A PROJECT REPORT

ON NON-BANKING FINANCIAL COMPANIES

IN THE SUBJECT FINANCIAL SERVICE

SUBMITTED TO UNIVERSITY OF MUMBAI FOR SEMESTER I OF M.COM (BANKING AND FINANCE)

BY SAYLI SHASHIKANT NAFDE Roll No. 258

UNDER THE GUIDANCE OF Prof. / Dr. SEEMA MALANKAR YEAR 2012 2013

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C E R T I F I C A T E

This is to certify that the project entitled Non-Banking Financial Companies Submitted by Ms. Sayli Shashikant Nafde Roll No. 258 student of M.Com. (Part-I) Accountancy / Management / Banking & Finance (University of Mumbai) Semester I examination has not been submitted for any other examination and does not form a part of any other course undergone by the candidate. It is further certified that he / she has completed all required phases of the project. This project is original to the best of our knowledge and has been accepted for Internal Assessment.

Internal Examiner

External Examiner

Co-ordinator

Principal

College seal

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DECLARATION BY THE STUDENT

I, Sayli Shashikant Nafde student of M.Com. Part-I Banking and Finance, Roll No. 258 hereby declare that the project for the Paper Financial Services titled, Non-Banking Financial Companies submitted by me to University of Mumbai, Semester I examination during the academic year 2012-2013, is based on actual work carried by me under the guidance and supervision of Prof.Dr. Seema Malankar.

I further state that this work is original and not submitted anywhere else for any examination.

Signature of student

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ACKNOWLEDGEMENT

At the beginning, I would like to thank GOD for his shower of blessing. The desire of completing this project was given by my guide Prof.Dr. Seema Malankar. I am very much thankful to her / him for the guidance, support and for sparing her / his precious time from a busy schedule. I would fail in my duty if I dont thank my parents who are pillars of my life. Finally I would express my gratitude to all those who directly and indirectly helped me in completing this project.

(Signature of the student)

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INDEX CHAPTER NO. 1 2 3 4 5 6 7 8 Introduction Historical Background Meaning, Definition, Factors, and Regulation of NBFCs Classification of NBFCs Role of NBFCs Function of NBFCs Commercial Bank v/s Non- Banking Financial Companies RBI Guideline for Asset and Liability Management System in NBFCs 9 10 11 12 13 14 15 16 17 Liquidity Risk Management Financial Companies Regulation Bill, 2000 Appraisal of Financial Companies Regulation Bill,2000 Norms for NBFCs Current Status of NBFCs Financial Linkage Between Bank and NBFCs List of NBFCs Conclusion Bibliography 35 36 37 38-39 40-41 42-43 44 45 46 6-8 9-11 12-14 15-23 24-26 27-28 29-30 31-34 SUBJECT PAGE NO.

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1. INTRODUCTION: We studied about banks, apart from banks the Indian Financial System has a large number of privately owned, decentralized and small sized financial institutions known as Non-banking financial companies. In recent times, the non-financial companies (NBFCs) have contributed to the Indian economic growth by providing deposit facilities and specialized credit to certain segments of the society such as unorganized sector and small borrowers. In the Indian Financial System, the NBFCs play a very important role in converting services and provide credit to the unorganized sector and small borrowers.

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund companies etc. NBFCs can be classified into deposit accepting companies and non-deposit accepting companies. NBFCs are small in size and are owned privately. The NBFCs have grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as service oriented companies. Their main companies are banks and financial institutions. According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of India.

The NBFCs in advanced countries have grown significantly and are now coming up in a very large way in developing countries like Brazil, India, and Malaysia etc. The non-banking companies when compared with commercial and co-operative banks are a heterogeneous (varied) group of finance companies. NBFCs are heterogeneous group of finance companies means all NBFCs provide different types of financial services.

Non-Banking Financial Companies constitute an important segment of the financial system.

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NBFCs are the intermediaries engaged in the business of accepting deposits and delivering credit. They play very crucial role in channelizing the scare financial resources to capital formation.

NBFCs supplement the role of the banking sector in meeting the increasing financial need of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs have more flexible structure than banks. As compared to banks, they can take quick decisions, assume greater risks and tailor-make their services and charge according to the needs of the clients. Their flexible structure helps in broadening the market by providing the saver and investor a bundle of services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of the organized financial system in India. The Financial System of any country consists of financial Markets, financial intermediation and financial instruments or financial products. All these Items facilitate transfer of funds and are not always mutually exclusive. Inter-relationships Between these are parts of the system e.g. Financial Institutions operate in financial markets and are, therefore, a part of such markets.

NBFCs at present providing financial services partly fee based and partly fund based. Their fee based services include portfolio management, issue management, loan syndication, merger and acquisition, credit rating etc. their asset based activities include venture capital financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short they are now providing variety of services. NBFCs differ widely in their ownership: Some are subsidiaries of

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large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd (Devdas, 2005). Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions. The term Finance is often understood as being equivalent to money. However, final exactly is not money; it is the source of providing funds for a particular activity. The word system, in the term financial system, implies a set of complex and closely connected or inter-linked Institutions, agents, practices, markets, transactions, claims, and liabilities in the Economy. The financial system is concerned about money, credit and finance. The three terms are intimately related yet are somewhat different from each other:

Money refers to the current medium of exchange or means of payment. Credit or loans is a sum of money to be returned, normally with interest; it refers to a debt

Finance is monetary resources comprising debt and ownership funds of the state, company or person.

