Money borrowed from foreign sources* 624.18 601.32(2.8) (2.7)Inter-corporate borrowings 3,076.48 1,842.74(13.6) [8.2)Money raised by issue of convertible or secured debentures, 4,001.78 3,348.82Including those subscribed by banks (17.7) (14.9)Borrowings from banks 6,038.10 5,632.77(26.7) (25.1)Borrowings from Financial Institutions 1,544.76 1,384.47(6.8) (6.1)Commercial Paper 465.23 554.42(2.1) (2.5)Others # 4,130.47 6,480.24(18.3) (28.9)Total 22,620.59 22,448.38(100.0) (100.0)@ Mainly by State-Government owned companies.* The amount received from foreign collaborators as well as from institutional investors (Asian DevelopmentBank,International Finance Corporation, etc.). The major amount is in infrastructure and leasing companies.# Includes security deposits from employees and caution money, allotment money, borrowings from mutualfunds, Directors, etc.Note:Figures in brackets are percentages to total.Table V.10: Net Owned Funds vis-à-vis Public Deposits of NBFCs @(As at end-March)(Amount in Rs. crore)Range of 1999 2000NOFAmounts No. of Net Public Public No. of Net Public Publicreporting Owned Deposits Deposits reporting Owned Deposits Depositscompanies Fund as companies Fund asmultiple multipleof NOF of NOF1 2 3 4 5 6 7 8 9Upto 0.25 736 38.08 650.22 17.1 205 -215.15 394.78 -1.80.25 - 0.50 319 70.43 115.51 1.6 360 116.17 194.20 1.70.50 - 5.0 332 442.74 1,067.55 2.4 314 501.98 362.86 0.75 - 10 55 336.37 264.71 0.8 43 294.12 202.13 0.710 - 50 64 1,285.08 2,107.15 1.6 46 1,060.24 2,773.16 2.650 - 100 11 786.99 1,271.05 1.6 9 628.40 877.58 1.4100 - 500 18 3,946.07 4,286.73 1.1 19 4,279.95 3,533.24 0.8Above 1,000 1 1,120.83 21.74 0.02 - - - -Total 1,536 8,026.59 9,784.66 1.2 996 6,665.71 8,337.95 1.3@ Excluding RNBCs.Note : There were no reporting companies with NOF of above Rs. 1,000 crore as at end-March 2000Table V.11: Financial Performance of NBFCs*(Amount in Rs. crore)Item 1998-99 1999-2000 Variation of Col. (3)over Col. (2)1 2 3 4 5

Absolute PercentageA.Income (i+ii) 6,809 6,770 -39 -0.6i) Fund 6,551 6,299 -252 -3.8ii) Fee 258 471 213 82.6B.Expenditure (I+ii+iii) 6,416 6,363 -53 -0.8i) Financial 4,355 3,687 -668 -15.3ii) Operating 1,077 1,614 537 49.9iii) Other 984 1,062 78 7.9C.Tax Provisions 273 270 -3 -1.1D.Net Profit 120 137 17 14.2E.Total Assets 35,968 40,007 4,039 11.2F.Financial Ratios @i) Income 18.9 16.9 -2.0 -ii) Fund Income 18.2 15.7 -2.5 -iii) Fee Income 0.7 1.2 0.5 -iv) Expenditure 17.8 15.9 -1.9 -v) Financial Expenditure 12.1 9.2 -2.9 -vi) Operating Expenditure 3.0 4.0 1.0 -vii) Other Expenditure 2.7 2.7 -0.1 -viii)Tax Provisions 0.8 0.7 -0.1 -ix) Net Profit 0.3 0.3 0.0 -* excluding RNBCs.@ Ratios to Total AssetsClose Monitoring of Errant NBFCs5.44 The Reserve Bank continued to keep close surveillance on large NBFCs, particularlythose which had difficulties in honouring commitments to depositors and against whomCompany Law Board (CLB) had issued orders for repayment of deposits. The implementation ofCLB orders is being monitored by Regional Co-ordination Committees formed at Chennai,Kolkata, New Delhi and Mumbai with representatives from Department of Company Affairs andEconomic Offences Wing of State Governments.Institutionalised Decision-making Mechanism5.45 The Informal Advisory Group for NBFCs constituted by the Reserve Bank in January1998 consists of representatives from the Institute of Chartered Accountants of India, nationallevel Associations of NBFCs, chief executive officers of two large NBFCs, besides the ReserveBank. The Group meets at quarterly intervals to deliberate on regulatory issues relating toNBFCs for aiding decision-making process, and serves as a useful institutionalised frameworkfor periodical consultation with various associations of NBFCs. The term of the Group has beenextended to June 2002.Developmental Aspects5.46 The NBFCs are widely dispersed across the country and their managements exhibitvaried degrees of professionalism. Furthermore, the depositors have varied degrees ofperceptions regarding safety of their deposits while making an investment decision. Therefore, aneed was felt for educating the depositors about the regulations of NBFCs, the personnel ofNBFCs and their auditors about their obligation to the regulator and the personnel ofenforcement bodies like police and State Government departments about their role in curbingunscrupulous activities. The Task Force on NBFCs had also suggested that the StateGovernments should be increasingly involved in curbing the illegal and unauthorised deposittaking activities of the NBFCs and unincorporated bodies engaged in the financial business. TheReserve Bank also received requests from a number of State Governments for conductingseminars/programmes for their civil and police officials on various aspects of legal and

