EXICUTIVE SUMMERY

The study presents a comparative study of NBFCs in India. There are almost 13000 registered
NBFCs in India. The study is aimed to provide an holistic vie of the NBFC Industry. NBFC
fulfills the
financial gap !y providing loan at a loer rate of interest. The ma"or players of each field
1# $ousing Finance Industry% &IC $ousing Finance.
'# Infrastructure Finance Industry% I(FC
3# )sset Financing% *hriram Transport Finance
+# Composite% ,eliance Capital
The study also compared the Indian Ban-s v.s NBFC. It as found that at even at the time of the
economic slodon NBFC as more profita!le. /orters Five forces as also used to analyse the
industry and to find the competitiveness in the industry. The industry is not tightly regulated as
there are many regulatory !odies. $ence0 there as an important need to study the NBFC as the
industry plays an important role in the financial *ervices mar-et of IN(I).
It is encouraging that the NBFC sector1s importance is finally !eing ac-noledged across F*
mar-et constituents as ell as the regulator. $oever0 the importance attached to the sector is
often transcending into misplaced e2u!erance. 3ver simplified and vague drivers for NBFC
valuations such as strategic fit and customer !ase0 can never su!stitute dispassionate !usiness
analytics. ) rational assessment of the intrinsic values of NBFCs factoring issues such as past
performance0 structural ea-nesses of the sector 4for instance funding disadvantages#0 along
ith an identification of real capa!ilities are essential to ensure that the e5uili!rium !eteen
price paid and value reali6ed is reached to the e2tent possi!le. In the a!sence of this0 India is sure
to itness the re7opening of the NBFC horror story al!eit ith a ne chapter on the erosion of
NBFC investment values affecting investors across categories
Meaning of NBFC
) Non7Ban-ing Financial Company 4NBFC# is a company registered under the Companies
)ct0 189: and is engaged in the !usiness of loans and advances0 ac5uisition of
shares.stoc-.!onds.de!entures.securities issued !y ;overnment or local authority or other
securities of li-e mar-eta!le nature0 leasing0 hire7purchase0 insurance !usiness0 chit !usiness !ut
does not include any institution hose principal !usiness is that of agriculture activity0 industrial
activity0 sale.purchase.construction of immova!le property. ) non7!an-ing institution hich is a
company and hich has its principal !usiness of receiving deposits under any scheme or
arrangement or any other manner0 or lending in any manner is also a non7!an-ing financial
company 4,esiduary non7!an-ing company#.
NBFCs are doing functions a-in to that of !an-s< hoever there are a fe differences%
4i#an NBFC cannot accept demand deposits< 4ii# an NBFC is not a part of the payment and
settlement system and as such an NBFC cannot issue che5ues dran on itself< and 4iii# deposit
insurance facility of (eposit Insurance and Credit ;uarantee Corporation is not availa!le for
NBFC depositors unli-e in case of !an-s.
1.1 TYPES OF NBFCS
3riginally0 NBFCs registered ith ,BI ere classified as%
4i#e5uipment leasing company<
4ii# hire7purchase company<
4iii# &oan company<
4iv# Investment company.
$oever0 ith effect from (ecem!er :0 '00: the a!ove NBFCs registered ith ,BI have !een
reclassified as
4i# )sset Finance Company 4)FC#
4ii# Investment Company 4IC#
4iii# &oan Company 4&C#
Classification of NBFCs ase! on t"e Nat#$e of its #siness%
The NBFCs that are registered ith ,BI are !asically divided into + categories depending upon
its nature of !usiness%
= >5uipment leasing company<
= $ire7purchase company<
= &oan company<
= Investment company<
= Infrastructure finance company
Reclassification of NBFCs &.e.f. 't" (ece)e$* +,,'%
$oever in terms of the NBFC )cceptance of /u!lic (eposits 4,eserve Ban-# (irections0 18??
ith effect from (ecem!er :0 '00: the a!ove NBFCs registered ith ,BI have !een reclassified
as%
-oan Co).an/ 0-C1
&oan company means any company hich is a financial institution carrying on as its principal
!usiness the providing of finance hether !y ma-ing loans or advances or otherise for any
activity other than its on !ut does not include an )sset Finance Company.
In2est)ent Co).an/0IC1
Investment Company is a company hich is a financial institution carrying on as its principal
!usiness the ac5uisition of securities.
Investment Companies are further divided into folloing su!7 categories%
= Co$e In2est)ent Co).anies%
The ,eserve Ban- of India vide its Notification No. (NB*4/(#CC.No. 18@.03.10.001.'010711
dated )ugust 1'0 '0100 a ne class of NBFCs !y the name of 1Core Investment Companies
4CIC# as added
Core Investment Companies in terms of ,BIs Notification means%
a non7!an-ing financial company carrying on the !usiness of ac5uisition of shares and securities
and hich satisfies the folloing conditions as on the date of the last audited !alance sheet%7
4i# it holds not less than 80A of its net assets in the form of investment in e5uity shares0
preference shares0 !onds0 de!entures0 de!t or loans in group companies<
4ii# its investments in the e5uity shares 4including instruments compulsorily converti!le into
e5uity shares ithin a period not e2ceeding 10 years from the date of issue# in group companies
constitutes not less than :0A of its net assets
Net assets0 for the purpose of this proviso0 ould mean total assets e2cluding B
= Cash and !an- !alances<
= Investment in money mar-et instruments and money mar-et mutual funds
= advance payments of ta2es< and
= deferred ta2 payment.