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2.HISTORICAL BACKGROUND. The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve Bank Amendment Act, 1963 to include provisions relating to non-banking institutions receiving deposits and financial institutions. It was observed that the existing legislative and regulatory framework required further refinement and improvement because of the rising number of defaulting NBFCs and the need for an efficient and quick system for Redressal of grievances of individual depositors. Given the need for continued existence and growth of NBFCs, the need to develop a framework of prudential legislations and a supervisory system was felt especially to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to review the existing framework and address these shortcomings, various committees were formed and reports were submitted by them. Some of the committees and its recommendations are given hereunder:

1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying the various money circulation schemes which were floated in the country during that time and taking into consideration the impact of such schemes on the economy, the Committee after extensive research and analysis had suggested for a ban on Prize chit and other schemes which were causing a great loss to the economy. Based on these suggestions, the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted

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2. Dr.A.C.Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee set out the agenda for reforms in the NBFC sector. This committee made wide ranging recommendations covering, inter-alia entry point norms, compulsory registration of large sized NBFCs, prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit rating for acceptance of public deposits and more statutory powers to Reserve Bank for better regulation of NBFCs.

3. Khan Committee (1995)

This Group was set up with the objective of designing a comprehensive and effective supervisory framework for the non-banking companies segment of the financial system. The important recommendations of this committee are as follows: i. Introduction of a supervisory rating system for the registered NBFCs. The ratings assigned to NBFCs would primarily be the tool for triggering on-site inspections at various intervals. ii. Supervisory attention and focus of the Reserve Bank to be directed in a comprehensive manner only to those NBFCs having net owned funds of Rs.100 laths and above. iii. Supervision over unregistered NBFCs to be exercised through the off-site surveillance mechanism and their on-site inspection to be conducted selectively as deemed necessary depending on circumstances. iv. Need to devise a suitable system for co-coordinating the on-site inspection of the

NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they were subjected to one-shot examination by different regulatory authorities.

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v.

Some of the non-banking non-financial companies like industrial/manufacturing units were also undertaking financial activities including acceptance of deposits, investment operations, leasing etc to a great extent. The committee stressed the need for identifying an appropriate authority to regulate the activities of these companies, including plantation and animal husbandry companies not falling under the regulatory control of Either Department of Company Affairs or the Reserve Bank, as far as their mobilization of public deposit was concerned.

vi.

Introduction of a system whereby the names of the NBFCs which had not complied with the regulatory framework / directions of the Bank or had failed to submit the prescribed returns consecutively for two years could be published in regional newspapers.

4. Narasimha Committee (1991)

This committee was formed to examine all aspects relating to the structure, organization & functioning of the financial system.

These were the committees which founded non- banking financial companies.

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3.NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy. They are indispensible part in the Indian financial system because they supplement the activities of banks in terms of deposit mobilization and lending. They play a very important role by providing finance to activities which are not served by the organized banking sector. So, most the committees, appointed to investigate into the activities, have recognized their role and have recognized the need for a well-established and healthy non-banking financial sector.

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 but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. Non-banking institution which is a company and which has its principal business of receiving deposits under any scheme of arrangement or any other manner, or lending in any manner is also a non- banking financial company.

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DEFINITIONS OF NBFC.

Non-Banking Financial Company has been defined as: (i) A non-banking institution, which is a company and which has its principal business the receiving of deposits under any scheme or lending in any manner. (ii) Such other non-banking institutions, as the bank may with the previous approval of the central government and by notification in the official gazette, specify. NBFCS provide a range of services such as hire purchase finance, equipment lease finance, loans, and investments. NBFCS have raised large amount of resources through deposits from public, shareholders, directors, and other companies and borrowing by issue of non-convertible debentures, and so on. Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions: UNIT TRUST OF INDIA. LIFE INSURANCE CORPORATION (LIC). GENERAL INSURANCE CORPORATION (GIC).

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Factors contributing to the Growth of NBFCs: According to A.C. Shah Committee, a number of factors have contributed to the growth of NBFCs. Comprehensive regulation of the banking system and absence or relatively lower degree of regulation over NBFCs has been one of the main reasons for their growth. During recent years regulation over their activities has been strengthened, as see a little later. The merit of non-banking finance companies lies in the higher level of their customer orientation. They involve lesser pre or post-sanction requirements, their services are marked with simplicity and speed and they provide tailor-made services to their clients. NBFCs cater to the needs of those borrowers who remain outside the purview of the commercial banks as a result of the monetary and credit policy of RBI. In addition, marginally higher rates of interest on deposits offered by NBFCs also attract a large number of depositors Regulation of NBFCs In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing directions to the maximum amount of deposits, the period of deposits and rate of interest they could offer on the deposits accepted. Norms were laid down regarding maintenance of certain percentage of liquid assets, creation of reserve funds, and transfer thereto every year a certain percentage of profit, and so on. These directions and norms were revised and amended from time to time. In 1997, the RBI Act was amended and the Reserve Bank was given comprehensive powers to regulate NBFCs. The amended Act made it mandatory for every NBFC to obtain a certificate of registration and have minimum net owned funds. Ceilings were prescribed for acceptance of deposits, capital adequacy, credit rating and net-owned funds. T he Reserve Bank also developed a comprehensive system to supervise NBFCs accepting/ holding public deposits.

