NBFC5

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Non banking financialcompanies

By sudev jyothisiFN-92

SCMS-COCHIN

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Pr epa r ed by P inal Shah 3

Contd

Able to ca r ve niche in meeting c r edit need of wholesale and r etail custome r s.Thei r numbe r has gone up f r om 7,063in 1981to 51,929 in 1996.The r egulated deposits of NBFCsamounted to Rs. 20,428.93 co r es in1993

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Differ ence between NBFC andBank

(i) a NBFC cannot accept demand deposits(demand deposits are funds deposited at a

depository institution that are payable ondemand -- immediately or within a very shortperiod -- like your current or savingsaccounts.)

(ii) it is not a part of the payment and settlementsystem and as such cannot issue cheques toits customers; and

(iii) deposit insurance facility of DICGC is notavailable for NBFC depositors unlike in caseof banks.

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salient features of NBFCs

i) The NBFCs are allowed to accept/renewpublic deposits for a minimum period of 12months and maximum period of 60 months.They cannot accept deposits repayable ondemand.ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI fromtime to time. The present ceiling is 11 per cent per annum. The interest may be paid or compounded at rests not shorter thanmonthly rests.

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Contd

iii) NBFCs cannot offer gifts/incentives or anyother additional benefit to the depositors.

iv) NBFCs (except certain AFCs) should haveminimum 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 disclosuresabout the company in the Application Formissued by the company soliciting deposits.

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NBFCIt means

1. A financial institutions that is company

2.A non-banking institution that is a companywhose p r incipal business is the r eceiving of deposits unde r any scheme o r a rr angement or lending in any manne r

3. Othe r non banking institutions with p r ior app r oval of GOI.It excludes FI which ca rr y on ag r icultu r alope r ations as thei r pr incipal business.

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Contd

It is only non-banking institution that isany hi r e-pu r chase finance, investment,loan o r mutual benefit financialcompany and an equipment leasingcompany but excludes and insu r ance

company/stock exchange/stock b r okingcompany/ me r chant banking company.

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Type of NBFC1. An equipment leasing company (ELC)2. A hir e pu r chase company (H P C)

3. A housing finance company (HFC)4. An investment company (IC)5. A loan company(LC)6. A mutual benefit financial companies

(MBFC)I.e. Nidhi companies7. A Miscellaneous non-banking company I.e.

chit fund company (MNBC)Residua r y Non Banking companies (RNBC) (it

is not NBFC)

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MBFCs

MBFCs or Nidhis we r e exempt f r ompr ovision of RBI s NBFCs dir ections.Howeve r , the RBI imposed a ceiling of

15% inte r est r at on deposits andpr ohibited f r om issuing adve r tisements

in any fo r m and paying any b r oke r agefor soliciting deposits.

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MNBCs

A company o r FI ca rr ying all o r any of followingtypes of business.

collection of money in one lumpsum/installments by way of Cont r ibutionsSale of units/ce r tificates/othe r inst r umentsIn any manne r

As membe r ship/admission fee/Se r vice cha r ges to w. r .t MF, any savings, th r ift etc.

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MNBC

Manage to an ag r eement with thesubsc r ibe r s each one of whom

subsc r ibes a ce r tain sum in installment save r definite pe r iod.Conduct any othe r for m of chit/.Unde r take/ca rr y on/engage anybusiness simila r to those r efe rr ed toabove.

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RNBC

All non banking financial institutionsothe r than NBFC, MBFC and MNBCs a r eknown as RNBCs.

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Catego r ization of NBFC

Accepting public depositsNot accepting public deposits but engaged in

loan, Investments, hi r e pu r chase, leasefinance.Not accepting public deposits and haveacqui r ed sha r e/secu r ities in thei r owngr oup/holding/subsidia r y companies of not less than 90% of thei r total assets and a r enot t r ading in these sha r es.

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P ublic Deposits

It include FD, Recu rr ing deposits, depositsr eceived f r om r elatives and f r iends,

sha r eholde r s by public limited company andmoney r aised by issue of unsecu r eddebentu r es/bonds.It will not include money r aised by NBFCs byway of issue of secu r ed debentu r es/bonds,bo rr owings f r om banks/ financial institutionsdeposit fo r m di r ecto r s, fo r eign citizens, p r ivet limited companies fo r m thei r sha r eholde r s.