4iii#it does not trade in its investments in shares0 !onds0 de!entures0 de!t or loans in group
companies e2cept through !loc- sale for the purpose of dilution or disinvestment<
4iv# it does not carry on any other financial activity referred to in *ection +9 I 4c# and +9 I 4f# of
the ,eserve Ban- of India )ct0 183+ e2cept%
a# Investment in
If. !an- deposits0
ii. Coney mar-et instruments0 including money mar-et mutual funds0
iii. ;overnment securities0 and
ID. Bonds or de!entures issued !y group companies<
!# ;ranting of loans to group companies< and
c# Issuing guarantees on !ehalf of group companies.
Ot"e$ Co).anies
3sset Finance Co).an/ 03FC1
)FC ould !e defined as any company hich is a financial institution carrying on as its
principal !usiness the financing of physical assets supporting productive . economic activity0
such as automo!iles0 tractors0 lathe machines0 generator sets0 earth moving and material handling
e5uipments0 moving on on poer and general purpose industrial machines. Financing of
physical assets may !e !y ay of loans0 lease or hire purchase transactions.
/rincipal !usiness for this purpose is defined as aggregate of financing real.physical assets
supporting economic activity and income arising therefrom is not less than :0A of its total assets
and total income respectively.
M#t#al Benefit Financial Co).an/ 0MBFC1
Cutual Benefit Financial Company means a company hich is a financial institution notified !y
The Central ;overnment under section :'0) of The Companies )ct 189:.
The a!ove7mentioned types of NBFCs may !e further classified into%
o NBFCs accepting pu!lic deposit 4NBFCs7(# and
o NBFCs not accepting.holding pu!lic deposit 4NBFCs7N(#.
O.e$ating leasing entities%
3perating leasing companies do not come under the ,BI definition of NBFCs since operating
lease is not Ee5uipment leasingF !usiness as defined !y the ,BI. 3nly financial leasing is
included in the ,BI definition of e5uipment leasing.
1.+ RE4U-3TIONS OF NBFCS
In terms of *ection +97I) of the ,BI )ct0 183+0 it is mandatory that every NBFC should !e
registered ith ,BI to commence or carry on any !usiness of non7!an-ing financial institution as
defined in clause 4a# of *ection +9 I of the ,BI )ct0 183+. $oever0 to o!viate dual regulation0
certain categories of NBFCs hich are regulated !y other regulators are e2empted from the
re5uirement of registration ith ,BI vi6. Denture Capital Fund.Cerchant Ban-ing
companies.*toc- !ro-ing companies registered ith *>BI0 Insurance Company holding a valid
Certificate of ,egistration issued !y I,()0 Nidhi companies as notified under *ection :'0) of
the Companies )ct0 189:0 Chit companies as defined in clause 4!# of *ection ' of the Chit Funds
)ct0 18?' or $ousing Finance Companies regulated !y National $ousing Ban-.
) company incorporated under the Companies )ct0 189: and desirous of commencing
!usiness of non7!an-ing financial institution as defined under *ection +9 I4a# of the ,BI )ct0
183+ should have a minimum net oned fund of ,s '9 la-h 4raised to ,s '00 la-h .e.f )pril
'10 1888#. The company is re5uired to su!mit its application online !y accessing ,BI1s secured
e!site https%..sece!.r!i.org.in.C3*C3*.r!ilogin.do 4the applicant companies do not need to
log on to the C3*C3* application and hence user ids for these companies are not re5uired#. The
company has to clic- on GC&ICH for Company ,egistration on the login page. ) indo
shoing the >2cel application forms availa!le for donload ould !e displayed. The company
can then donload suita!le application form 4i.e. NBFC or *C.,C# from the a!ove e!site0 -ey
in the data and upload the application form. The company may note to indicate the name of the
correct ,egional 3ffice in the field GC7? of the G)nn27Identification /articulars or-sheet
of the >2cel application form. The company ould then get a Company )pplication ,eference
Num!er for the Co, application filed on7line. Thereafter0 the company has to su!mit the hard
copy of the application form 4indicating the Company )pplication ,eference Num!er of its on7
line application#0 along ith the supporting documents0 to the concerned ,egional 3ffice. The
company can then chec- the status of the application !ased on the ac-noledgement num!er.
The Ban- ould issue Certificate of ,egistration after satisfying itself that the conditions as
enumerated in *ection +97I) of the ,BI )ct0 183+ are satisfied.
)ll NBFCs are not entitled to accept pu!lic deposits. 3nly those NBFCs holding a valid
Certificate of ,egistration ith authorisation to accept /u!lic (eposits can accept.hold pu!lic
deposits. NBFCs authorised to accept.hold pu!lic deposits !esides having minimum stipulated
Net 3ned Fund 4N3F# should also comply ith the (irections such as investing part of the
funds in li5uid assets0 maintain reserves0 rating etc. issued !y the Ban-.