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4. CLASSIFICATION OF NBFCs: This classification is in addition to the present classification of NBFCs into deposit-taking and Non-deposit-taking NBFCs. Depending on the nature their major activity, the non-banking financial companies can be classified into the following categories, they are:

(1) (2) (3) (4) (5) (6) (7) (8)

Equipment leasing companies. Hire-purchase finance companies. Housing finance-companies. Investments companies. Loan companies. Mutual Fund Benefit Companies. Chit fund companies. Residuary companies.

Equipment Leasing Company:

(a)

Equipment leasing company means any company which is carrying on the activity of leasing of equipment, as its main business, or the financing of such activity.

(b)

The leasing business takes place of a contract between the lessor (lessor means the leasing company) and the lessee (lessee means a borrower).

(c)

Under leasing of equipment business a lessee is allowed to use particular capital equipment, as a hire, against a payments of a monthly rent.

(d)

Hence, the lessee does not purchase the capital equipment, but he buys the right to use it.

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(e) (i)

There are two types of leasing arrangements, they are: Operating leasing: In operating leasing the producer of capital equipment offers his product directly to the lessee on a monthly rent basis. There is no middleman in operating leasing.

(ii)

Finance leasing: In finance leasing, the producer of the capital equipment sells the equipment to the leasing company, then the leasing company leases it to the final user of the equipment. Hence, there are three parties in finance leasing. The leasing company acts as a middleman between the producer of equipment and the user of equipment.

Benefits/Advantages of Leasing:

(1)

100% finance: They borrower in the equipment can get up to 100% finance for the use of capital through leasing arrangement in the sense, that the leasing company provides the equipment immediately and the borrower need not pay the full amount at once. Hence, the borrower can use the amount for fulfilling other needs such as expansion development, etc.

(2)

Payment is easier: Leasing finance is costlier. However, the borrower finds it convenient (easy) as he has to pay in installments out of the return from the investment in the equipment. Hence, the borrower does not feel the burden of payment.

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(3)

Tax concessions: The borrower can get tax concessions in case of leasing equipments. The total amounts of rent paid on leased equipment are deducted from the gross income. In case of immediate purchase, interest on the loan and the depreciation are deducted from the taxable income.

Hire-purchase Finance Companies:

(a)

Hire purchase finance company means any company which is carrying on the main business of financing, physical assets through the system of hire-purchase.

(b)

In hire-purchase, the owner of the goods hires them to another party for a certain period and for a payment of certain installment until the other party owns it.

(c)

The main feature of hire-purchase is that the ownership of the goods remains with the owner until the last installment is paid to him. The ownership of goods passes to the user only after he pays the last installment of goods.

(d)

Hire-purchase is needed by farmers, professionals and transport group people to buy equipment on the basis of hire purchase.

(e)

It is a less risky business because the goods purchased on hire purchase basis serve as securities till the installment on the loan is paid.

(f) (g)

Generally, automobile industry needs lot hire-purchase finance. The problem of recovery of loans does not occur in most cases, as the borrower is able to pay back the loan out of future earnings through the regular generation of funds out of the asset purchased.

(h)

In India, there are many individuals and partnership firms doing this business. Even

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commercial banks, hire-purchase companies and state financial corporations provide hire-purchase credit. Housing Finance Companies:

(a)

A housing finance company means any company which is carrying on its main business of financing the construction or acquisition of houses or development of land for housing purposes.

(b)

Housing finance companies also accept the deposits and lend money only for housing purposes.

(c)

Even though there is a heavy demand for housing finance, these companies have not made much progress and as on 31st March, 1990 only 17 such companies here reported to the RBI.

(d)

The ICICI and the Canara Bank took the lead to sponsor housing finance companies, namely, Housing Development Corporation Ltd. and the Can fin Homes Ltd.

(e)

All the information about the Housing finance companies is available with the National Housing Bank. Housing finance companies also have to compulsorily to register themselves with the Reserve Bank of India.

(f)

National Housing bank is the apex institution in the field of housing. It promotes housing finance institutions, both on regional and local levels.

(a)

Investment Companies: Investment company means any company which is carrying on the main business of securities.

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(b)

Investment companies in India can be broadly classified into two types:

(1) Holding Companies: (i) In case of large industrial groups, there are holding companies which buy shares mainly for the purpose of taking control over another institution. (ii) They normally purchase the shares of the institution with the aim of controlling it rather than purchasing shares of different companies. (iii) Such companies are set up as private limited companies.

(2) Other Investment Companies: (i) Investment companies are also known as Investment trusts. (ii) Investment companies collect the deposits from the public and invest them in securities. (iii) The main aim of investment companies is to protect small investors by collecting their small savings and investing than in different securities so that the risk can be spread. (iv) An individual investor cannot do all this on his own, due to lack of expertise in investing. Hence, investing companies are formed for collective investing. Companies are formed for collective investments of money, mainly of small investors. (v) Another benefit of an investment company is that it offers trained, experienced and specialized management of funds. (vi) It helps the investors to select a financially sound and liquid security. Liquid security means a security which can be easily converted into cash. (vii)In India investment trusts are very popular. They help in putting the savings of people into productive investments. (viii)Some of the investment trusts also do underwriting, promoting and holding company

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business besides financing. (ix)These investments trusts help in the survival of business in the economy by keeping the capital market alive, active and busy.

