NON-BANKING FINANCIAL COMPANIES

Udit Khandelwal

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

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/ securities issued by Government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business. It does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

RESIDUARY NON-BANKING COMPANY

A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner. The deposits received do not involve investment, asset financing, or loans.
. Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Reserve Bank of India.

DIFFERENCE BETWEEN NBFCS AND BANKS

(i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.) (ii) it is not a part of the payment and settlement system and as such cannot issue cheque to its customers drawn to itself; and (iii) deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation ) is not available for NBFC depositors unlike in case of banks.

The NBFCs that are registered with RBI are:

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

With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as
(i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)

TYPES OF NBFC

Asset finance Companies (AFC) AFC are financial institutions whose principal business is of financing physical assets such as automobiles, tractors, construction equipments material handling equipments and other machines. ex: Bajaj Auto Finance corp. , Fullerton India etc

Investment Companies (IC) ICs generally are involved in the business of shares, stocks, bonds, debentures issued by government or local authority that are marketable in nature ex: Stock Broking Companies, Gilt firms

Loan Companies (LC) LCs are loan giving companies which operate in the business of providing loans. These can be housing loans, gold loans etc ex: Mannapuram Gold Finance, HDFC

NBFCS : OVERVIEW

13000+ players registered under RBI : A & B categories

Spread all across the country Approx. 570 NBFCs authorized to accept public deposits (Catg. A) Assets worth Rs. 15000 Crore financed annually & growing steadily

Asset financing

Commercial vehicles Passenger cars Multi-utility & multi-purpose vehicles Two-wheelers & Three-wheelers Construction equipments Consumer durables

ROLE OF NBFCS

As recognized by RBI & Expert Committees / Taskforce

Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation

Broad base economic development

Irreplaceable supplement to bank credit in rural segments major thrust on semi-urban, rural areas & first time buyers / users To finance economically weaker sections Huge contribution to the State exchequer

ROLE OF NBFCS (CONTD..)

70-80% of Commercial Vehicles are finance driven

Indian economy is more dependent on roads Heavy Govt. outlay for mega road projects Heavy replacement demand anticipated 30 lacs commercial vehicles by the year 2007 Another Rs.6000 Crores required for phasing out old commercial vehicles CRISIL in its study has placed commercial vehicle financing under low risk category Each commercial vehicle manufactured, sold and financed gives employment to minimum 20 persons (direct and indirect)

CUSTOMER SERVICE

The key factor for our survival & growth

NBFCs provide prompt, tailor made service with least hassles. This more than compensates for the higher lending rates of NBFCs as compared to Banks & FIs All customers get direct and easy access to and individual attention of the top management NBFCs cater to a class of borrowers who :- Do not necessarily have a high income - But have adequate net worth - Are honest and sincere (gauged by the personal touch maintained with them).

REGISTRATION
A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format along with necessary documents for Banks consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

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

If a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits

CEILING ON PUBLIC DEPOSITS

Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating

1.5 times of NOF or Rs 10 crore whichever is less 4 times of NOF

LC/IC with CRAR of 15% and having minimum investment grade credit rating

1.5 times of NOF

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

SYMBOLS OF MINIMUM INVESTMENT GRADE RATING

Name of rating agencies

Level of minimum investment grade credit rating (MIGR)

CRISIL

FA- (FA MINUS)

ICRA

MA- (MA MINUS)

CARE

CARE BBB (FD)

FITCH Ratings India Pvt. Ltd

tA-(ind)(FD)

Regulations on NBFC :

i)

The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.

ii)

iii)

iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating.

v) The deposits with NBFCs are not insured.

vi) The repayment of deposits by NBFCs is not guaranteed by RBI.

vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.

WORKING AND CURRENT POSITION OF NBFCS

Cost of Funding - Shot up during the crisis due to short tenure borrowings, stabilized now & expected to be less volatile due to larger proportion of long term Funding Many NBFCs took advantage of the lower interest rate regime at the shorter end of the yield curve by borrowing short term funds (3months 1 year) at lower rates and lending for maturities ranging from 3-4 years at higher rates.

Average borrowings costs increased from around 9.5-10.0% in FY08 to 11.5-12.0% in FY09. This shows the severity of the impact as financial crisis affected funding costs in the second half of FY09
The response by NBFCs was to gradually replace short term funding with long term sources.

Asset Quality Deteriorated more due to unsecured loans which is now virtually stopped by most players, provisioning has improved & asset quality expected not to worsen further. Aggregate Gross NPA (The net non-performing assets to loans )ratio trended from around 1.1% for FY08 to around 2.1% in FY09. Unsecured lending has virtually stopped for many NBFCs and underwriting norms have also been tightened in general for other asset classes

MEASURES TO OVERCOME THE CRISIS

The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI) were permitted to raise shortterm foreign currency borrowings.

Allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding requirements of NBFCs through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL. Risk weights on banks exposures to claims on NBFCs-NDSI were reduced to 100 per cent from 150 per cent.

Deferring the higher CAR norms for NBFCs-ND-SI by 1 year.

OUTLOOK
Overall positive outlook on the sector due to The better ALM position,
Focus on relatively safer asset classes and The demonstrated acceptance of the sector as systemically important by the regulator. Mergers with profitable companies Short term foreign buying allowed. Portfolio diversification Including asset management companies House finance companies Ventured into insurance sector.

RBIS REGULATION REVISION OF NBFCS IN ITS ANNUAL REPORT(AUGUST25TH2010)

RBI has been taking efforts to tighten control over NBFCs, which are more loosely regulated than banks. Any takeover or merger involving deposit-taking NBFCs now requires the prior approval of RBI. In addition, the management of the merged entity must comply with the fit and proper criteria of RBI.

RBI also chided NBFCs involved in micro-finance for charging high rates while accessing cheaper funds from banks.

The end-borrowers do not get the benefit of low interest rates, as NBFCs are assigned the responsibility of managing the loans. Consequently, the borrower continues to pay the same rate of interest, which is as high as 23.6-30 per cent. According to the banking regulator, there are 12 systematically important nondeposit NBFCs that are lenders with an asset size of at least Rs 100 crore engaged in micro-finance lending. The main sources of funds for these NBFCs are borrowings from banks and financial institutions. Most of them have received large amounts as foreign direct investment and many of them are now largely foreign-owned,