Ies0 there is a ceiling on acceptance of /u!lic (eposits. )n NBFC maintaining re5uired
N3F.Capital to ,is- )ssets ,atio 4C,),# and complying ith the prudential norms can accept
pu!lic deposits as follos%
Category of NBFC having minimum N3F of ,s '00 la-hs
Ceiling on pu!lic deposit
)FCJ maintaining C,), of 19A ithout credit rating
)FC ith C,), of 1'A and having minimum investment grade credit rating
1.9 times of N3F or ,s 10 crore hichever is less
+ times of N3F
&C.ICJJ ith C,), of 19A and having minimum investment grade credit rating
1.9 times of N3F
J)FCK)sset Finance Company
JJ &C.IC K &oan company.Investment Company
)s has !een notified on Lune 1@0 '00? the ceiling on level of pu!lic deposits for NBFCs
accepting deposits !ut not having minimum Net 3ned Fund of ,s '00 la-h is revised as under%
Category of NBFC having N3F more than ,s '9 la-h !ut less than ,s '00 la-h ,evised Ceiling
on pu!lic deposits )FCs maintaining C,), of 19A ithout credit rating and >5ual to N3F
)FCs ith C,), of 1'A and having minimum investment grade credit rating 1.9 times of
N3F
&Cs.ICs ith C,), of 19A and having minimum investment grade credit rating >5ual to N3F
presently0 the ma2imum rate of interest an NBFC can offer is 1'.9A. The interest may !e paid
or compounded at rests not shorter than monthly rests.
The NBFCs are alloed to accept.rene pu!lic deposits for a minimum period of 1' months and
ma2imum period of :0 months. They cannot accept deposits repaya!le on demand.
The NBFCs are alloed to accept.rene pu!lic deposits for a minimum period of 1' months
and ma2imum period of :0 months. They cannot accept deposits repaya!le on demand.
NBFCs cannot offer interest rates higher than the ceiling rate prescri!ed !y ,BI from time to
time. The present ceiling is 1'.9 per cent per annum. The interest may !e paid or compounded at
rests not shorter than monthly rests.
NBFCs cannot offer gifts.incentives or any other additional !enefit to the depositors.
NBFCs 4e2cept certain )FCs# should have minimum investment grade credit rating.
The deposits ith NBFCs are not insured.
The repayment of deposits !y NBFCs is not guaranteed !y ,BI.
Certain mandatory disclosures are to !e made a!out the company in the )pplication Form
issued !y the company soliciting deposits.
>ffective from )pril '+0 '00+0 NBFCs cannot accept deposits from N,Is e2cept deposits !y
de!it to N,3 account of N,I provided such amount does not represent inard remittance or
transfer from N,>.FCN, 4B# account. $oever0 the e2isting N,I deposits can !e reneed.
4UI(E-INES FOR NE5 (EPOSITS
Customer identification% MHno The CustomerM 4HIC# should !e the -ey guiding principle for
identification of an individual . corporate customer 4depositor or !orroer#.
)ccordingly0 the HIC frameor- should have to7fold o!"ective0 4i# to ensure customer
identification and verifying his identity and residential address< and 4ii# to monitor transactions
of a suspicious nature.
NBFCs should ensure that the identity of the customer0 including !eneficial oner is done
!ased on disclosures !y customers themselves.
Typically easy means of esta!lishing identity ould !e documents such as /ermanent
)ccount Num!er 4/)N#0 ration card0 driving licence0 >lection CommissionMs identity card0
passport0 et cetera in case of individuals and registration certificate0 partnership deed.agreement0
et cetera and other relia!le documents in respect of companies0 firms and other !odies.
Derification through such documents should !e in addition to the introduction !y a person
-non to the NBFC.
P$oce!#$es fo$ e6isting c#sto)e$s
In respect of e2isting customers0 NBFCs should ensure that gaps and missing information in
compliance of HIC guidelines on customer identification procedure is filled up and completed
!efore Lune 300 '00+.
Ceiling an! )onito$ing of cas" t$ansactions
NBFCs ould normally not have large cash ithdraals and deposits.
$oever0 herever transactions of ,s 10 la-h 4,s 1 million# and a!ove are underta-en0 they
should -eep record of these transactions in a separate register maintained at !ranch0 as ell as at
,egistered 3ffice.
*uch information should !e made availa!le to regulatory and investigating authorities0 hen
demanded.
4#i!elines an! )onito$ing .$oce!#$es
The !oard of directors of NBFCs should formulate policies and procedures to operationalise
the guidelines and put in place an effective monitoring system to ensure compliance !y their
!ranches.
>arly computerisation of !ranch.office reporting ill facilitate prompt generation of such
reports and monitoring.
Inte$nal cont$ol s/ste)s
(uties and responsi!ilities should !e e2plicitly allocated among the staff for ensuring that
policies and procedures are managed effectively and that there is full commitment and
compliance to an effective HIC programme in respect of !oth e2isting and prospective
customers.clients.