Loan company:

(a)

A loan company means any company whose main business is to provide finance through loans and advances.

(b)

It does not include a hire purchase finance company or an equipment leasing company or a housing finance company.

(c) (d)

Loan company is also known as a Finance Company". Loan companies have very little capital, so they depend upon public deposits as their main source of funds. Hence, they attract deposits by offering high rates of interest.

(e)

Normally, the loan companies provide loans to wholesalers, retailers, small-scale industries, self-employed people, etc.

(f) (g)

Most of their loans are given without any security. Hence, they are risky. Due to this reason, the loan company charges high rate of interest on its loans. Loans are generally given for short period of time but they can be renewed.

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 Mutual Benefit Financial Company:

(a) (b)

They are the oldest form of non-banking financial companies. A mutual benefit financial company means any company which is notified under section 620A of the Companies Act, 1956.

(c) (d)

It is popularly known as "Nidhis". Usually, it is registered with only very small number of shares. The value of the shares is often Rs. 1 only

(e)

It accepts deposits from its members and lends only to its members against tangible securities.

Chit-fund Companies: History:

The chit fund schemes have a long history in the southern states of India. Rural unorganized chit funds may still be spotted in many southern villages. However, organized chit fund companies are now prevalent all over India. The word is Hindi and refers to a small note or piece of something. The word passed into the British colonial lexicon and is still used to refer to a small piece of paper, a child or small girl

How Chit Fund Help?

Chit Funds have the advantage both for serving a need and as an investment. Money can be readily drawn in an emergency or could be continued as an investment.

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Interest rate is determined by the subscribers themselves, based on mutual decisions and varies from auction to auction. The money that you borrow is against your own future contributions. The amount is given on personal sureties too; unlike in banks and other financial institutions which demand a tangible security. Chit funds can be relied upon to satisfy personal needs. Unlike other financial institutions, you can draw upon your chit fund for any purpose - marriages, religious functions, medical expenses, just anything... Cost of intermediation is the lowest.

(a)

Chit funds companies are one of the oldest forms of local non-banking financial institution in India.

(b) (c) (d)

They are also known as "kuries". These institutions have originated from south India and are very popular over there. A chit fund organization is an organization of a number of people who join together and subscribe (contribute) amounts monthly so that any members who is in need of funds can draw the amount less expenses for conducting the chit. It is an organization run on cooperative basis for the benefit of the members who contribute money, the funds are used by them as and when a particular member needs it.

(e)

It helps the persons who save money regularly to invest their savings with good chances of profit.

(f) (g)

Chit funds have many defects as the rate of return given to each member is not the same. It differs from person to person, this leads in improper distribution of gains and losses.

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(h)

Also, the promoters of these funds do everything for their own benefit to get maximum income.

(I)

Hence, the banking commission has made suggestions to pass uniform chit funds laws for the whole of India.

Residuary Non-banking Companies:

(a)

The term "residue" means a small part of something that remains. As the meaning of the term shows, a residuary company is one which does not fall in any of the above categories.

(b)

It generally accepts deposits by operating different schemes similar to recurring deposit schemes of banks.

(c)

Deposits are collected from a large number of people by promising them that their money would be invested in banks and government securities

(d)

The collection of deposits is done at the doorsteps of depositors through bank staff, who is paid commission.

(e)

These companies get the funds at low cost for longer terms, at they invest them in investments which generates good amount of return.

(f) (g) (ii) (iii)

Many of these companies operate with very small amount of capital. They have some adverse (bad) features, such as: Some do not submit periodic returns to the regulatory authority. Some of them do not appoint banks, etc.

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5. ROLE OF NON- BANKING FINANCIAL COMPANIES.

(1)

Promoters Utilization of Savings:

Non- Banking Financial Companies play an important role in promoting the utilization of savings among public. NBFCs are able to reach certain deposit segments such as unorganized sector and small borrowers were commercial bank cannot reach. These companies encourage savings and promote careful spending of money without much wastage. They offer attractive schemes to suit needs of various sections of the society. They also attract idle money by offering attractive rates of interest. Idle money means the money which public keep aside, but which is not used. It is surplus money. (2) Provides easy, timely and unusual credit:

NBFCs provide easy and timely credit to those who need it. The formalities and procedures in case of NBFCs are also very less. NBFCs also provides unusual credit means the credit which is not usually provided by banks such as credit for marriage expenses, religious functions, etc. The NBFCs are open to all. Every one whether rich or poor can use them according to their needs. (3) Financial Supermarket:

NBFCs play an important role of a financial supermarket. NBFCs create a financial supermarket for customers by offering a variety of services. Now, NBFCs are providing a variety of services such as mutual funds, counseling, merchant banking, etc. apart from their

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traditional services. Most of the NBFCs reduce their risks by expanding their range of products and activities. (4) Investing funds in productive purposes: NBFCs invest the small savings in productive purposes. Productive purposes mean they invest the savings of people in businesses which have the ability to earn good amount of returns. For example In case of leasing companies lease equipment to industrialists, the industrialists can carry on their production with less capital and the leasing company can also earn good amount of profit. (5) Provide Housing Finance:

NBFCs, mainly the Housing Finance companies provide housing finance on easy term and conditions. They play an important role in fulfilling the basic human need of housing finance. Housing Finance is generally needed by middle class and lower middle class people. Hence, NBFCs are blessing for them. (6) Provide Investment Advice:

NBFCs, mainly investment companies provide advice relating to wise investment of funds as well as how to spread the risk by investing in different securities. They protect the small investors by investing their funds in different securities. They provide valuable services to investors by choosing the right kind of securities which will help them in gaining maximum rate of returns. Hence, NBFCs plays an important role by providing sound and wise investment advice.

