Shadow Banks in India

Do we have shadow banks in India? The answer is yes. It is yes, because we have financial institutions which accept deposits and
extend credit like banks, but we do not call them shadow banks; we call them the Non-Banking Finance Companies (NBFCs). Are
they in fact shadow banks? No, because these institutions have been under the regulatory structure of the Reserve Bank of India,
right from 1963 i.e. 50 full years before the developed west is doing so.
Evolution of Regulation of NBFCs in India
In the wake of failure of several banks in the late 1950s and early 1960s in India, large number of ordinary depositors lost their
money. This led to the formation of the Deposit Insurance Corporation by the Reserve Bank, to provide guarantee to the depositors.
(Later by adding a credit guarantee element, it became the DICGC). While this provided the necessary safety net for the bank
depositors, the Reserve Bank did note that there were deposit taking activities undertaken by non-banking companies. Though they
were not systemically as important as the banks, the Reserve Bank initiated regulating them, as they had the potential to cause pain
to their depositors.
Later in 1996, in the wake of the failure of a big NBFC, the Reserve Bank tightened the regulatory structure over the NBFCs, with
rigorous registration requirements, enhanced reporting and supervision. Reserve Bank also decided that no more NBFC will be
permitted to raise deposits from the public. Later when the NBFCs sourced their funding heavily from the banking system, it raised
systemic risk issues. Sensing that it can cause financial instability, the Reserve Bank brought asset side prudential regulations onto
the NBFCs.
NBFCs of India
The definition of the term NBFC entails a very wide meaning. NBFCs include not just the finance companies that the general public
is largely familiar with; the term also entails wider group of companies that are engaged in investment business, insurance, chit fund,
nidhi, merchant banking, stock broking, alternative investments, etc. as their principal business. Today I would be concentrating only
on those NBFCs that are under the regulatory purview of the Reserve Bank.
Traditionally, India has had a bank-dominated financial sector. Even so, there have always been NBFCs. These were in early times
small family run businesses for deposits acceptance and lending activities. Even today, the sector may be small as compared to
banking sector with a total asset size of just around 14 percent of that of scheduled commercial banks (other than RRBs). However,
there is no denying that the sector has grown tremendously over the years in size, form and complexity, with some of the NBFCs
operating as conglomerates having business interests spread to sectors like insurance, broking, mutual fund and real estate.
Concomitant with the above, interconnectedness and systemic importance of the NBFC sector also have increased.
NBFCs being financial intermediaries are engaged in the activity of bringing the saving and the investing community together. In this
role they are perceived to be playing a complimentary role to banks rather than competitors, as it is a known fact that majority of the
population in the country do not yet have access to mainstream financial products and services including a bank account and
therefore the country needs institutions beyond banks for reaching out in areas where banks presence may be lesser. Thus NBFCs
especially those catering to the urban and rural poor namely NBFC-MFIs and Asset Finance Companies have a complimentary role
in the financial inclusion agenda of the country. Further, some of the big NBFCs viz; infrastructure finance companies are engaged
in lending exclusively to the infrastructure sector and some are into factoring business, thereby giving fillip to the growth and
development of the respective sector of their operations. Thus NBFCs have also carved niche business areas for them within the
financial sector space and are also popular for providing customized products like second hand vehicle financing, mostly at the
doorstep of the customer. In short, NBFCs bring the much needed diversity to the financial sector thereby diversifying the risks,
increasing liquidity in the markets thereby promoting financial stability and bringing efficiency to the financial sector.
At the same time, their growing size and interconnectedness also raise concerns on financial stability. Reserve Banks endeavour in
this context has been to streamline NBFC regulation, address the risks posed by them to financial stability, address depositors and
customers interests, address regulatory arbitrage and help the sector grow in a healthy and efficient manner. Some of the regulatory
measures include identifying systemically important non-deposit taking NBFCs as those with asset size of Rs. 100 crore and above
and bringing them under stricter prudential norms (CRAR and exposure norms), issuing guidelines on Fair Practices Code, aligning
the guidelines on restructuring and securitization with that of banks, permitting NBFCs-ND-SI to issue perpetual debt instruments
etc.
