42

CHAPTER III

CONCEPT OF NON-BANKING FINANCIAL COMPANIES -

A BIRD'S EYE VIEW

Normally savings of surplus-spending units are transferred to deficit

units either through direct or primary securities, such as shares and bonds or

through financial intermediaries. The market for loanable funds in India has

for long possessed an additional channel for the transmission of funds,

namely the acceptance of deposits directly from the public by manufacturing

and other business concerns. This is a unique feature of the Indian financial

system; there is no practice abroad of such direct acceptance of deposits by

companies from the savers. It also means that deposits can be regarded as a

direct as well as indirect security or financial claim. The practice of

acceptance of deposits by companies has become widespread and well

established the volume of such deposits has grown significantly, and since

this has implications for formulating a policy for the financial sector of the

economy, different aspects of this practice have been taken up separately for

discussion in this chapter.

Non-banking finance companies which are heterogeneous in nature in

terms of activity and size are important financial intermediaries and an

integral part of the Indian financial system. They have been able to carve out
 43

a niche for themselves in meeting the credit needs of both wholesale and

retail customers. While their functions and the services they render are

different, the common features is acceptance of deposits from the public,

borrowing from banks and in the case of companies organized as public

limited companies, accessing the capital market.

DEFINITION

According to the Reserve Bank (Amendment Act) 1997, "A Non-

banking finance company (NBFC) means a financial institution which is a

company; 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; such other

non-banking institution or class of such institutions as the Bank may with

the previous approval of the Central Government specify".'^ The definition

excludes financial institutions besides institutions which carry on

agricultural operations as their principal business.

Non-banking finance companies consists mainly of finance companies

which carry on hire purchase finance, housing finance, investment, loan.

'^ Machiraju, Indian Financial System, 1998, p.7.1

 44

equipment leasing or mutual benefit financial companies but do not include

insurance companies or stock exchanges or stock-broking companies.'^

A residuary non-banking company is a company which receives any

deposit under any scheme or arrangement, by whatever name called, in one

lump sum or in instalments or in any other manner and which is not a) an

equipment leasing company b)hire purchase company c)housing finance

company d) an insurance company e) an investment company, f) a loan

company g) a mutual benefit financial company or h) a miscellaneous non-

banking company. Finally non-banking, non-financial company is defined

as an industrial concern or a company whose principal activity is agricultural

operations or trading in goods and services or real estate and which is not

classified as a financial or a miscellaneous or a residuary non-banking

company.

CLASSIFICATION OF NBFCs

The Reserve Bank has also made certain refinements in the norms for

classification of NBFCs into various sub-groups based on their principal

activity as evidenced from the asset/income pattern. Having regard to the

special regulatory dispensation accorded to equipment leasing and hire

purchase finance companies, the criteria for classification of the NBFCs has

"^ Ibid.,
 45

been tightened. Thus, an NBFC to be eUgible for being classified as

equipment leasing company or a hire purchase finance company shall have

not less than sixty per cent of its assets and shall derive income from these

activities taken together.'^

All new NBFCs incorporated after January 9, 1997 will provisionally

classified for a period of one year and reviewed thereafter on the basis of

their asset/income pattern as disclosed in their balance sheet/profit and loss

account and other related aspects. Existing NBFCs, also, those unclassified

will be classified on the basis of their principal activity as evidenced from

their financial statements into various categories such as Equipment Leasing

Companies, Hire Purchase Finance Companies, Loan Companies,

Investment Companies, Miscellaneous Non-banking companies or

Residuary Non-banking companies as the case may be. Only such of the

NBFCs as have been specifically notified under section 620A of the

Companies Act, 1956 by the Government of India will be classified as Nidhi

Companies. NBFCs which have been incorporated with the intention to

function as Nidhis will be classified as Loan Companies and the directions

as applicable to Loan Companies will be made applicable to them till such

notification.

" Ibid., p.7.7

 46

Equipment Leasing and Hire Purchase Finance Companies

The ceiling of public deposits as a multiple of net owned fund (NOF)

in respect of equipment leasing and hire purchase finance companies has

been enhanced. Equipment leasing and hire purchase finance having rating

of minimum investment grade have also now been allowed to access public

deposits.

The revised limits are as under:

Level of rating Existing limits Enhanced limits

(As a multiple of NOF)

AAA 3 times 4 times

AA 2 times 2.5 times

A 1 time 1.5 times

Minimum investment grade i.e.

A-(CRISIL and ICRA)

BBB (CARE)

BBB (DCR India) NIL 0.5 times

The requirement of rating and level of public deposits for loan and

investment companies remains unchanged.

 47

The question that arises is whether these institutions pose any

competition for the commercial banks. There is no easy answer to this

question. As these institutions do not usually accept demand deposits, they

do not compete with banks in that field. With regard to time deposits,

however, since the return offered by them is higher, some diversion from

banks to these agencies cannot be altogether ruled out. The Banking

Commission had pointed out that a part of their funds represents activisation

of currency balances. The loan business of these institutions is

supplementary/complementary to that of banks. They give loans to

borrowers and for purposes which are shunned or inadequately catered to by

the banks. Much attention has been paid in India to the problem of

regulating and controlling these institutions for two reasons, (a) Their

managements have sometimes been found to be dishonest, and depositors'

interest has been neglected, (b) By giving loans for the purpose of

speculation and hoarding, they have tended to undermine the goals of

monetary policy in the country. About 4485 Investment companies had total

resources of the order of Rs.7354 crore at their disposal in the year 1994.

The volume of their resources is estimated to have been about Rs.l3800

crore in 1996. '^

'* Gorden, E and K.Natarajan, Financial Maricets, Himalaya Publishing House, New Delhi, 2003, p.249
 48

HIRE PURCHASE FINANCE COMPANIES

Normally, the two terms—hire purchase credit and instalment

credit—are used synonymously. The two however, differ technically, in that

in the case of the former the ownership of the good in question is not

transferred to the buyer till he clears all dues, while in the case of the latter,

once the loan contract is signed the ownership is immediately transferred to

the buyer. We shall also use the two terms interchangeably another term

which is used in this context is consumer credit. It is a concept with limited

scope in comparison with the other two just indicated because, strictly

speaking, it covers credit for financing sales and purchases of consumer

goods and services only. Hire purchase credit may be consumer credit or

commercial credit.

Hire purchase credit may be provided by the seller himself or by any

financial institution. When the seller provides such credit, his sources of

funds may be his own capital or borrowings from certain financial

institutions. Different types of financial institutions such as banks and sales

finance companies have now entered the business of hire purchase finance.