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(7)

Increase the Standard of living:

NBFCs play an important role in increasing the standard of living in India. People with lesser means are not able to take the benefit of various goods which were once considered as luxury but now necessity, such as consumer durables like Television, Refrigerators, Air Conditioners, Kitchen equipments, etc. NBFCs increase the Standard of living by providing consumer goods on easy installment basis. NBFCs also facilitate the improvement in transport facilities through hire- purchase finance, etc. Improved and increased transport facilities help in movement of goods from one place to another and availability of goods increase the standard of living of the society. (8) Accept Deposits in Various Forms:

NBFCs accept deposits forms convenient to public. Generally, they receive deposits from public by way of depositor a loaner in any form. In turn the NBFCs issue debentures, units certificates, savings certificates, units, etc. to the public. (9) Promote Economic Growth:

NBFCs play a very important role in the economic growth of the country. They increase the rate of growth of the financial market and provide a wide variety of investors. They work on the principle of providing a good rate of return on saving, while reducing the risk to the maximum possible extent. Hence, they help in the survival of business in the economy by keeping the capital market active and busy. They also encourage the growth of well- organized business enterprises by investing their funds in efficient and financially sound business enterprises only. One major benefit of NBFCs speculative business means investing in risky activities.. NBFCs play a very positive and active role in the development of our country.

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6. FUCTION OF NON BANKING FINANCIAL COMPANIES:(1) Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various ways such as issue of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of nbfcs are made up of money received from public by way of deposit or loan or investment or any other form. (2) Lending money:

Another important function of nbfcs is lending money to public. Non- banking financial companies provide financial assistance through. (a) Hire purchase finance: Hire purchase finance is given by nbfcs to help small important operators, professionals, and middle income group people to buy the equipment on the basis on Hire purchase. After the last installment of Hire purchase paid by the buyer, the ownership of the equipment passes to the buyer. (b) Leasing Finance: In leasing finance, the borrower of the capital equipment is allowed to use it, as a hire, against the payment of a monthly rent. The borrower need not purchase the capital equipment but he buys the right to use it.

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(c) Housing Finance: NBFCs provide housing finance to the public, they finance for construction of houses, development of plots, land, etc.

(d) Other types of finance provided by NBFCs include: Consumption finance, finance for religious ceremonies, marriages, social activities, paying off old debts, etc. NBFCs provide easy and timely finance and generally those customers which are not able to get finance by banks approach these companies. (e) Investment of surplus money: NBFCs invest their surplus money in various profitable areas.

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7.COMMERCIAL BANK VERSUS (V/S) NON-BANKING FINANCIAL COMPANIES While commercial banks and non-banking financial companies are both financial intermediaries (middleman) receiving deposits from public and lending them. Commercial bank is called as Big brother while the NBFC is called as the Small brother. But there are some important differences between both of them, they are as follows:

No. 1

Commercial Banks. Issue of cheques: In case of commercial banks, a cheque can be issued against bank deposits.

Non Bank Financial companies.

In case of NBFCs there is no facility to issue cheques against bank deposits.

Rate of interest: Commercial bank offer lesser rate of interest on deposits and charge less rate of interest on loans as compared to NBFCs. NBFCs offer higher rate of interest on deposits and charge higher rate of interest on loans as compared to Commercial banks.

Facilities provided by them: Commercial banks can enjoy the benefit of certain facilities like deposit insurance cover facilities, refinancing facilities, etc. NBFCs are not given such facilities.

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Law which governs them: Commercial banks are regulated by Banking Regulation Act 1949 and RBI. NBFCs are regulated by different regulation such as SEBI, Companies Act, National Housing Bank, Unit Fund Act and RBI.

Types of assets: commercial banks hold a variety of assets in the form of loans, cash credit, bill of exchange, overdraft etc. NBFCs specialize in one types of asset. For e.g.: Hire purchase companies specialize in consumer loans while Housing Finance Companies specialize in housing finance only.

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8. RBI GUIDELINES FOR ASSET-LIABILITY MANAGEMENT (ALM) SYSTEM IN NBFCS. This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in NBFCs which form part of the Asset Liability Management (ALM) function. This is applicable to all NBFCs and Residuary non-banking companies

meeting the criteria of asset base of Rs.100 crores, whether accepting deposits or not, or holding public deposits of Rs.20 crores or more. Sl.No. Description / Compliance requirement Comments. As we are aware, the guidelines for introduction of ALM system by banks and all India financial intuitions have already been issued by Reserve Bank of India and the system has become operational. Since the operations of financial companies also give rise to Asset Liability mismatches and interest rate risk exposures, it has been decided to introduce an ALM system for the NON- Banking Financial Companies (NBFCs) as well, as part of their overall system for effective risk management in their various portfolios. A copy of the guidelines for Asset Liability Management (ALM) system in NBFCs is enclosed. Is there an Asset Liability Committee (ALCO) consisting of the companys senior

management to decide the business strategy of the NBFC. 1. In the normal course, NBFC'S are exposed to credit and market risks in view of the asset-liability transportation. With liberalization in Indian financial markets over the last few years and growing integration of domestic with external markets and entry of MNC's for meeting the credit needs of not only the corporate but also the retail segments, the risks associated with NBFC's operations have become complex and large, requiring