NBFCs as components of the financial sector:
A broad picture of the role of NBFCs and the interconnectedness they have in the financial sector can be gauged from the details
given below:
General:
The total number of NBFCs as on March 31, 2014 are 12,029 of which deposit taking NBFCs are 241 and non-deposit taking
NBFCs with asset size of Rs. 100 crore and above are 465, non-deposit taking NBFCs with asset size between Rs. 50 crore
and Rs.100 crore are 314 and those with asset size less than Rs. 50 crore are 11009. As on March 31, 2014, the average leverage
ratio (outside liabilities to owned fund) of the NBFCs-ND-SI stood at 2.94, return on assets (net profit as a percentage of total
assets) stood at 2.3%, Return on equity (net profit as a percentage of equity) stood at 9.22 % and the gross NPA as a percentage of
total credit exposure (aggregate level) stood at 2.8%.
Asset Liability composition
Liabilities* of the NBFC sector:
Owned funds (23% of total liabilities), debentures (32%), bank borrowings (21%), deposit (1%), borrowings from Financial
Institutions (1%), Inter-corporate borrowings (2%), Commercial Paper (3%), other borrowings (12%), and current liabilities &
provisions (5%).
Assets* of the NBFC sector:
Loans & advances (73% of total assets), investments (16%), cash and bank balances (3%), other current assets (7%) and other
assets (1%). (The data pertains to only reported deposit taking NBFCs and those non-deposit taking NBFCs with asset size
of Rs.100 crore and above. All figures are as on end March, 2014.)
Role of NBFCs in financial inclusion
Financial inclusion has been defined as the provision of affordable financial services to those who have been left unattended or
under-attended by formal agencies of the financial system. These financial services include payments and remittance facilities,
savings, loan and insurance services. Micro finance has been looked upon as an important means of financial inclusion in India.
Microfinance is not just provision of micro credit but also other services in small quantities to the poor i.e. providing essential
financial services to the poor in an affordable way. Financial Inclusion also is aiming at the same by providing the poor with not only
deposit accounts or credit but also insurance and remittance facility.
As articulated by the Committee on Comprehensive Financial Services for Small Businesses and Low Income Households (Mor
Committee) in its report, on both Financial Inclusion (defined as the spread of financial institutions and financial services across the
country) and Financial Depth (defined as the percentage of credit to GDP at various levels of the economy) the overall situation
remains very poor and, on a regional and sectoral basis, very uneven.
While the Reserve Banks model for financial inclusion is essentially bank-led, we believe that non-bank entities do have space to
partner banks in the financial inclusion initiatives. We have enabled non-bank entities as Business Correspondents of banks to
achieve the larger goal of financial inclusion. Since September 2010, MFIs that are bank-SHGs, Trusts, Societies or Section 25
companies have been permitted to become Banking Correspondents (BCs). At the same time several non-bank entities on their own
are part and parcel of this greater goal, for e.g. NBFC-MFIs that form the significant part of the MFI sector have deeper reach in the
rural areas. NBFC-MFIs do not formally figure in the bank led model of financial inclusion but they by their wider and deeper reach
can be catalysts in providing the necessary handhold to the poor borrowers to gain access to essential financial services.
While the new banks that are being envisaged would definitely give fillip to the countrys financial inclusion initiatives, juxtaposing the
humungous task of complete financial inclusion against it also brings to focus the need for exploring alternative ways to achieve the
goal. The Mor Committee has observed that each of the channels, be they large National Banks, regional cooperative banks, or
Non-Banking Financial Companies (NBFCs) have a great deal of continuing value to add by focusing on its own differentiated
capabilities and accomplish the national goals of financial inclusion by partnering with others that bring complementary capabilities
to bear on the problem.
Role of NBFCs in capital market
Investment activity of NBFC sector comprises around 16% of their total assets. These constitute mainly investments in capital
market. There are specialized NBFCs that are exclusively engaged in capital market investment i.e. trading in securities. These
NBFCs therefore help in giving liquidity to the capital market. Further, NBFCs also lend to investors for investing in capital market.
Regulatory challenges in this regard might come in the form of probable overheating of the market, which could be addressed
through appropriate regulatory measures including enhanced disclosures.
Role of NBFCs in factoring
Factoring as defined in the Factoring Regulation Act, 2011 involves acquisition of receivables (by a Factor) thereby getting entitled
to undivided interest on the receivables or financing against the security interest over any receivables but does not include credit
facilities provided by a bank in its ordinary course of business against security of receivables. Subsequent to the notification of the
Factoring Regulation Act by the Government, Reserve Bank formed a new category of NBFCs called NBFC-Factors and issued
directions to them. NBFC-Factors are almost exclusively engaged in providing factoring service. Factoring service which is
perceived as complimentary to bank finance is expected to enable the availability of much needed working capital finance for the
small and medium scale industries especially those that have good quality receivables but may not be in a position to obtain enough
bank finance due to lack of collateral or credit profile. By having a continuous business relationship with the Factor in place, small
traders, industries and exporters get the advantage of improving the cash flow and liquidity of their business as also availing
ancillary services like sales ledger accounting, collection of receivables, credit protection etc. Factoring helps them to free their
resources and have a one stop arrangement for various business needs enabling smooth running of their business.