They may provide instalment loans against the stocks of goods of wholesale

traders. Such loans are clean and unsecured advances, and, therefore, tend to

have a very high cost for the borrower. This method of financing sellers is
 49

not very popular. Alternatively, financial institutions may discount or

purchase instalment receivables on an outright basis. This is rendered

possible because instalment contracts are transferable and negotiable.

LEASE FINANCE COMPANIES

A lease is a financing device which has developed rapidly during the

1960s and 1970s in the U.S and in India just before the middle of the 1980s.

It is a form of financing employed to acquire the use of assets. Through

lease, firms can acquire the economic use of assets for a stated period of

time without owning it. Every lease involves two parts—the user of the asset

known as the lessee, and the owner of the asset known as the lessor.

There are two main types of leases: (a) operating lease and

(b)fmancial or capital lease.'^ The operating lease is a short term lease which

can be cancelled by giving proper notice at the option of the lessee.

Financial lessee is a non-cancelable contractual commitment on the part of

the lessee to make a series of payments to the lessor for the use of an asset. It

may be cancelled only if the lessor is reimbursed for any losses. The lease

payment is a fixed obligation which, if not met, will lead to financial

insolvency of the lessee. The financial lease may take the following forms:

(i) Sale and lease back. In this case the firm sells an asset it owns to another

" Ibid., p.249

 50

party which leases it back to the former, (ii) Direct lease. Here a company

acquires the use of an asset directly from the manufacturers, (iii) Leveraged

lease. In this case, three parties not the usual two are involved in the

arrangement. The three parties are the lesser, the lessee, and the lender.

Although there may be some difference between the lease and hire-

purchase credit depending upon the type of contract, in essence, both of

them is quite similar. Leasing is said to be the forerunner of the growth of

consumer credit business. Leasing is also a manufacturer sales-aid, a

marketing device which helps the manufacturers to retain control of the

market and customers.

HOUSING FINANCE COMPANIES

Housing is one of the basic necessities of man, and the capital

required per dwelling is so large that few individuals can raise it from their

own savings. There is therefore a great need and scope for the development

of arrangements for supplying loans or finance for the purpose of house

construction. However, for some reason or other, the shelter sector of the

Indian financial system remained utterly underdeveloped till the end of the

1980s. The lack of adequate institutional supply of credit for house building

was stressed as an important gap in the process of financial development in

 51

India. In the recent past, the authorities have initiated certain steps to bridge

this gap.

HUDCO

HUDCO is an important institution in this area. It was set up in April

1970 with the specific purpose of providing loans for shelter. It has been

financing housing projects located in the areas where there is a keen demand

not only for houses but also for commercial and industrial sites. It has been

providing mortgage loans to cooperative housing societies also. Its loans are

to the extent of 60 per cent of the cost of the houses, and the maturity period

of its loans is between 8 to 10 years. It may be noted that 55 per cent of

HUDCO loans are earmarked for economically weaker sections and low

income group families besides 15 per cent of total loans are earmarked for

rural areas. Thus a major portion of HUDCO lending is at subsidized rates of

interest. Upto the end of March 1990 HUDCO had cumulatively sanctioned

and disbursed loans of Rs.4220 crore and Rs.2789 crore respectively. It

disbursed loans of Rs.270 crore, Rs.325 crore, and Rs.522 crore inl986-87,

1987-88, and 1988-89 respectively.^°

THE STATE HOUSING FINANCE SOCIETIES

20
Gorden,E and K.Natarajan, Op.Cit., p.257
 52

The State Housing Finance Societies (SHFSs) constitute another

major source of funds in the residential mortgage market. These societies

advance loans to the affiliated Primary Cooperative Housing Societies for

construction of dwelling houses, purchase of land, additions and

improvements to existing houses, purchase of houses, and repayment of

earlier mortgage debt. The terms and conditions of loans vary somewhat

from state to state; they also vary with the location of these, the borrower's

income group and the purpose of loan within the state. The maximum

amount of a loan varies between 65 to 80 per cent of the value of the land

and buildings, or some specified maximum amount, whichever is lower.

MUTUAL BENEFIT FINANCIAL COMPANIES

Mutual benefit financial companies or nidhis, as they are known in

India are public limited joint stock companies operating mainly in South

India, particularly in Tamilnadu. They are old institutions, some of which

have existed for 75 to 100 years. Out of 123 nidhis in 1995, 97 were in

Tamilnadu of which 70 were in Chennai city alone. Some of them operate

through the network of branches. Most of them issue shares of denomination

of Re.l and no one except promoters and directors can hold more than one

share. They have a large membership varying from 1000 to 200000. Yet

^' Gorden,E and K.Natarajan, Op.Cit., p.257

 53

their share capital is very small. The sources of their funds are share capital,

deposits from their members, and deposits from the public. The deposits

they accept are fixed and recurring deposits. Unlike other NBFIs, nidhis also

accept demand deposits to some extent. They also borrow from banks. They

may float special schemes for widows, pensioners etc.

RESIDUARY NON-BANKING COMPANIES

Residuary non-banking companies (RNBCs) generally tap the public

savings by operating deposit schemes akin to recurring deposit schemes of

the banks. Mobilisation of deposits is effected from a large number of small

and uninformed depositors by expressly promising them that their money

would be invested in banks and government securities. The collection of

deposits is done at the door steps of depositors through field staff who is

paid a sizeable commission. These companies get the fiands at low cost for

longer terms, and deploy them at relatively high yields. Many of these

companies operate with meager capital. There are no restrictions on the

quantum of deposits they can raise. They have certain adverse features;

negative networth in some cases; not submitting periodic returns to the

regulatory authority; absence of designation of their banks by some of them;

and their mushroom growth. The aggregate deposits held by them as on 31

 54

March 1990 were about Rs.900 crore, i.e. comparable to those of MNBCs
99

and greater than those of MBFCs.

MONEYLENDERS

The unorganized sector in the Indian Financial System consists of

money-lenders, indigenous banks, Nidhis, and chit funds. The Central

Banking Enquiry Committee has classified money-lenders into professional

and non-professional money-lenders. Professional money-lenders are those

who have taken up money-lending as the sole profession. The professional

money-lenders are known as Mahajan or Sahukar. Non-professional money-

lenders are those who have taken money-lending as one of their businesses,

in addition to their main business/profession. Non-professional money-

lenders are merchants, traders, landlords who carry on their profession but

also lend out their surplus funds for profit.

