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NON-BANKING FINANCIAL

COMPANIES

Mr Shamsuddin

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

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 NonBanking 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

www.professoraugustin.com

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.

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

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.

ii)

NBFCs cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time. The present ceiling is 11 per
cent per annum. The interest may be paid or compounded at rests
not shorter than monthly rests.

iii)

NBFCs cannot offer gifts/incentives or any other additional benefit


to the depositors.

iv) NBFCs (except certain AFCs) should have minimum investment


grade credit rating.

v) The deposits with NBFCs are not insured.

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

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

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
non-deposit 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,

Thank You