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RBI (Amendment) Act, 1997Mar ch

Minimum NOF Rs. 25 lakhCompulso r y r egist r ation with RBIMaintenance of liquid assetsCr eation of r ese r ve fund into with 20%of Net p r ofit should be t r ansfe rr ed

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Net Own FundsMinimum NOF must be r s. 25 lakh o r suchothe r amount not exceeding Rs 200 lakh.NOF means

1. P aid up capital2. Fr ee r ese r ves accumulated losses,

defe rr ed r evenue expenditu r e and othe r intangible assets

3. Less investments in sha r es4. Less the book value of

debentu r es/bonds/outstanding loans andadvances including hi r e-pu r chase and leasefinance.

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NOF

NBFC not having NOF of less than r s. 25lakh will not be entitled to accept deposit f r om public.But they can r aise bo rr owings fo r mothe r r esou r ces.

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Regist r ation

With effect f r om Jan 1997, tocommence a new company o r to ca rr yon existing company the business of NBFC must obtain ce r tificate of r egist r ation f r om RBI.

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Maintenance of Assets

They have to invest in unencumbe r edapp r oved Indian secu r ities 5% o r mo r e thei r outstanding deposits at the close of businesson the last wo r king day of second p r ecedingqua r te r .Appr oved secu r ities it means secu r ities of any state gove r nment o r cent r al gove r nment and bonds unconditionally gua r anteed bythem as r ega r ds the payment of inte r est aswell as r epayment of p r incipal.

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contd

Included in unencumbe r ed app r ovedsecu r ities a r e app r oved secu r itieslodged by NBFCs with othe r institutionsfor an advance/any othe r a rr angement.The basis of valuation of such secu r ities

would be the cost o r cu rr ent ma r ket pr ice.

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Rese r ve Fund

Ever y NBFC must c r eate a r ese r ve fundto which at least 20% of its net p r ofitsmust be t r ansfe rr ed befo r e thedecla r ation of any dividend.

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Minimum c r edit r atings

NBFCS that have minimum NOF of 25lakh can accept public deposits but theymust have minimum investment g r adefor thei r FD f r om one of app r ovedr ating agencies at least once a yea r .

A copy of r ating should be sent to RBI.

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Cr edit r ating agency

Cr edit r ating agency Min r ating

Cr edit Rating Info r mationse r vices of India Ltd. (CRISIL) FA -

Investment Info r mation andcr edit r ating agency of India Ltd.

MA-

Cr edit analysis and r esea r ch ltd. CARE BBB

FITCH Rating India Pr ivate Ltd. Ind BBB -

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Ceiling on quantum of deposits fo r ELC/HP C

NOF Rs. 25 LakhCapital adequacy r atio 15% (As pe r last balance sheet)Acceptance of deposits 1.5*NOF o r 10cr which eve r is lowe r .If they have minimum g r ade 4*NOF

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LC/IC

NOF Rs. 25 lakhMin Investment g r ade

15% adequacy r atio as pe r last balancesheet.If AAA r atings ad. Ratio is below 15%- theya r e p r ohibited f r om accepting/ r enewing

deposits in excess of amount outstanding ason Dec 18 1998 o r 1.5 NOF which eve r islow.

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Contd..

If g r ading is AA but with less than15% ad r atio than its allowed to accept public deposit upto its NOF till it attains15%If g r ading is A and ad r atio is less

than 15% the ceiling on deposit is onehalf of NOF.

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Inte r est r ate ceiling.

It is the r ate of inte r est on deposits.It is paid o r compounded at r ests but not sho r te r than monthly r ests.Curr ently ceiling is 12.5%.

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Br oke r age

Br oke r age payable by NBFCs on deposit of one yea r to vie yea r s has at 2%unifo r mly.

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Othe r cr ite r ia

It must pay its p r esent and futu r edeposito r s in full when they claim.Its affai r s a r e not det r imental to theinte r ests of its p r esent and publicinte r est of deposito r s.

It has adequate capital st r uctu r e andea r ning p r ospects.

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P owe r of r egulation

RBI can gene r al r egulate o r pr ohibit theissue by any NBI of any p r ospectus o r adve r tisement soliciting deposits of money fo r m the public and also specifyconditions subject to which they can be

issued.

NBFC5

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