Money-lenders do not receive deposits. They lend their owned funds

without bothering much about the purpose of the loan. In villages, loans are

made on the basis of trust and confidence. Only in the case of a substantial

amount, the money-lender insists on conditional mortgage of landed

^^ Nirmala Prasad K. and Chandradass,J. Banking and Financial System in India, Himalaya Publishing
House, New Delhi, 1997, p.257

'' Ibid.
 55

property. He often collects his interest in kind after the harvest. He does not

maintain regular account books. The contract between the money-lender and

the borrower is very flexible. In case, the borrower needs money even before

the maturity of the loan, the money-lender does not hesitate to lend them and

renew their loan agreement. As long as they consider that this loan is safe,

they do not compel them to pay back. But the rate of interest is quite high. In

many cases, it has been pointed out by the Enquiry Committee that the

interest has exceeded the principal.

CHIT FUNDS

The Chit Fund is one of the financing agencies in India. It was very

populat one time in Tamilnadu and Kerala and has spread over to North

India. Chit fiinds may also be known as Kuri. They collect regular

subscription from their members and distribute the same among themselves.

Chit funds are generally classified into Simple Chit, Prize Chit and Business

Chit.2^

In recent times, the non-banking finance companies (NBFCs) have

emerged as substantial contributors to the Indian economic growth by

^'' Nirmala Prasad K and Chandradass J, Op.Cit.,

 56

supplementing the efforts of banks and other development financial

institutions. They play a key role in the direction of savings and investment.

In the wake of rapid industrial development and liberalization of the

financial sector, the entrepreneurs, corporate sector as well as the key

financial institutions have diversified their activities to cater to the specific

needs of the economy. In this context, the key financial institutions and

professionals have promoted financial institutions to create a diversified and

competitive financial system.

The NBFCs, when compared to commercial and cooperative banks

are a heterogeneous group of finance companies. These companies also

intermediate between the savers and the investors. The NBFCs in advanced

countries have grown phenomenally and are now coming up in a massive

way in the developing countries like Brazil, India, Jordan, Korea and

Malaysia. The different categories, of the NBFCs include loan companies,

investment companies, hire purchase finance companies, equipment leasing

companies, mutual benefit finance companies, miscellaneous finance

companies, miscellaneous non-banking companies, residuary non-banking

companies and housing finance companies.

 57

GROWTH OF NON BANK FINANCIAL SERVICES

As the demand for financial services grows, countries will need to

encourage the development of non-bank financial intermediaries and

securities markets in order to broaden the range of services and to stimulate

competition and efficiency. India has made considerable progress towards

more diversified financial systems.

The role of banks in non-bank financial services began to grow from

the time of the amendment to the Banking Regulation Act in 1983. Many

merchant banking divisions and mutual funds were set up by the public

sector banks since then. Banks began to increase their non-bank and non-

funded business which are called financial services. More recently some

more developments took place to expand the scope for such services:

(l)keeping open Indian capital market to foreign financial institutions and

overseas corporate bodies to invest in India. (2) FERA dilution to encourage

both the inflow and outflow of funds and foreign investment in India, some

of which might flow into the stock and capital markets. (3)Opening up

mutual fund business and even banking to the private sector. Already a

number of private sector companies/firms are engaged in financial services,

such as investment financing, hire purchase, mortgage financing and housing

finance etc. private sector was permitted to set up mutual funds, banks and
 58

financial institutions, financial deregulation, fi-eeing of interest rates on

debentures, banks lending rates and their practices etc.

PROBLEMS OF NBFCs

The new regulations announced by the RBI are welcome in certain

aspects as it is necessary to have higher capital adequacy norms and also

better management of funds. But there is confused thinking about how

NBFCs should mobilize resources and increase their hire purchase and

leasing business. The failure of CRB Corporation and the fiasco following

default by many nidhis in their obligations to depositors have obviously been

responsible for the monetary authorities to take a severe view of the

operations of NBFCs.

However, the latest moves are in strong contrast with those adopted in

earlier years when it was pointed out that NBFCs should mobilize resources

on their own and not depend to any great extent on bank finance or term

loans from financial institutions. The ratios for accepting deposits from the

public in relation to owned funds were liberally conceived and only recently

AAA companies were allowed to accept deposits or fix interest rates without

any limit.

The new stipulations relating to the acceptance of deposits by

differently rated companies will cause hardship to those which have been
 59

placing greater reliance on deposit mobilization rather than on securing

credit from banks. The latter also were adopting a step-motherly attitude

towards NBFCs due to an impression that they were competitors and

transacting business with banks funds which could have been handled by

them.

Judging by the reaction of the managements of even the better placed

NBFCs, the ratios relating to deposits and net owned funds (NOFs) would

have to be revised for preventing a stunting of growth of those NBFCs

which have been functioning efficiently and against whom there were no

complaints from depositors about repayments on maturity date or regular

payment of interest charges.

Except a few institutions like Sundaram Finance, Lakshmi General

Finance, Cholamandalam Investment, 20* Century Finance most others have

excess deposits, which had to be repaid before December 1998. Apart from

the fact, further growth can be ensured only with higher cash credit limits

and gathering of resources through NCDs . The compulsion to refund excess

deposits may have nullifying effects during the interregnum as additional

resources raised in other forms will have to be utilized for refunding excess

deposits.
 60

It has therefore been represented by many NBFCs that the maximum

ratios should be revised to five times of net owned funds and a period of two

or three years should be allowed for refunding excess deposits or effecting

the necessary adjustments. If the scope for securing funds in the desired

manner is made available the monetary authorities can have effective

supervision of the operations of the NBFCs concerned and prevent an

increase in non-performing assets and help also the small and medium

borrowers to get their requirements from NBFCs without undue delay at

fairly reasonable interest rates.

Since NBFCs may have to play a more important role when economic

growth gets accelerated there will be need for larger volume of assistance

against hire purchase and lease contracts. There should thus be a pragmatic

approach to outstanding issues, as stated above, for securing a better

coordination of the activities of banks financial institutions, NBFCs and

others.

METHOD TO PROTECT RETAIL INVESTOR

The RBI has directed NBFCs to constitute audit committee consisting

of three members of board of directors. Also, NBFCs will be required to

follow a uniform accounting year of March 31, every year with effect from

accounting year ending March 31, 2001. Crisil expects that these measures
 61

will improve accountability and higher level of transparency, particularly on

transactions within the group companies.