supervisory issues pertaining to NBFCs. Accordingly, the Reserve Bank has organised focussedtraining programmes/ seminars/workshops for personnel of NBFCs and enforcement agencies.Table V.12: Distribution of Reporting NBFCs by CRAR(As at end-March)CRAR 1999 2000Range EL HP LC/IC RNBC Total EL HP LC/IC RNBC Total(per cent)1 2 3 4 5 6 7 8 9 10 11Less than 10 11 33 39 1 84 7 11 12 2 3210-12 1 1 2 - 4 - - 1 - 112-15 1 7 10 - 18 1 3 3 - 715-20 7 27 15 1 50 3 31 8 - 4220-30 10 71 37 - 118 12 52 16 1 81Above 30 27 144 230 2 403 23 253 159 1 436Total 57 283 333 4 677 46 350 199 4 599Publicity Campaign for NBFC Depositors5.47 The elaborate publicity campaign for educating depositors through advertisements whichbegan in July 1998 continued through the year. The campaign has since been fine-tuned with athree-pronged strategy comprising advertisements in print media, spots on electronic media andinformal publicity through seminars and press meets elucidating the steps taken for ensuringprotection of depositors’ interests.Committee for Redesigning Balance Sheet Format for NBFCs5.48 The Committee for Redesigning of Financial Statements of Non-Banking FinancialCompanies (Chairman: Shri V.S.N.Murty), submitted its Report in September 1999. Itrecommended revised formats for balance sheets which essentially follows the existing formatsprescribed under the Companies Act, with additional disclosures in respect of maturity profile ofassets and liabilities, sector-wise concentration of assets and liabilities, details in respect ofoverdue loans and other credits, non-performing assets and provisioning thereagainst, valuationof investments, etc., as schedules to the main balance sheet as well as the formats for theseadditional schedules. Two salient recommendations of the Committee viz., uniform accountingyear ending on March 31, and constitution of audit committees for NBFCs having asset size ofRs.50 crore and above have been implemented. Other recommendations of the Committee areunder the consideration of the Reserve Bank.Asset Securitisation5.49 The Government of India constituted an Expert Committee (Chairman: Shri T.R.Andhyarujina) for the purpose of formulating specific proposals to give effect to the suggestionsmade by the Committee on Banking Sector Reforms (Chairman: Shri M. Narasimham) relatingto changes needed in the legal framework. The Committee submitted its Report in February2000. As a follow up, the Government of India constituted a Working Group (Chairman: ShriS.H. Bhojani, with Shri M.R.Umarji as a member from the Reseve Bank) on asset securitisationin July 2000 to examine the Expert Committee's recommendations for implementation. TheWorking Group has drafted a Bill on asset securitisation and submitted the same to theGovernment.Foreclosure Laws5.50 The Government of India constituted a Working Group (Chairman: Shri M.R. Umarji) inJuly 2000 to examine the recommendations of the Andhyarujina Expert Working Group onForeclosure Laws regarding vesting of powers with banks and financial institutions for takingpossession and sale of securities without the intervention of the courts and to draft a bill forconsideration of the Government. The Working Group submitted its report to the Government

along with the draft Bill in May 2001.1 Regulated deposits are defined as receipt of money by way of deposit or loan or in any other form excludingamounts received as share capital, bank borrowings, institutional borrowings, chit subscription, borrowings fromregistered money lenders and money received in ordinary course of business; further excluding certain other formsof deposits as specified in Non-Banking Financial Companies (Reserve Bank) Directions, 1977 like money receivedfrom Central or State Governments, foreign Government, financial institutions, companies and certain other formsof deposits.2 As regards plantation companies, the Securities and Exchange Board of India (SEBI) is entrusted with theresponsibility of regulating the resource-taking activities of these companies. Accordingly, SEBI has implemented aregulatory framework in terms of which no new plantation scheme can be floated without credit rating and minimumrequirement of paid up capital. The SEBI (Collective Investment Schemes) Regulations, 1999 were notified inOctober 1999. As prescribed in the regulations, no person other than a Collective Investment ManagementCompany, which had obtained a CoR from SEBI under the SEBI (Collective Investment Schemes) Regulations,1999 would be entitled to carry on or sponsor or launch a collective investment scheme. Also, no company engagedin the business of collective investment scheme can launch any new scheme or raise money from investors evenunder existing schemes, unless a CoR is granted to it under the aforesaid regulations. The Securities Laws (SecondAmendment) Act, 1999 inserted a new section 11 AA in the SEBI Act, 1992. In February 2000, the SEBI(Collective Investment Schemes) Amendment Regulations, 2000 were notified in the Gazette of India.