Internal audit.inspection
Internal auditors must specifically scrutinise and comment on the effectiveness of the
measures ta-en !y !ranches . offices of NBFC in adoption of HIC norms and steps toards
prevention of money laundering.
*pecific cases of violation should !e immediately !rought to the notice of head . controlling .
registered office.
,ecord -eeping
NBFCs should prepare and maintain proper documentation on their customer relationships
and cash transactions of ,s 10 la-h and a!ove.
The records of all such transactions should !e retained for at least ten years after the
transaction has ta-en place and should !e availa!le for perusal and scrutiny !y audit
functionaries as ell as regulators and la enforcement authorities< as and hen re5uired0 at the
!ranch as ell as at registered office.
Training of staff and management
It is important that all the operating and management staff is made fully aare of the
implications and understand the need for strict adherence to HIC norms.
NBFCs may ta-e suita!le steps to impart training to their operational staff on anti7 money
laundering measures.
RESPONSIBI-ITIES
The NBFCs accepting pu!lic deposits should furnish to ,BI
i. )udited !alance sheet of each financial year and an audited profit and loss account in respect
of that year as passed in the annual general meeting together ith a copy of the report of the
Board of (irectors and a copy of the report and the notes on accounts furnished !y its )uditors<
ii. *tatutory )nnual ,eturn on deposits 7 NB* 1<
iii. Certificate from the )uditors that the company is in a position to repay the deposits as and
hen the claims arise<
iv. Nuarterly ,eturn on li5uid assets<
v. $alf7yearly ,eturn on prudential norms<
vi. $alf7yearly )&C ,eturns !y companies having pu!lic deposits of ,s. '0 crore and a!ove or
ith assets of ,s. 100 crore and a!ove irrespective of the si6e of deposits < vii. Conthly return
on e2posure to capital mar-et !y companies having pu!lic deposits of ,s. 90 crore and a!ove<
and
viii. ) copy of the Credit ,ating o!tained once a year along ith one of the $alf7yearly ,eturns
on prudential norms as at 4v# a!ove.
IMPORT3NCE OF NBFCS
)ccording to ,BI Non Ban-ing Finance Companies 4NBFCs# is a constituent of the institutional
structure of the organi6ed financial system in India. NBFCs perform a significant and important
role in our financial system. They facilitate the process of channelising of pu!lic savings and
provide !etter return to the depositors. Oe are aare that due to li!erali6ation and glo!alisation0
!an-ing industry and financial sector has gone through many reforms. In the present economic
environment it is very difficult to cater need of society !y Ban-s alone so role of Non Ban-ing
Finance Companies and Cicro Finance Companies !ecome indispensa!le. The activities of non7
!an-ing financial companies 4NBFCs# in India have undergone 5ualitative changes over the
years through functional specialisation. The role of NBFCs as effective financial intermediaries
has !een ell recognised as they have inherent a!ility to ta-e 5uic-er decisions0 assume greater
ris-s0 and customise their services and charges more according to the needs of the clients. Ohile
these features0 as compared to the !an-s0 have contri!uted to the proliferation of NBFCs0 their
fle2i!le structures allo them to un!undle services provided !y !an-s and mar-et the
components on a competitive !asis. The distinction !eteen !an-s and non7!an-s has !een
gradually getting !lurred since !oth the segments of the financial system engage themselves in
many similar types of activities. )t present0 NBFCs in India have !ecome prominent in a ide
range of activities li-e hire7purchase finance0 e5uipment lease finance0 loans0 investments0 etc.
By employing innovative mar-eting strategies and devising tailor7made products0 NBFCs have
also !een a!le to !uild up a clientele !ase among the depositors0 mop up pu!lic savings and
command large resources as reflected in the groth of their deposits from pu!lic0 shareholders0
directors and their companies0 and !orroings !y issue of non7 converti!le de!entures0 etc.
)ccording to H/C; survery The Indian Non Ban-ing Finance Company 4NBFC# sector has
often !een relegated to the shados0 in most discussions on the Indian Financial *ervices 4F*#
industry. Ban-s0 insurance companies and capital mar-et players ta-e centre stage and invaria!ly0
NBFCs attract pu!lic attention only during times of crisis. &ittle attention has !een paid to the
silent !ut effective manner in hich NBFCs have spread their operations across the country.