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strategic management. NBFCs are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits, subject to the ceiling of maximum rate of interest on deposits they can offer on deposits prescribed by the Bank; and advances on a dynamic basis. The interest rates on investments of NBFC's in Government and other securities are also now market related. Intense pressure on the management of NBFC's to maintain a good balance among spreads, profitability and long-term viability. Imprudent liquidity management can put NBFC's earnings and reputation at great risk.

2.

NBFC's need to address these risks in a structured manner by upgrading their risk management and adopting more comprehensive Asset-Liability Management (ALM) practices than has been done hitherto. ALM, among other function, is also concerned with risk management and provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity and interest rate equity and commodity price risks of major operators in the financial system that needs to be closely integrated with the NBFC's business strategy. It involves assessment of various types of risks and altering the asset-liability portfolio in a dynamic way in order to manage risks.

3.

This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in NBFC's which form part of the Asset-Liability Management (ALM) function. The initial focus of the ALM function would be to enforce the risk management discipline i.e. managing business after assessing the risks involved. The objective of good risk management systems should be that these systems will evolve into

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a strategic tool for NBFC's management. 4. The ALM process rests on three pillars:

ALM Information Systems Management Information Systems Information availability, accuracy, adequacy and expediency ALM Organization Structure and responsibilities level of top management involvement Risk parameters Risk identification Risk management Risk policies and tolerance levels.

ALM INFORMATION SYSTEMS

ALM has to be support by a management philosophy which clearly specifies the risk policies and tolerance limits. This framework needs to be built on sound methodology with necessary information system as back up. Thus, information is the key to the ALM process. It is, however, recognized that varied business profiles of NBFC's in the public and private sector do not make the adoption of a uniform ALM System for all NBFC's feasible.

NBFC's have heterogeneous organizational structures, capital base, asset sizes management

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profile, business activities and geographical spread. ALM ORGANISATION

(a)

Successful implementation of the risk management process would require strong commitment on the part of the senior management in the NBFC, to integrate basic operations and strategic decision making with risk management.

(b)

The Asset-Liability Committee (ALCO) consisting of the NBFC's senior management including Chief Executive Officer (CEO) should be responsible for ensuring adherence to the limits set by the Board as well as for deciding the business strategy of the NBFC (on the assets and liabilities sides) in line with the NBFC's budget and decided risk management objectives.

(c)

The ALM Support Groups consisting of operating staff should be responsible for analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should also prepare forecasts (simulations) showing the effects of various possible changes in market conditions related to the balance sheet and recommended the action needed to adhere to NBFC's internal limits.

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9. LIQUIDITY RISK MANAGEMENT

Measuring and managing liquidity needs are vital for effective operation of NBFCs. By ensuring an NBFC's ability to meet its liabilities as they become due, liquidity management can reduce the probability of an adverse situation developing. The importance of liquidity transcends individual institution, as liquidity shortfall in one institution can have repercussions on the entire system. NBFCs management should measure not only the liquidity positions of NBFCs on an ongoing basis but also examine how liquidity requirements are likely to involve under different assumptions. Experience shows that assets commonly considered as liquid, like Government securities and other money market instruments, could also become illiquid when the market and players are unidirectional.

NBFCs holding public deposits are required to invest up to a prescribed percentage (15% as on date) of their public deposits in approved securities in terms of liquid asset requirement of section 45-IB of the RBI Act,1934. Residuary Non-Banking Companies (RNBCs) are required to invest up to 80% of their deposits in a manner as prescribed in the Directions issued under the said Act. There is no such requirements for NBFCs which are not holding public deposits. Thus various NBFCs including RNBCs would be holding in their investments portfolio securities which could be broadly classifiable as 'mandatory securities' (under obligation of law) and other 'non-mandatory securities'.

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10.FINANCIAL COMPANIES REGULATION BILL, 2000. The Government of India framed the Financial Companies Regulation Bill, 2000 to Consolidate the law relating to NBFCs and unincorporated bodies with a view to ensured position or protection. The salient features of this Bill are: All NBFCS will be known as Financial Companies instead of NBFCs; NBFCs holding public deposits would not be allowed to carry on any non-Financial business without the prior approval of RBI; RBI would have the powers to prescribe minimum net-worth norms; unsecured depositors would have first charge on liquid assets and assets created out of deployment of part of the reserve fund. Financial Companies would require prior approval of RBI for any change in name, management or registered office; Regulation of unincorporated bodies would be in the hands of the respective State Governments; Penalties have been rationalized with the objective that they should serve as a deterrent and investigative powers have been vested with District Magistrates and Superintendents of Police; RBI would be empowered to appoint Special Officer(s) on delinquent financial companies; Any sale of property in violation of RBI order would be void; The Company Law Board will continue to be the authority to adjudicate the claims of depositors. Financial companies would have no recourse to the CLB to seek deferment of the depositors dues. The Bill has been introduced in Parliament in 2000 and has since been referred to the Standing Committee on Finance. 8.0 Anomalies in the NBFC regulations.