The Reserve Bank has recently also taken the initiative of mooting a Trade Receivables and Credit Exchange for financing of Micro,
Small and Medium Enterprises, which is under development stage. The exchange will bring together the MSMEs, the Factors and
the corporate buyers under one platform whereby MSMEs bills against large companies can be accepted electronically and
auctioned so that MSMEs are paid promptly. The objective is to build a suitable institutional infrastructure which will not only enable
an efficient and cost effective factoring / reverse factoring process to be put in place, but also ensure sufficient liquidity is created for
all stakeholders through an active secondary market for the same.
Role of NBFCs in vehicle financing / second hand vehicle financing
Talking about the niche sectors that NBFCs cater to, vehicle financing especially second hand vehicles need special mention.
Certain NBFCs that are classified as Asset Finance Companies have gained expertise in this segment and play a significant role in
providing a livelihood to customers who are drivers. From the Reserve Banks side, to encourage the productive activity that these
NBFCs are engaged in, we have accorded certain additional dispensations to them in the form of enhanced bank credit, higher
exposure norm ceiling and provision of ECB under automatic route for leasing related to infrastructure.
Role of NBFCs in infrastructure financing
Infrastructure Finance Companies and Infrastructure Debt Funds are NBFCs exclusively into financing the infrastructure sector.
Some of these companies have asset books running to lakhs of crores of rupees and are experts in long term project financing.
Recognising their significance, the Reserve Bank has given special dispensations in the form of enhanced bank credit, higher
exposure norm ceiling and provision of ECB under automatic route for on-lending to infrastructure sector. The asset liability pattern
however, is a matter of concern in the case of IFCs as these are lending long term against comparatively shorter term liabilities.
The Regulatory Challenges
So, you may wonder, if the NBFCs are performing such a wonderful service to the economy, by being partners in financial inclusion,
providing niche financing in the areas like infrastructure, factoring, asset financing, etc. what is the concern that the Reserve Bank
can have? Why have you indicated in the title for this oration "Regulatory Challenges", you may ask me. Let me explain.
The need for regulating the financial institutions arise primarily because of the high leverage with which they operate that can cause
financial instability, the asset liability mismatch which can pose serious risks to the investors and depositors, and their capacity to
engender havoc to the real sectors of the economy.
Traditionally, regulation of banks has assumed greater importance than that of their non-banking counterparts. One reason, of
course, is that protection of depositors has been traditionally an important mandate of banking supervisors. Banks are at the centre
of payment and settlement systems and monetary policy transmission takes place through them. Banks play a critical role in credit
intermediation through maturity transformation, i.e. acceptance of short term liabilities and converting them into long term assets viz.
loans and advances. Along with economic value, this function also creates potential liquidity risk. Moreover, banks also operate on a
significantly higher leverage compared to any other type of organisations which could amplify their vulnerability. For all these
reasons, banks are subject to a detailed and a rigorous regulatory framework.
Non-banks also have depositors; these depositors also need some assurance about the safety of their funds. Non-banks also lend
their resources as loans and advances, thus carrying out credit intermediation through maturity transformation and thereby creating
liquidity risk. Further non-banks also operate on a significantly higher leverage than an ordinary commercial institution. Thus, when
non - bank financial entities undertake bank-like functions, large risks are created which could potentially be destabilizing for the
entire system. Moreover, the global financial crisis demonstrated many ways in which shadow banking can have an impact on the
global financial system, both directly and through its interconnectedness with the regular banking system, prompting the move to
overhaul the regulation of shadow banking system. Like banks, a leveraged and maturity-transforming shadow banking system can
also be vulnerable to "runs" and generate contagion, thereby amplifying systemic risk. Shadow banking can also heighten pro-
cyclicality by accelerating credit supply and asset price increases during upswings and exacerbating fall in asset prices during
downswings. These effects were powerfully revealed during the global financial crisis in the form of dislocation of asset-backed
commercial paper (ABCP) markets, the failure of an originate-to-distribute model employing structured investment vehicles (SIVs)
and conduits, "runs" on MMFs and a sudden reappraisal of the terms on which securities lending and repos were conducted.
Now you may say "Yes, we agree that the NBFCs need to be regulated. But, why are you saying that there are challenges? Don't
you have the law enabling you to regulate them?"