NBFCs have provided financial solutions to sections of society ho hitherto ere at the mercy
of unorgani6ed players for credit and savings products0 hich ere delivered on economically
and socially usurious terms. ronically0 in recent times0 NBFCs are once again in the spotlight for
their perceived strengths and capa!ilities rather than their pro!lems. Ohile this re7rating ought to
!ring cheer to a much maligned sector0 a degree of caution needs to !e instilled ithin potential
investors in NBFCs0 ho need to clearly understand the true drivers of value for finance
companies. This understanding is imperative to ena!le a !etter "udgment of the intrinsic orth of
NBFCs. This article proceeds to illustrate the -ey factors responsi!le for the strong re7rating of
the NBFC sector0 as ell as discuss the validity of each of these factors0 as actual drivers of
value. Today0 the NBFC sector is as financially sound as it has ever !een.To an e2tent0 this can !e
attri!uted to the very pro!lems affecting the sector hich have resulted in the purging of several
players0 leaving the fittest fe to dominate the landscape. Ta-ing the ,eserve Ban- of India1s
4,BI# definition of Preporting NBFCs1 as a pro2y for non7dormant players0 a mere '+ NBFCs
held 8'.@ percent of the total assets of all NBFCs in '0097'00:. The !alance assets0 amounting to
less than ? percent of the total0 ere fragmented across +38 NBFCs. In addition to this
consolidation0 at present0 NBFCs in general are ell7capitali6ed ith strong parent support. )
ma"ority of active NBFCs reported capital ade5uacy ratios e2ceeding 1' percent.
RO-E OF NBFCS
)ccording to >/O ,esearch Foundation 4>/O,FThe Indian economy is going through a period
of rapid Qfinancial li!eralisationM. Today0 the QintermediationM is !eing conducted !y a ide range
of financial institution through a plethora of customer friendly financial products. The segment
consisting of Non7Ban-ing Financial Companies 4NBFCs#0 such as e5uipment leasing.hire
purchase finance0 loan and investment companies0 etc. have made great strides in recent years
and are meeting the diverse financial needs of the economy. In this process0 they have influenced
the direction of savings and investment. The resultant capital formation is important for our
economic groth and development. Thus0 from !oth the macroeconomic perspective and the
structure of the Indian financial system0 the role of NBFCs has !ecome increasingly important.
The crucial role of Non Ban-ing Finance Institutions 4NBFIs# in !roadening access to financial
services0 and enhancing competition and diversification of the financial sector has !een ell
recogni6ed. The main advantages of these companies lie in their a!ility to loer transactions
costs of their operations0 their 5uic- decision7ma-ing a!ility0 customer orientation and prompt
provision of services. Ohile NBFIs are sometimes seen as a-in to !an-s in terms of the products
and services offered0 this is strictly not accurate0 as more often0 NBFIs play a range of roles that
complement !an-s. Further0 *tatus Note on NBFCs NBFIs can add to economic strength to the
e2tent they enhance the resilience of the financial system to economic shoc-s. ) ell developed
and properly regulated NBFI sector is thus an important component of !road0 !alanced0 efficient
financial system that spreads ris-s and provides a sound !ase for economic groth and
prospirity.
ON 4-OB3- CRISIS
)ccording to C),>% NBFC sector faced significant stresses on asset 5uality0 li5uidity and
funding costs due to the glo!al economic slodon R its impact on the domestic economy.
Ohile all the NBFCs ere affected0 the impact varied according to the structural features of each
NBFC. )sset7lia!ility maturity 4)&C# profiles0 type of assets financed and origination .
collection models folloed ere the primary differentiators ithin NBFCs. The support
provided !y the ,eserve Ban- of India 4,BI# highlighted the e2plicit acceptance of the systemic
importance of the sector. FI10 as mar-ed !y re7aligning of the lia!ility profiles0 tightening of
lending norms coupled ith closing don of many of the unsecured loan segments. 3n a
structural !asis0 the sector is no more ro!ust due to the lessons learned !y NBFCs from this
crisis. /rofita!ility is e2pected to !e loer than historical levels due to conservative )&C
management0 higher provisioning and avoidance of high yielding unsecured loan segments.
$oever profits are at the same time e2pected to !e much more sta!le R less
suscepti!le.osperity.
Eligiilit/ C$ite$ia fo$ Sta$ting NBFC
Initial /rocedure
= The *tart up NBFC should !e incorporated under the Companies )ct0 189:
= It should !e registered ith ,BI0 under *ection +97I of the ,BI )ct0 183+
= The company is re5uired to su!mit the application for registration in the prescri!ed format
along ith necessary documents for ,BIMs consideration. ,BI then issues certificate of
registration after satisfying itself that the conditions as enumerated in *ection +97I) of the ,BI
)ct0 183+ are satisfied
= For registration ith ,BI0 the company is re5uired to fill the application0 hich can !e
donloaded from .r!i.org.in.scripts.B*.vieforms.asp2.
= )fter donloading the >SC>& !ased application form0 data should !e -eyed in0 it can !e
uploaded in the ,BIMs *ecure e!site https%..sece!.r!i.org.in. 3nce uploaded0 the company ill
get a Co, 4Company )pplication ,eference Num!er#. *u!se5uently0 the company should ta-e
the hard copy of the same ith the supported documents and su!mit it to the concerned regional
office.
N3T>% Certain category of NBFCs li-e Denture Capital Fund.Cerchant Ban-ing
Companies.*toc- Bro-ing Companies etc need not !e registered ith ,BI they are governed !y
*>BI. Insurance companies holding a valid certificate of registration are regulated !y I,()0
$ousing finance companies regulated !y National $ousing Ban-.