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11. AN APPRAISAL OF FINANCIAL COMPANIES REGULATION BILL, 2000: THE UNION Government's move to enact a separate law to regulate and control the nonbanking finance companies (NBFC) sector is indeed laudable, after a large number NBFCs had failed to repay public deposits, ruining thousands of gullible investors, drawn mainly from the middle class strata of the society. However, a careful perusal of the new bill, introduced in the Lok Sabha on December 13, shows that this legislation seeks largely to consolidate into a single stand-alone enactment the regulatory provisions concerning the NBFC sector already existing in Chapters 111-B and C of the Reserve Bank of India Act, 1934, (RBI Act), as amended in 1997. Thus the new law, when enacted, will just be old wine in new bottle. It was in the wake of the CRB scam that left several thousands of depositors high and dry that the RBI Act was amended in 1997 to empower, inter alia, the Company Law Board (CLB) to hear and decide complaints from depositors on defaults committed by financial companies. However, an objective study will reveal that the RBI (Amendment) Act, 1997, which added Chapter IR-B to the parent Act, has hardly benefited the depositor fraternity. The winding-up petition filed against CRB by the RBI under the new provisions in 1997 is still pending with the Delhi High Court. The perpetrators of the CRB fraud have been bailed out and are scot-free. Many depositors have been devastated. Justice delayed is indeed justice denied.

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12. NORMS for NBFCS. In public interest and to regulate the credit system in the best interest of India, the RBI has laid down the following important norms or rules to be followed by NBFCs accepting public deposits: (1) What constitutes public deposits?

Public deposit includes fixed or recurring deposits which are received from friends, relative, shareholders of a public limited company and money raised in issued of unsecured debentures or bond. It does not include money raised from issue of secured debentures and bond or from borrowings of banks or financial institutions, deposits from directors or inter- corporate deposits received from foreign national citizens and from shareholders of private limited companies. (2) Who is allowed to accept deposits from public?

The NBFCs which have net owned capital of less than Rs. 25 Lakhs will not be permitted to accept deposit from public. In order to raise funds the NBFC can borrow from some other sources also. (3) NBFCs have to submit financial statements:

All NBFCs will have to submit their annual financial statements and returns if they accept public deposits. (4) Certain deposits are not regulated by RBI:

The RBI has given directions to NBFCs accepting public deposits to regulate the amount of deposit, rate of interest, time period of deposits, brokerage and borrowings received by them.

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The directions do not include amount received or generated by central bank or state government. Amount received from IDBI, ICICI Nabard, Electricity Board and IFCI are also not included in directions of RBI. Amount received from mutual funds, directors of firm and shareholders also do not come under the category of amount received for regulation from RBI. (5) Ceiling (limits on interest):

There is a maximum limit on the rate of interest of deposits. The limit charges with the RBI directions. (6) Period of deposits:

The deposits can be accepted for a minimum period of 12 months and a maximum period of 2 year. (7) Register of depositors:

The NBFCs have to maintain a register of depositors with details like name, address, amount, date of each deposit, maturity period and other details according to the required by RBI. (8) Credit rating:

To protect the public NBFCs are required to get themselves approved by the RBI through credit rating agencies. The NBFCs which have not owned funds of Rs 25 Lakhs can obtain public deposits if they are credit rated and they receive a minimum investment grade for their fixed deposits from an approved rating agency.

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13. The current status of Non- Banking Financial Companies. PRUDENTIAL NORMS: The Reserve Bank put in place in January 1998 a new regulatory framework involving prescription of prudential norms for NBFCs which deposits are taking to ensure that these NBFCs function on sound and healthy lines. Regulatory and supervisory attention was focused on the deposit taking NBFCs (NBFCs D) so as to enable the Reserve Bank to discharge its responsibilities to protect the interests of the depositors. NBFCs - D are subjected to certain bank like prudential regulations on various aspects such as income recognition, asset classification and provisioning; capital adequacy; prudential exposure limits and accounting / disclosure requirements. However, the non-deposit taking NBFCs (NBFCs ND) are subject to minimal regulation. The application of the prudential guidelines / limits is thus not uniform across the banking and NBFC sectors and within the NBFC sector. There are distinct differences in the application of the prudential guidelines / norms as discussed below: i) Banks are subject to income recognition, asset classification and provisioning norms; capital adequacy norms; single and group borrower limits; prudential limits on capital market exposures; classification and valuation norms for the investment portfolio; CRR / SLR requirements; accounting and disclosure norms and supervisory reporting requirements. ii) NBFCs D are subject to similar norms as banks except CRR requirements and prudential limits on capital market exposures. However, even where applicable, the

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norms apply at a rigour lesser than those applicable to banks. Certain restrictions apply to the investments by NBFCs D in land and buildings and unquoted shares. iii) Capital adequacy norms; CRR / SLR requirements; single and group borrower limits; prudential limits on capital market exposures; and the restrictions on investments in land and building and unquoted shares are not applicable to NBFCs ND. iv) Unsecured borrowing by companies is regulated by the Rules made under the Companies Act. Though NBFCs come under the purview of the Companies Act, they are exempted from the above Rules since they come under RBI regulation under the Reserve Bank of India Act. While in the case of NBFCs D, their borrowing capacity is limited to a certain extent by the CRAR norm, there are no restrictions on the extent to which NBFCs ND may leverage, even though they are in the financial services sector.