ALTERNATIVES FOR SURVIVAL

The Nidhi committee has recommended that no director should

continue for more than ten years in any nidhi. The chamber feels that since

most directors have been closely identified with the proper functioning of

the nidhis and as they are in any case elected by shareholders, there should

not be any undue restrictions on the total tenure of an individual director.

The restriction on giving loans to directors against jewellery and property

has been welcomed by the chamber. It, however, feels that this provision

should apply only to future loans and in any case directors can be allowed to

avail themselves of loans against their own deposits.

In terms of the committee's recommendations, the nidhis have been

asked to place 10 per cent of their deposits in fixed deposits with banks. The

chamber's view is the return on bank deposit is low and consequently nidhis

will have to mark up their interest rates on loans.

That is why the portfolios of nidhis even in the same city or locality

are dissimilar. As for jewel loans, the chamber wants a reasonable period of

24 months and for mortgage loans 84 months. A shorter period would be

self-defeating.
 62

Finally the chamber feels that the committee has sought to impose

international norms on indigenous institutions such as nidhis. Given that

almost all nidhis lend only on asset-backed basis with adequate safeguards,

the provisions can be diluted.

STRESS

Nidhi companies and benefit funds, most of which have been in

existence for more than 100 years are under severe stress. A wave of

negative sentiment has engulfed these bodies which were until very recently

perceived by middleclass and lower middle class families as being rock

solid. Along with the public mistrust in any type of saving institution other

than banks and a few NBFCs, the average investors have started suspecting

even age-old institutions such as nidhis and reclaiming deposits that are

maturing. Informal discussions with a few nidhi companies in Chennai as

well as with the Chamber of Nidhis reveal that this completely unjustified

public perception has to be changed soon if the age old nidhis are to

continue serving their customers. After several representations the nidhis

were able to partially convince the Government that this rule was highly

detrimental to their interests. But till date no clear cut clarification has come.
 63

ROLE OF NBFCs

The growth in the economy in the last two decades has been propelled

by the service sector and the Table provides the real growth rate (at 1993-94

prices) of Service Sector activities between 1993-94 and 2002-03. All have

grown above the national income rate of 5.89 per cent. Hotels and

restaurants have grown 10.5 per cent, trade at 7.9 per cent and non-railway

transport 7.6 per cent. The service sector activities are substantially financed

by non-banking financial companies (NBFCs) which constitute engines of

credit growth.

A similar analysis suggests that in un-registered manufacturing, the

gross value addition was Rs. 119015 crores in 2002-03. Going by the

estimate of 50 per cent fi^om the Annual Survey of Industry (ASI) data, the

share of short term borrowings would be Rs.59508 crores. Bank credit to

small scale industries was Rs.60394 crores in 2003 (of which at least 50 per

cent would be to registered category). This means more than 50 per cent of

the borrowing requirement of unregistered manufacturing is met by non-

bank sources.

The share of the construction industry in gross value addition in 2003

was Rs. 138443 crores. Lending by commercial banks for housing activities

in 2003 amounted to Rs.36587 crores or around 35 per cent of the aggregate

 64

borrowing needed (75 per cent of value addition) by this industry. Thus

nearly 65 per cent of the private construction activity is financed by the non-

banking sector. The P&P (proprietorship and partnership) sector has a large

presence, more than 60 per cent in this industry.

The truck financing activity is the most innovative and efficient

symbol of the NBFC sector. Second-hand truck financing has created a

fascinating backbone for the transport industry by focusing on the small man

and this has been one of the major contributions of the NBFC sector to the

economy.

One can, therefore, say that the role of NBFCs in the credit delivery

system in both manufacturing and service sectors is significant per se and

compared to the commercial banks also. But, unfortunately, the planners,

instead of nurturing and enhancing their credit delivery mechanisms, are

focusing more on control and regulation. The failure of some NBFCs has

shifted the focus to their liability side while the asset or lending side is more

important for an emerging market like India.

In a large country like India seeing substantial growth in service

activities where the share of P&P firms is significant, it is important that the

role played by NBFCs in credit provision is recognized. They have extensive

network and credibility among their constituents, both borrowers and

 65

lenders. Their ability to access public deposits is the meeting point for their

customers, since both are usually un-incorporated entitles.

A developing country like India needs multiple institutions catering to

different segments and capable of accessing funds from the public, the

market or from institutions. A prudent lender is one who borrows efficiently.

It is actually two sides of a coin.

NDP AND GROWTH RATE IN DIFFERENT ACTIVITIES 1993-94 TO

2002-2003
Category 1993-1994 2002-2003 Growth rate
%
Agriculture and allied activities 229829 272421 1.91
Manufacturing 103739 174627 5.96
Of which
Organised 65774 108175 5.68
Unorganised (Non-corporate) 37965 66452 6.42
Construction 38749 65486 6.00
Trade hotels and Restaurants 96627 193765 8.04
Of which
Trade 91324 180734 7.88
Hotels and Restaurants 5303 13031 10.5
Non-Railway Transport 22888 44284 7.61
Real estate, ownership of 40431 67413 5.84
dwellings and business services
Other services 48275 97318 8.1
Total NDP (including other 697992 1168224 5.89
activities)
Note: The NDP figures at 1993-94 prices and the growth rate is the
geometric average growth rate at constant 1993-94 prices during the period.
It is computed from the NAS 2004

Source: National Accounts Statistics 2004, Central Statistical Organisation,

New Delhi
 66

The RBI has now strengthened its machinery of registration and

supervision and extended prudential norms to NBFCs. Denying access to

deposits would seem a case of throwing a baby out with the bathwater. On

the contrary, the RBI may apply its mind in strengthening the fiinctioning of

NBFCs if necessary facilitating better access to the capital market. The

RBI's Report on Trend and Progress of Banking in India 2004 mentions that

banks should extend wholesale financial assistance to non-governmental

organizations/microfinance intermediaries and work as innovative models

for securitization of MFIs receivable portfolios. Such micro-credit

institutions can take the form of NBFCs funded by individuals or a group of

banks, but not permitted to take public deposits.

There are some persistent problems for NBFCs apart from deposit-

taking. These relate to flexible handling of their capital issues both SEBI for

relaxations with sympathy, especially since they are rated and supervised.

These specific relaxations are more a matter of confidence-building. The

requests made by NBFCs deserve sympathetic treatment by both the

securities market regulator and the central bank. In short, NBFCs are vitally

needed to give the Indian economy a much needed boost by enabling easier

access to credit. As it is, public and private sector banks are finding it

difficult to extend their reach for various reasons.