Nat#$e of B#siness
The company should not have its principal !usiness as
4a# )gricultural operations
4!# Industrial activity 4!# The purchase or sale of any goods 4other than securities# or the
providing of any services
4c# The purchase0 construction or sale of immova!le property0 Coreover no portion of the
income should !e derived from the financing of purchases0 constructions or sales of immova!le
property !y other persons
Ca.ital Re7#i$e)ent
The start up company should have a minimum net oned fund 4N3F# of ,s '9 la-h hich is
raised to ,s '00 la-h from )pril '10 1888. Net 3ned Fund /aid7up capital and free reserves0
minus accumulated losses0 deferred revenue e2penditure and other intangi!le assets &ess0 4i#
Investments in shares of su!sidiaries.companies in the same group. all other NBFCs 4ii# The
!oo- value of de!entures.!onds. outstanding loans and advances0 including hire purchase and
lease finance made to0 and deposits ith0 su!sidiaries. companies in the same group0 in e2cess of
10A of the oned funds.
Note% NBFCs that ere in e2istence ho had previously N3F of ,s'9 &a-hs 4!efore the act# are
given a time period of 3 years to attain a N3F of '00 &a-hs. $oever ,BI can still e2tend this
time period for an additional 3 years su!"ect to the condition that such NBFCs should intimate
the ,BI a!out attaining the N3F ithin 3 months from the date of attainment
Reg#lations on NBFCs ta8ing (e.osits
1. )ll NBFCs are not entitled to accept pu!lic deposits. 3nly those NBFCs holding a valid
certificate of registration ith authori6ation to accept pu!lic deposits can accept.hold pu!lic
deposits
'. Ne NBFCs are not alloed to raise pu!lic deposits for period of to years from the date of
registration. )fter completion of to years0 detailed revie is ta-en of the company !y the
regulator
3. The NBFCs are alloed to accept.rene pu!lic deposits for a minimum period of 1' months
and ma2imum period of :0 months. They cannot accept deposits repaya!le on demand
+. NBFCs cannot offer interest rates higher than the ceiling rate prescri!ed !y ,BI from time to
time. The present ceiling is 1'.9 per cent per annum. The interest may !e paid or compounded at
rests not shorter than monthly rests.
9. NBFCs cannot accept deposits from N,I e2cept deposits !y de!it to N,3 account of N,I
provided such amount do not represent inard remittance or transfer from N,>.FCN, account.
:. NBFCs ith net oned fund 4N3F# of less than ,s. '9 la-hs 4ith or ithout credit rating#
are not entitled to accept pu!lic deposits
@. >valuation of the 5uality of management in respect of the promoters.directors is ta-en into
consideration hile giving alloance for ta-ing pu!lic deposits

Resi!#a$/ Non9Ban8ing Co).anies 0RNBCs1
They form a part of NBFCs hoever their functioning is different from the regular NBFCs
,esiduary Non7Ban-ing Company is a class of NBFC hose principal !usiness is receiving of
deposits0 under any scheme or arrangement. The deposits received do not involve investment0
asset financing0 or loans. These companies are re5uired to maintain investments as per directions
of ,BI0 in addition to li5uid assets. The functioning of these companies is different from those of
NBFCs in terms of method of mo!ili6ation of deposits and re5uirement of deployment of
depositorsM funds
= *ahara Cutual Fund as the first ,NBC started in India.
Ceiling on RNBCs ta8ing (e.osits
There is no ceiling on raising of deposits !y ,NBCs !ut every ,NBC has to ensure that
the amounts deposited and investments made !y the company are not less that the
aggregate amount of lia!ilities to the depositors
To ensure the safely of pu!lic investments ,NBCs are re5uired to invest in a portfolio
comprising of highly li5uid and secured instruments vi6. Central.*tate ;overnment
securities0 fi2ed deposit of scheduled commercial !an-s 4*CB#0 Certificate of deposits of
*CB.FIs0 units of Cutual Funds0 etc
Inte$est Pa/)ent on (e.osits
The amount paya!le !y ay of interest0 premium0 !onus or other advantage0 !y a ,NBC
in respect of deposits received shall not !e less than 9A 4to !e compounded annually# on
the amount deposited in lump sum or at monthly or longer intervals< and at the rate of
3.9A 4to !e compounded annually# on the amount deposited under daily deposit scheme.
Further0 an ,NBC can accept deposits for a minimum period of 1' months and ma2imum
period of ?+ months from the date of receipt of such deposit. They cannot accept deposits
repaya!le on demand.
CURRENT SCEN3RIO

Nearly 11 years after the last of the to !an-ing licences ere issued !y ,BI to private sector
entities0 the government has again started the process of alloing the !etter7managed non7
!an-ing finance companies 4NBFCs# to graduate to full7fledged !an-s. FC /rana! Cu-her"ee1s
Budget proposal on Friday as the first step toards the same.
The second step ill !e enacted on Tuesday morning. ) select group of officials from top
NBFCs0 under the aegis of the Finance Industry (evelopment Council 4FI(C#0 the trade !ody for
NBFCs in India0 are meeting , ;opalan0 the !an-ing secretary in the finance ministry0 to present
a case for select NBFCs to !e converted into full7fledged !an-s0 sources said. )!out 1'719
NBFCs and corporate houses having presence in the financial sector are e2pected to "oin the race
to float a !an-.