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14. FINANCIAL LINKAGES BETWEEN BANKS AND NBFC: Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs offer products/services which include leasing and hire-purchase, corporate loans, investment in nonconvertible debentures, IPO funding, margin funding, small ticket loans, venture capital, etc. However NBFCs do not provide operating account facilities like savings and current deposits, cash credits, overdrafts etc. NBFCs avail of bank finance for their operations as advances or by way of banks subscription to debentures and commercial paper issued by them. Since both the banks and NBFCs are seen to be competing for increasingly similar types of some business, especially on the assets side, and since their regulatory and cost-incentive structures are not identical it is necessary to establish certain checks and balances to ensure that the banks depositors are not indirectly exposed to the risks of a different cost-incentive structure. Hence, following restrictions have been placed on the activities of NBFCs which banks may finance: i) Bills discounted / rediscounted by NBFCs, except for rediscounting of bills discounted by NBFCs arising from the sale of a) Commercial vehicles (including light commercial vehicles); and b) Two-wheeler and three-wheeler vehicles, subject to certain conditions; c) Investments of NBFCs both of current and long term nature, in any company/entity by way of shares, debentures, etc. with certain exemptions; ii) Unsecured loans/inter-corporate deposits by NBFCs to/in any company.

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iii) All types of loans/advances by NBFCs to their subsidiaries, group companies/entities. iv) Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs). v) Bridge loans of any nature, or interim finance against capital/debenture issues and/or in the form of loans of a bridging nature pending raising of long-term funds from the market by way of capital, deposits, etc. to all categories of Non-Banking Financial Companies, i.e. equipment leasing and hire-purchase finance companies, loan and investment companies, Residuary Non-Banking Companies (RNBCs). vi) Should not enter into lease agreements departmentally with equipment leasing companies as well as other Non-Banking Financial Companies engaged in equipment leasing.

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15. LIST OF NON-BANKING FINANCIAL COMPANIES:

A. R. T. LEASING PRIVATE LIMITED. 144, M.C.ROAD, CHENGANNUR. ALAPUZHA DISTRICT KERALA AL BARR FINANCE HOUSE LTD (FORMERLY KNOWN AS ALBARAKA FINANCE HOUSE LIMITED), INDIA HOUSE NO. 2, KEMPS CORNER, MUMBAI 400 036. ADAYAR FINANCE & LEASING LTD., 208, BHARATHI SALAI, ROYAPETTAH, CHENNAI 600 014

ADOR FINANCE LTD. ADOR HOUSE, 6 K DUBASH MARG MUMBAI - 400 023

AD-MANUM FINANCE LTD 5, YESHWANT COLONY, INDORE 452 003 (MP)

ALPIC FINANCE LTD., NEW EXCELSIOR BLDG., 6TH FLOOR, WALLACE STREET, FORT, MUMBAI - 400 001

ALTA LEASING & FINANCE LTD. ALTA BHAVAN, 532, SENAPATI BAPAT MARG DADAR, MUMBAI - 400 028 ANNA FINANCE LIMITED 16 B/9, DEV NAGAR, D.B. GUPTA ROAD, KAROL BAGH,

ANMOL FINANCIAL SERVICES LTD A -66, IST FLOOR, GURU NANAK PURA , VIKAS MARG, DELHI - 110092 ABIRAMI FINANCIAL SERVICES (INDIA) LTD 157, HABIBULLAH ROAD, T. NAGAR, CHENNAI - 600 017

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16. CONCLUSION: NBFCs are gaining momentum in last few decades with wide variety of products and services. NBFCs collect public funds and provide loan able funds. There has been significant increase in such companies since 1990s. They are playing a vital role in the development financial system of our country. The banking sector is financing only 40 per cent to the trading sector and rest is coming from the NBFC and private money lenders. At the same line 50 per cent of the credit requirement of the manufacturing is provided by NBFCs. 65 per cent of the private construction activities was also financed by NBFCs. Now they are also financing second hand vehicles. NBFCs can play a significant role in channelizing the remittance from abroad to states such as Gujarat and Kerala. NBFCs in India have become prominent in a wide range of activities like hire purchase finance, equipment lease finance, loans, investments, and so on. NBFCs have greater reach and flexibility in tapping resources. In desperate times, NBFCs could survive owing to their aggressive character and customized services. NBFCs are doing more fee-based business than fund based. They are focusing now on retailing sector-housing finance, personal loans, and marketing of insurance. Many of the NBFCs have ventured into the domain of mutual funds and insurance. NBFCs undertake both life and general insurance business as joint venture participants in insurance companies. The strong NBFCs have successfully emerged as Financial Institutions in short span of time and are in the process of converting themselves into Financial Super Market. The NBFCs are taking initiatives to establish a self-regulatory organization (SRO). At present, NBFCs are represented by the Association of Leasing and Financial Services (ALFS), Federation of India Hire Purchase Association (FIHPA) and Equipment Leasing Association of India (ELA). The Reserve Bank wants these three industry bodies to come together under one roof.

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17. BIBLIOGRAPHY BOOKS:1) Statutory guidances for non- banking financial companies. Taxman. WEBSITES:-

www.NBFC.com www.RBI.com www. How Stuff Works.com www. Wikipedia.com

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