 67

INSTRUCTIONS TO DEPOSITORS OF NBFCs

The following are the instructions given to NBFC Depositors:

• Only NBFCs which are registered with and have approval of RBI can

accept public deposits.

• The RBI does not guarantee the repayment of deposits by any NBFCs

including those which have obtained Certificate of Registration under

Section 45 1A of the Reserve Bank of India Act.

• NBFC deposits are neither insured nor backed by security.

• NBFCs cannot offer more than 16% interest on public deposits.

• NBFCs cannot offer more than 2% brokerage.

• NBFCs cannot offer gifts/incentives.

• NBFCs cannot accept deposits for less than 12 months and more than

60 month.

• All depositors must be issued proper receipts for deposits.

In case of default in repayment of matured deposits, customers may

approach the concerned regional bench of the Company Law Board

having jurisdiction over the company.

 68

PRESENT POSITION

Over the last decade or so, the Reserve Bank of India has been

blowing hot and cold about non-banking finance companies, (NBFCs). The

RBI reacted to a series of defaults and mis-demeanours by a few NBFCs

restricting their ability to take public deposits. This unfortunately led to a

collapse of many NBFCs which depended on a continuous inflow of

deposits to meet redemption obligations. Subsequently there seems to have

been a better realization of the role of NBFCs in financing the small scale

industry, particularly the transport sector.

FUNCTIONS OF NBFCs

Deposits in the present context are accepted from the public by

(a)public and private limited non-banking, non-financial companies of

«
varying sizes (b)public and private limited non-banking financial companies,

(c)govemment companies since 1980, (d)branches of foreign companies,

(e)partnership firms and (f)proprietary concerns. Among these different

groups of companies, the non-financial ones account for the largest

proportion of aggregate deposits. Within this group of companies, the

private limited companies and small companies rely more on deposits

because of the difficulties they face in raising funds on the stock market and

from the financial institutions.

 69

TYPES OF DEPOSITS

(i) Data on public deposits are available from surveys conducted

by the RBI and published periodically in the RBI bulletin. The aggregate

deposits with companies divided into two categories namely, regulated

deposits and exempted borrowings.

Deposits are (a) loans guaranteed by the former managing agents or

secretaries and treasurers, (b)unsecured debentures, (c)deposits and

unsecured loans from shareholders of the company (d)deposits and

unsecured loans guaranteed by directors in their personal capacity, (e)fixed

deposits, (f)deposits from associate members in the case of mutual benefit

financial companies and (g) other deposits.

(ii) Exempted borrowings are: (a)borrowings from former managing

agents, secretaries and treasurers, (b) money received from directors,

(c)money received from shareholders in the case of private limited

companies, (d) security deposits from employees, (e)money received from

purchasing, selling and other agents, (f)money received from joint-stock

companies of the same group or others, (g)other borrowings, i.e., loans from

the government and security deposits from customers, (h)money received

through debentures secured by immovable properties or convertible

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debentures, (i)inter-corporate deposits; and (j)borrowings from banks and

financial institutions.

Among different categories of deposits, the fixed ones account for the

largest portion of aggregate deposits. Next to fixed deposits and borrowings

from the government, inter-company borrowings constitute the largest

proportion of aggregate deposits. The volume of these deposits is influenced

by the RBI policy on bank credit expansion. If the RBI follows a restrictive

policy, the amount of inter-corporate deposits tends to go up. These deposits

serve the purpose of bridge finance. The market for inter-corporate deposits

is highly volatile and it may be likened to inter-bank call money market. The

companies which are not in a position to get adequate bank credit, which

suffer from erratic cash receipts and payments, which face difficulties in

respect of trade credit, etc., are the ones which need these deposits. The

companies with oversubscription to security issues, large application money

and security deposits are the suppliers in this market.

The companies participate in the inter-corporate deposits (ICD)

market to reconcile temporary cash mismatches. The business in this market

is usually done over the phone. Earlier, it mostly operated on a non-

collateralized basis, but now it is moving towards collateral lending. The

stock brokers often act as brokers in this market also. Similarly, now NBFCs
 71

also have entered as brokers in it. The companies borrow in this maricet to

get over problems arising out of management of the working capital cycle,

and lenders lend primarily to park their funds for short-terms. The

companies also take advantage of the cash arbitrage i.e. borrowing from

banks and lending in this market. They have used funds raised through

global depository receipts also for lending in this market. There have been

cases where ICDs have been used for long term requirements, which created

default conditions. The factors which determine the volume of business in

this market are: interest rates, overall demand for funds in the economy, the

state of the primary stock market, and time-specific policies such as banking

the bridge finance. It is estimated that the volume of business in the ICDs

market was Rs.7000 to Rs.8000 crore in 1994-95.

There is a relationship between the maturity period of deposits and the

purpose for which those deposits are used. If companies accept deposits for

meeting short-term working capital requirements they would invite short

term deposits, but if they want to meet part of the long term capital

requirements with deposits then they must accept long term deposits.

The rate of interest on public deposits has to be higher for tax reasons.

Interest income received by the depositor from a non-banking company is

not eligible for tax concessions. With effect from 1975, tax on interest
 72

income on such deposits is deducted at source if the income credited or paid

or Hkely to be credited or paid to the assessee in any financial year exceeds

Rs.lOOO. From the point of view of the company also, 15 per cent of the

expenditure by way of interest paid by non-financial companies on deposits

received fi-om the public is not allowed as deductible expense for tax

purposes. In short, tax provision in India may have the effect of raising the

relative effective cost of borrowing for companies and of reducing the

effective rate of return to depositors.

It may be worthwhile to indicate here the likely impact of changes in

the other interest rates in the country (particularly banks borrowing and

lending rates) on the interest rates on public deposits, and the growth or

reduction in public deposits. The relationship is more complex than is

usually supposed. The first thing to realize is that when we talk of interest

rates on public deposits, both deposit and lending rates of commercial banks

are of relevance. Bank deposit rates are relevant because they represent a

price on the alternative avenues for investment to deposit holders; they are

also relevant because they represent a price on alternative sources of finance

to the deposit-accepting companies.