The finance minister is convinced that there is a huge need for lo7cost financing at the semi7
ur!an and rural areas in India011 said a industry source. The financial services industry !elieves
the Budget proposal as a reflection of the same. In the finance ministry things are moving in
the right direction and the !an-ing secretary1s meeting proves the same011 said the source. FI(C
office !earers could not !e contacted during the e2tended ee-end.
)nd the last Tnion Budget0 the FC had announced that ,BI is considering giving additional
!an-ing licences to private sector players0 including NBFCs. This as ostensi!ly to further
financial inclusion and also to improve the si6e and sophistication of the Indian !an-ing system.
The announcement set the financial mar-ets on fire ith a lot of con"ecturing as to ho ould !e
the luc-y fe. The access to lo7cost current account and savings accounts and the a!ility to
offer all financial products under one roof ere cited as ma"or attractions for NBFCs to rush to
see- !an-ing licences. It as also e2pected that ,BI ould give ne licences to private players
very soon. But0 an analysis reveals a different picture. Neither is ,BI in a hurry to issue fresh
licences nor are many NBFCs -een to get into commercial !an-ing.
The reasons for this are manifold. ,BI rules are stringent for commercial !an-s as they are the
visi!le face of the Indian financial system and commercial !an-s are primarily the custodians of
pu!lic money. ,BI places restrictions on commercial !an-s in their lending operations. 3ut of ,s
100 ta-en in as deposits0 appro2imately ,s 30 has to !e set apart as statutory re5uirements
toards C,, and *&,. This leaves the !an-s ith ,s @0 to lend. 3ut of this0 +0A has to !e
statutorily lent toards the priority sector as defined !y ,BI. This leaves !an-s ith
appro2imately ,s +' to lend at their on discretion. Cany NBFCs ould definitely find this as
restrictive to say the least.
)s per the guidelines of '0010 NBFCs see-ing a !an-ing licence should have a minimum paid7
up capital of ,s '00 crore0 hich must !e increased to ,s 300 crore ithin 3 years of conversion
into a !an-. Further0 !an-s have to invest large funds in fi2ed assets and information technology
primarily to facilitate financial inclusion0 ris- management0 anti money laundering0 etc. These
huge capital e2penditures increase the pay!ac- period for the investments made. )lso0 !an-ing7
as7a7!usiness model is far more people70 process7 and product7driven than a simple NBFC
model. For e2ample0 in order to adopt universal !an-ing0 the staff needs to !e multi7s-illed in
!an-ing functions. *o0 the operating e2penses ill !e su!stantially higher0 hich0 in turn0 ould
reduce the profita!ility of operations
FIN(IN4S : M3N34ERI3- IMP-IC3TIONS
FIN(IN4S
Top7rated NBFCs have not only !een successful in managing their mar-et share !ut also in
protecting their profita!ility. ) com!ination of the factors cited earlier had helped these NBFCs
earn !etter returns on their deployment. In fact0 almost all the top7rated NBFCs en"oy a return on
total assets that is higher than $(FC Ban-Ms0 one of the !etter7run !an-s. The higher return on
assets as despite their operating cost ratio !eing similar to that of $(FC Ban-. For e2ample0
operating e2penses as a proportion of net margin or-ed out to :? per cent for $(FC Ban-. 3n
an average0 this as not significantly higher than the ratio for most top7rated NBFCs. If return on
assets ere still superior0 then it as !ecause of the higher return on their funds. For top NBFCs0
the interest income or-ed out to 1@7'1 per cent of their total assets for the year ended FI. The
li5uidity in the !an-ing system also helped these finance companies. *preads over government
securities for ))) rated corporate sector de!t instrument are no only 90 !asis points. In other
ords0 if the cost of funds for !an-ing companies has declined sharply0 then top7rated NBFCs
have also !enefited from such a decline in interest rates. *ome of these companies are no
raising funds at @7? per cent.
)lso0 these companies have displayed the a!ility to manage their portfolio ithout large
incidence of non7performing assets. For instance0 &IC $ousing Finance0 I(FC and *hriram
Transport Finance !oast of net non7performing assets to net advances ratio of less than 1 per
cent. This again has helped them loer the overall cost of operations and0 there!y0 protect their
profita!ility. $igher profita!ility and innovative financing options0 such as securiti6ation0 have
also helped in !oosting the capital ade5uacy ratio of these NBFCs. among others0 &IC $ousing
Finance0 I(FC and *hriram Transport Finance0 ,eliance Capital0 !oast of capital ade5uacy ratios
upards of 19 per cent. In other ords0 their !alance sheets continue to !e strong to
accommodate further groth in dis!ursements.