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CONDITIONS FOR NBFCs

Non Banking Finance Companies which have applied to the Reserve

Bank of India for grant of Certificate of Registration under Section 45-1A of

RBI Act on or before July 9, 1997 but have net owned fund (NOF) below

Rs.25 lakh are directed to note that: the last date for attaining the minimum

statutory NOF limit of Rs.25 lakhs has expired on January 9, 2000. RBI will

not in the normal course grant extension of time to the NBFCs which have

not attained the minimum NOF by January 9, 2000 and their applications for

certificate of Registration not be considered. NBFCs which have attained

the NOF OF Rs.25 lakh as on January 9, 2000 should report to the RBI

immediately but not later than April 10, 2000.Therefore, NBFCs which have

not attained the minimum NOF till January 9, 2000 should: (a) discontinue

the business of NBFC immediately and inform the RBI of such

discontinuance not accept or renew public deposits (b) repay the deposits

already accepted, as per the terms and conditions of deposits and (c)continue

to comply with the provisions of Chapter III-B of the Reserve Bank of India

Act and the Directions issued there under till all deposits are repaid, (d)

NBFCs and unincorporated bodies are not allowed to use the name of RBI in

any manner.
 74

GROWTH FACTOR

Several factors have contributed to the rapid growth of NBFCs in

India. Comprehensive regulation of the banking system on the one hand and

the absence or relatively lower degree of regulation of NBFCs on the other

have to a significant extent contributed to this development.

Recognising the importance of the NBFC sector and the need to

integrate it with the mainstream financial system, the RBI has been taking

steps from time to time for the regulation of NBFCs. Experience over the

last three decades has shown that earlier regulations covered only the deposit

taking activities of NBFCs without adequately covering aspects of functional

diversity of these companies and expanding intermediation by them. Various

committees, which went into these aspects, strongly recommended that there

should be an appropriate regulatory framework for NBFCs and that more

powers should be vested with RBI to regulate them in an effective manner.

SOURCES OF FUNDS

The main sources of funds for NBFCs have been their paid up capital,

borrowings from banks and financial institutions, issue of bonds and

debentures, inter corporate loans, deposits from shareholders and directors

and public deposits.

 75

Some of the larger NBFCs have accessed multilateral funds. These

companies have been working within the stipulated frame work on

borrowings as a multiple of net owned funds. Although the overall ceilings

were not found inadequate, these companies have sometimes faced

difficulties in raising resources from banks/financial institutions more so at a

reasonable rate of interest. As a result, they looked for other sources even at

higher costs. The contribution of public issues, debenture/bonds, inter-

corporate loans and public deposits has shown a progressive rise in the

overall pool of funds.

Recognising the importance of the NBFC sector and the need to

integrate it with the mainstream of the financial system, the Working Group

on Finance Companies appointed by the RBI set the agenda for reforms.

Pending amendments to the RBI Act, a series of policy measures were

initiated to monitor the activities of large NBFCs having net owned funds of

Rs.50 lakhs and above on a broader spectrum of regulation simultaneously

offering them incentives for their compliance with the regulatory

framework.

SUPERVISORY MODEL FOR NBFCs

The RBI has instituted a strong and comprehensive supervisory

mechanism over NBFCs. The comprehensive Inspection Manual was

 76

introduced for on-site inspection of NBFCs and they are inspected at regular

intervals with focus on their asset side and not management. The system of

on-site examination put in place during 1997 is structured on the basis of

assessment and evaluation of CAMELS (quality of Capital, Assets,

Management, Earnings, Liquidity and Systems & procedures) approach and

the same is akin to the supervisory model adopted for the banking system.

The manual is being updated to provide guidance to inspecting officers on

the new operational features and the practices which may cause supervisory

concerns and to capture the functioning of these companies vis-a-vis the

regulatory changes introduced during the last three years.

SAFEGUARDING DEPOSITOR INTERESTS

In order to impress upon NBFCs the need to repay public deposits in

time and to retain the faith of depositors in the financial system, supervisory

meetings with chief executive officers of NBFCs are taken at various levels

in the RBI as well as in the Central Office depending upon the size of the

NBFC and the sensitivity of the surveillance reports generated by the RBI.

Supervisory action as warranted is taken against erring companies wherever

serious violation is noticed.

The Task Force on NBFCs appointed by the Government under

C.M.Vasudev, Special Secretary (Banking), which submitted its report in

 77

October 1998, has made various recommendations for improvement in the

regulatory framework for NBFCs.

The RBI has already implemented the recommendations which do not

require any change in the RBI Act. Some recommendations of the

Committee would require amendment to Chapters IIIB, IIIC and V of the

RBI Act which deal with regulation of NBFCs and unincorporated bodies.

However, it has been felt necessary to have a separate legislation for

regulating and supervising the NBFC sector and the Financial Companies

Regulation Bill 2000 was moved in the Lok Sabha on December 13, 2000. It

is now under active consideration of the Standing Committee of Parliament

on Finance.

The fleet footed proactive NBFCs sector has been playing a vital role

in the monetary system and has earned the name para-banking sector. Its

strength lies in quick decision-making, procedures without hassles, easy

approachability and personalized service. In the coming years, however,

survival of NBFCs will depend not only on their adaptability but on their

marketing skills and expertise in new areas. In order to improve their skills,

these companies have to train their staff aggressively. Their human resources

management departments are working overtime to impart the philosophy

that The Customer is King.

 78
The financial intermediation sector in India has undergone a

tremendous change in recent years and has come to acquire a globally

comparable structure, comprising strong regulatory supervision, focused on

a clearly defined set of intermediaries, namely banks, development finance

institutions and non-bank companies

CERTIFICATES OF REGISTRATION ISSUED TO NBFCs IN INDIA

End of June All NBFCs NBFCs accepting public deposits

1999 7855 624

2000 8451 679

2001 13815 776

2002 14077 784

2003 13849 710

2004 13671 584

Source: RBI

The small Indian, in earlier decades was a person rationed out of the

bank loan market because of systemic priorities, NBFCs with their flexible

operations and strong local presence, often reached out and financed this

small industrialist who would then go on and acquire equipment, vehicles,

properties and working capital to fund his dream.

 79

Over the past five years, monitoring of (public deposit-taking) NBFCs

has been similar to or in some cases more stringent than that of banks.

Besides, the RBI has prescribed prudential norms for all NBFCs. Tightening

of regulatory and supervisory framework for NBFCs has also been

coterminous with rapid product development and diversification and

sweeping changes in technology, alongside trends indicating consolidation

in the financial sector.

ACTIVITYWISE DISTRIBUTION OF NBFCs

(Excluding RNBCs (as at end of March 2004)

Activity Amount Per cent to total

2002 2003 2002 2003

Loans 13710 13296 34 35

Investment 4334 4338 11 12

Hire purchase 13202 13031 33 35

Equipment leasing 3112 2011 8 5

Bills 673 450 2 1

Other Assets 4802 4583 12 12

Total 39833 37709 100 100

Source :RBI
 80

In the loans arena, where the banks are very focused alongside NBFCs

high consumer optimism continues to drive GDP growth and retail

businesses. While retail loans/GDP ratios are high in developed countries, in

India, it is still quite low and thus there is great potential ahead, especially in

the smaller geographies where NBFCs have been fairly active for years.