(is#$se)ents 9 S"a$. fall !#$ing t"e c$isis
(is!ursements ere clearly hit during the crisis as is visi!le from /rimary reason for this initial
fall as lac- of supply of funds after the mar-et li5uidity dried up. Impact hoever differed
depending on the capital structure of the company0 ith NBFCs having larger )&C mismatches
and those hich had more dependence on mutual funds for funding ere affected more severely
as mutual funds themselves faced redemption pressure on their short term schemes. To support
the sector0 ,BI undertoo- several measures to improve li5uidity flo to the NBFC sector. This
as a significant development as the regulator highlighted the systemic importance of the sector.
RBI )eas#$es to i).$o2e li7#i!it/ of NBFCs
The systemically important non7deposit ta-ing non7!an-ing financial companies
4NBFCs7N(7*I# ere permitted to raise short7term foreign currency !orroings.
)lloed !an-s to avail li5uidity support under the &)F for the purpose of meeting the
funding re5uirements of NBFCs through rela2ation in the maintenance of *&, up to 1.9
per cent of their N(T&.
,is- eights on !an-s 1e2posures to claims on NBFCs7N(*I ere reduced to 100 per
cent from 190 per cent.
*etting up of a special purpose vehicle 4*/D# for addressing the temporary li5uidity
constraints of systemically important non7deposit ta-ing non7!an-ing financial
companies 4NBFCs7N(7*I#.
(eferring the higher C), norms for NBFCs7N(7*I !y 1 year.
Ohile li5uidity conditions started improving from N+ FI080 dis!ursements groth remained
su!dued for the sector till the first half of FI10. 3n a y7o7y !asis the cumulative dis!ursements
shoed a fall during N1 FI10 and $1 FI10. This period sa deterioration in asset 5uality of
most NBFCs0 hich as especially high in their unsecured loan portfolios. &oer dis!ursements
ere mainly !ecause of the pull !ac- of NBFCs out of unsecured lending segments. 3n a
cumulative !asis 8C> FI10 dis!ursements increased !y more than 18A. >ven if e consider
the lo !ase effect of N3FI08 dis!ursements0 there is clear indication of pic- up in
dis!ursements and a positive outloo- for the sector. Oith improvement in overall economic
activity and higher thrust on infrastructure financing !y the government0 the scenario is e2pected
to improve further in FI11.
Cost of F#n!ing 9 S"ot #. !#$ing t"e c$isis !#e to s"o$t ten#$e o$$o&ings* staili;e! no&
: e6.ecte! to e less 2olatile !#e to la$ge$ .$o.o$tion of long te$) f#n!ing
Cany NBFCs too- advantage of the loer interest rate regime at the shorter end of the yield
curve !y !orroing short term funds 43months B 1 year# at loer rates and lending for maturities
ranging from 37+ years at higher rates. $oever the level of mismatches differed !eteen
NBFCs and those ith higher mismatch faced not only li5uidity pressure0 !ut their cost of
funding also increased during this period due to inversing of the yield curve and a general rise in
interest rates. )verage !orroings costs1 4on an aggregate !asis for C),> rated NBFCs#
increased from around 8.9710.0A in FI0? to 11.971'.0A in FI08. This shos the severity of the
impact as financial crisis affected funding costs in the second half of FI08 and led to a '00 !ps
increase for the entire year. The response !y NBFCs as to gradually replace short term funding
ith long term sources. This is a significant structural change in the !orroing profiles that ill
!ring more sta!ility in profita!ility of the sector. $oever spreads ill also !e loer compared
to historical levels due to this change. (uring the 8C> FI10 cost of !orroing reduced from the
average of 11.971'.0A of FI08 to 10.' 10.9A for the 8 month period and is e2pected to remain
around these levels for FI10. This hoever is still higher than the FI0? levels due to the
structural move toards longer term !orroings.
3sset <#alit/ = (ete$io$ate! )o$e !#e to #nsec#$e! loans &"ic" is no& 2i$t#all/ sto..e!
/ )ost .la/e$s* .$o2isioning "as i).$o2e! : asset 7#alit/ e6.ecte! not to &o$sen f#$t"e$.
)sset 5uality for the sector deteriorated significantly during the crisis. )ggregate ;ross N/)
ratio trended from around 1.1A for FI0? to around '.1A in FI08. Ohile there as deterioration
in all asset classes0 unsecured asset classes 4/ersonal &oans0 Tnsecured *C> loans# shoed the
ma2imum deterioration and ere the -ey drivers for overall increase in N/)s. )part from the
asset7type financed0 another differentiator !eteen asset 5ualities as the origination R
collection model folloed. NBFC1s hich originated ma"ority of their portfolio through
!ranches R on employees shoed !etter asset 5uality performance than those hich used the
(*) model. )ggregate ;ross N/) ratio has further orsened to 3.0A at the end of 8C FI100
hoever it is close to pea-ing out. (e7groth in unsecured portfolio segment has also loered
the portfolio outstanding groth there!y leading to a P!ase effect 1on the ;ross N/) ratio and
adding to the rise in reported num!ers. /rovision coverage has increased from around 90A for
FI08 to around :0A at the end of 8CFI10 as players have !ecome more conservative.
Tnsecured lending has virtually stopped for many NBFCs and underriting norms have also
!een tightened in general for other asset classes. These developments indicate positive structural
changes.