The latest report by the working group on DFIs has recognized this

significant role and has suggested that a new framework be evolved for

monitoring NBFCs with a large systematic role (defined as NBFCs with

more than Rs.500 crore deposits) and that their working style and regulatory

focus be the same for banks, thus emphasizing the need for the sector to

remain healthy.

STRUCTURED DISABILITIES

Today, banks and NBFCs are virtually competing for the same

resources and business in the markets. In the financial year 2003, banks

accounted for 40 per cent of the commercial vehicle financing business (up

from 25 per cent 2-3 years earlier) and also dominated the car finance

segment with 5 out of the top 6 players being banks accounting for 65 per

cent of the disbursements during the year.

Yet NBFCs remain discriminated against on many parameters. For

example, banks are required to maintain a capital adequacy ratio of 9 per

 81

cent, while NBFCs need 12 per cent. They have no access to refinance of

priority sector funding or to RBI's market mechanisms like repo auctions.

NBFCs are also not covered under debt recovery tribunals and the

SARFAESI Act which helps banks reduces their NPAs and provide an

overall cost advantage.

Taxation anomalies also continue to persist, Banks benefit from tax

exemptions on housing loans infrastructure funding and even on provision

for bad debts while NBFCs do not. Further, the incidence of sales tax and

service tax on hire purchase and lease adds enormous pressure. In a business

where spreads are as low as 1 to 2 per cent, taxes amounting to one per cent

are not sustainable (in the case of lease, tax is applicable on the principal and

interest). This in turn, has rendered the artificial classification of NBFCs as

hire purchase, lease and loan companies irrelevant.

RBI closely supervises those NBFCs which accept public deposits,

through a comprehensive mechanism comprising on site examination, off-

site surveillance, a sensitive market intelligence system and initiation of

necessary supervisory action whenever necessary. The Statutory auditors of

NBFCs have been directed to report exceptions to compliance with RBI

regulations to the Reserve Bank directly for punitive action. RBI has

undertaken publicity campaign through print media all over the country to
 82

create awareness among the public about do's and don'ts in regard to

making deposits with NBFCs.

RBI has also been coordinating its efforts with State Government

authorities and other enforcement bodies for checking unscrupulous

activities of NBFCs and unincorporated bodies accessing public deposits

illegally. At the same time, the well-run and managerially sound NBFCs are

being encouraged to continue their genuine business operations. Bank credit

to the NBFCs for their advances against commercial vehicles has recently

been brought under the ambit of priority sector advances. The earlier ceiling

on bank credit to NBFCs as a multiple of their NOF have been abolished for

NBFCs registered with RBI.

The department of Company Affairs (DCA) has allowed conversion

of 192 non-banking financial companies as nidhi (mutual benefits)

companies under the Companies Act after their clearance from the Reserve

Bank of India. These NBFCs have to comply with the directions of the

Reserve Bank of India.

The DCA has issued modified guidelines on November last,

empowering the Government to appoint special officer to monitor the affairs

of a company in case of default in making refund of deposits to more than 10

depositors, conduct special audit by auditors appointed by the Government

 83

to ensure that a nidhi company maintains a contingent fund by transferring

half a per cent of each deposit to such fund and keep the entire amount in a

nationalized bank.

It also prohibits a person to hold the post of director in a nidhi

company for a period of more than 10 years provided that such director will

be eligible for reappointment after a period of two years of ceasing to hold

the post of director.

FRESH CHANGE TO NBFCs

The RBFs move to bring down the ceiling on deposit rate has come as

a bolt from the blue for non-banking finance companies (NBFCs). They are

convinced that it will have significant negative fallout on the industry which

is through a prolonged bad phase. Sources said the lower ceiling on deposit

rate would make NBFCs much more difficult to access public funds.

The bridge between NBFCs and new generation private banks vis-a-

vis deposit rates has narrowed down considerably. The difference in one

year deposit rates between them is around 150-200 basis points. NBFCs,

more often than not, provide an incremental rate of around half a percentage

for every one-year increase in maturity period. Since the ceiling rate has

been brought down to 12.5 per cent from 14 per cent (presumably for longer
 84

tenure, say three year deposits), this should logically force NBFCs to reduce

rates on lower tenure deposits.

The Reserve Bank of India cautioned the depositors in its latest policy

that whatever be the rigorous of regulation, the regulations by themselves

cannot provide a failsafe system for ensuring repayment of deposit.

Depositors should, therefore, be circumspect and satisfy themselves about

the financial soundness and health of the companies before placing their

deposits keeping in mind that they are investing their money at their own

risk and responsibility.

The RBI has also made certain refinements in the norms for

classification of NBFCs into various sub groups based on their principal

activity as evidenced from the asset/income pattern. Having regard to the

special regulatory dispensation accorded to equipment leasing and hire

purchase finance companies, the criteria for classification of the NBFCs into

these categories has been tightened. Thus, an NBFC to be eligible for being

classified as an equipment leasing company or hire purchase finance

company will have not less than 60 per cent of its assets and derive not less

than 60 per cent of its income from equipment leasing and hire purchase

activities taken together.

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REVISED RBI REGULATIONS FOR NBFCs

The Reserve Bank of India announced a set of measures to protect the

interests of depositors and provide more effective supervision over non-

banking financial companies, particularly those which accept public

deposits. For this purpose, the RBI has drawn necessary powers under the

provisions of the RBI (Amendment) Act, 1997. The regulations stipulate an

upper limit of public deposits which NBFCs can accept. This limit is linked

to the credit rating by an approved rating agency. An upper limit has also

been put on the rate of interest on deposits in order to restrain NBFCs from

offering incentives and mobilizing excessive deposits which they may not be

able to service.

Furthermore, disclosure requirements have been strengthened and

responsibilities have been cast on the boards of directors and auditors of the

companies to ensure that the operations of NBFCs conform to the deposit

regulations and prudential norms prescribed by the RBI.

For the purpose of the new regulations, NBFCs have been divided into

three broad categories—^those accepting public deposits; those not accepting

public deposits and are engaged in loan, investment, hire purchase finance

and equipment leasing activities; and those not accepting public deposits and

have acquired shares and securities in their own group or holding or

 86

subsidiary companies of not less than 90 per cent of their total assets and are

not trading in these shares and securities. While NBFCs accepting public

deposits will be subjected to all the provisions of the directions, those which

do not accept public deposits will be supervised in a limited manner.

CEILING ON INTEREST RATE

The NBFCs having net owned funds of less than Rs.25 lakhs will not

be entitled to accept deposits from the public. However, they can raise

borrowings from other sources. NBFCs having a credit rating lower than A

cannot accept public deposits. Those which have accepted public deposits in

excess of the prescribed limits have been allowed time up to December 31,

1998 to regularize their position. All NBFCs have now been subjected to an

interest rate ceiling of 16 per cent per annum. Those which are now offering

interest rates in excess of the prescribed ceiling are required to roll back their

interest rates to bring them within the ceiling with immediate effect.

Brokerage payable by NBFCs on deposits of one year to five years

has now been uniformly fixed at two per cent as against the varying rates

earlier. In addition, NBFCs may pay brokers by way of reimbursement on

the basis of vouchers or bills produced an amount not exceeding 0.5 per cent

of the deposits collected. NBFCs accepting public deposits only will be

required to submit to the RBI annual statutory returns and financial

 87

statements. Those not accepting public deposits are exempted from this

requirement.

The NBFCs including residuary non-banking companies accepting

public deposits will be required to comply with all the prudential norms

encompassing income recognition, accounting standards, asset classification,

provisioning for bad and doubtful debts, capital adequacy and

credit/investment concentration. Prudential norms have been revised to make

them more transparent and have been reissued in the form of directions to

make them mandatory.

The income recognition asset classification and provisioning norms as

applicable to lease and hire purchase assets have been relaxed having regard

to their distinctive nature. Hitherto such assets were to be treated as non-

performing assets (NPAs) in case the lease rentals and hire purchase

instalments remained past due for six months. In terms of new norms, such

assets will be classified as NPAs if the said instalments are overdue for 12

months and above.

ROLE OF STATUTORY AUDITORS

It will be the duty of the statutory auditors to comment in their report

that these companies have not accepted public deposits and have complied

with the specified norms. Any violation of non-compliance is required to be

 88

reported by the statutory auditors to the RBI by exception. The scope of the

auditor's certificate appended to the returns on prudential norms has been

widened to include certain aspects of supervisory concerns to the RBI and

also to ensure correct reporting of data.

The RBI has issued directions to the statutory auditors of the NBFCs

requiring them to issue, in addition to the normal auditors report on the

financial statements to the share holders, a report to the board of directors of

the NBFC containing a statement on certain matters of supervisory concern

to the RBI. The RBI said these directions were indented to provide

supervision over NBFCs and ensure that they complied with RBI directions.

In the event, any of the statements by the auditors are unfavourable or

qualified or in the opinion of the auditor, the NBFC has not complied with

the RBI.

In their report to the board of directors, the auditors will be required to

make a statement confirming compliance by the NBFC with the directions

issued by the RBI regarding (1) acceptance of public deposits, (2) credit

rating (3) prudential norms regarding income recognition, accounting

standards, asset classification provisioning and exposure limits (4) capital

adequacy, (5) liquidity requirements and (6) periodic submission of returns

to the RBI as applicable to the different categories of NBFCs.

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ISSUE OF CREDIT CARD

NBFCs are not allowed to undertake credit card business without prior

approval of Reserve Bank of India. However, RBI has been receiving

requests from NBFCs for permission to issue debit cards, stored value cards,

smart cards, value added cards, etc. In this connection, NBFCs are advised

that the issue of such cards have a characteristic akin to demand deposits as

they are payable at the convenience of the card holders and acceptance of

deposits payable on demand which is a banking function. The issue of such

cards is, therefore, violative of the extant NBFC Directions. RBI has advised

banks that they should not issue smart/debit cards in tie-up with any other

non-bank entities (cf.DBOD.NO.FSC.BC 106/24.01.019/2003-04 dated June

30, 2004)

In regard to credit card business, it is clarified that any company

including a non-deposit taking company intending to engage in this activity

requires a Certificate of Registration, apart from specific permission to enter

into this business, the pre-requisite for which is a minimum net owned fund

of Rs.lOO crore and subject to such terms and conditions as the bank may

specify in this behalf from time to time.

 90

PREMATURE REPAYMENT OF PUBLIC DEPOSITS OR

DEPOSITS

The provisions relating to premature repayment (after the minimum

lock-in period) of public deposits or deposits, are contained in

(a) Non-banking Financial Companies Acceptance of Public Deposits

(Reserve Bank) Directions, 1998 in the case of NBFCs.

(b) Miscellaneous Non-Banking Companies (Reserve Bank) Directions,

1977 in the case of MNBCs, and

(c) Residuary Non-Banking Companies (Reserve Bank) Directions 1987 in

thecaseofRNBCs.

As stipulated therein, in terms of (a) and (b) above, a NBFC or

MNBC is not permitted to repay any public deposits as the case may be,

within a period of three months from the date of acceptance of the same.

Similarly under (c) above, RNBCs is not permitted to repay any deposit

within a period of twelve months from the date of its acceptance. However,

after the above lock-in period, the public deposits or deposits can be prepaid

subject to certain conditions.

It has been brought to the notice the RBI that certain companies have

offered to the depositors the right to premature repayment. Such repayments

may vitiate the ALM discipline of companies and in case of a company

 91

whose assets may be insufficient to meet all its outside liabilities, such

repayments may result in preferential treatment to those depositors who exit

early. As such the said provisions need a review for the purpose of

safeguarding the ALM discipline among the companies and to restrict

preferential prepayment. Further, the provisions relating to repayment of

deposits and the applicable interest rate in the event of unforeseen death of a

depositor also need a review.

The Facility of premature repayment, after the lock-in period, of

public deposits by normally run NBFCs (deposits in cases of

RNBCs/MNBCs) would, henceforth, be at the sole discretion of the

company and cannot be claimed as a matter of right by the depositors. The

existing contracts conferring the right for premature withdrawal on the

depositor, would, however, remain unchanged. Further 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.

All deposit accounts standing to the credit of sale/first depositor in

the same capacity shall be clubbed and treated as one deposit account for the

purpose of premature repayment.

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The historical stage and the present stage of the NBFCs are compared

theoretically. An extensive analysis of the functioning of the Non-Banking

Financial companies is done. The revised and current guidelines for the

functioning of the NBFCs are also analysed. The forthcoming chapter deals

with the Performance Analysis of Sundaram Finance Limited.