Yes, we have the law. And it has evolved over the time. The challenges today are as follows:
First, there are law related challenges i. there are a number of companies that are registered as finance companies, but are not
regulated by the Reserve Bank, ii. there are unincorporated bodies who undertake financial activities and remain unregulated, iii.
there are incorporated companies and unincorporated entities illegally accepting deposits, iv. there are entities who camouflage
deposits in some other names and thus illegally accepting deposits. The law as it stands today is inadequate to deal with these
issues. In order to correct these and initiate action against violations, we need to bring in suitable amendments to the statutory
provisions. Reserve Bank is working with the government for such improvements in the law.
Secondly, as the entities, especially the unincorporated ones, can sprung in any nook and corner of the country and can operate
with impunity unnoticed, but endangering their customers interest, we need arrangements and structured for effective market
intelligence gathering. The Reserve Bank is restructuring its organisational setup, especially in its regional offices, for gathering
market intelligence.
Thirdly, empowering law and gathering intelligence by themselves are not sufficient. Enforcement of the law is a challenge. This is
primarily because of the various agencies involved in regulating the non-banking financial activities of entities. Right from the central
government ministries like finance and corporate affairs, agencies like CBI and FIU-IND, regulatory agencies like the Reserve Bank,
SEBI, the Registrar of Companies, the state government agencies like the police and others, all have to share information and
coordinate and cooperate to bring in an effective, timely and unified enforcement of the law. The Reserve Bank's State Level
Coordination Committees (SLCC) are being strengthened and a National level Coordination Committee is also being considered.
Fourthly, as was mentioned earlier, world over there is an increasing demand that the shadow banks be brought under tighter
regulations. G-20 has already expressed it as a mission to be achieved by 2015. In our case, bringing them under regulation is not
the issue, as they already are. The challenge for us is how differentially or how closely we should regulate the NBFCs? The demand
from the NBFC sector is that they should be subjected to light touch regulation. As mentioned earlier, NBFCs were brought under
regulatory ambit of the Reserve Bank since 1963; we brought them under prudential regulatory framework since 1997.
Nevertheless, the NBFC sector came under pressure during the 2008 crisis due to the funding inter-linkages among NBFCs, mutual
funds and commercial banks. NBFCs-ND-SI relied significantly on short term funding sources such as debentures (largely non -
convertible short term debentures), and CPs, which constituted around 56.8 percent of the total borrowings of NBFCs-ND-SI as on
September 30, 2008. These funds were used to finance assets which were reportedly largely a mix of long term assets, including
hire purchase and lease assets, long term investments, investment in real estate by few companies, and loans and advances.
These mismatches were created mainly as a business strategy for gaining from the higher spreads. However, there were no fall
back alternatives in cases of potential liquidity constraints. The ripple effect of the turmoil in American and European markets led to
liquidity issues and heavy redemption pressure on the mutual funds in India, as several investors, especially institutional investors,
started pulling out their investments in liquid and money market funds. Mutual funds being the major subscribers to CPs and
debentures issued by NBFCs, the redemption pressure on MFs translated into funding issues for NBFCs, as they found raising fresh
liabilities or rolling over of the maturing liabilities very difficult. Drying up of these sources of funds along with the fact that banks
were increasingly becoming risk averse, heightened their funding problems, exacerbating the liquidity tightness. The Reserve Bank
undertook many measures, both conventional as well as un-conventional, to enhance availability of liquidity to NBFCs.
Conclusion
To conclude, I may say that the challenge therefore for the NBFC sector is to grow in a prudential manner while not stopping
altogether on financial innovations. The key lies in having in place adequate risk management systems and procedures before
entering into risky areas. As for the regulator, it is the constant endeavour of Reserve Bank to enable prudential growth of the
sector, keeping in view the multiple objectives of financial stability, consumer and depositor protection, and need for more players in
the financial market, addressing regulatory arbitrage concerns while not forgetting the uniqueness of NBFC sector. The Bank
presently is in the process of reviewing the regulatory framework for NBFCs in the context of recent developments including the
Nachiket Mor Committee and others.
High interest rates, regulatory changes to impact NBFCs: Ehsan Syed,
Fitch Ratings
The concerns as we have highlighted are that there is going to be a cyclical impact from the moderating economic growth and continued high
interest rates, which will have an impact on the asset quality. Then the other point is of course the regulatory changes. Some of these are
proposed and some of these are already implemented.
But while the regulatory environment changing for NBFCs clearly is a concern, why would you list out credit costs or rather high
credit costs as a concern because we are at the top of the rate cycle, the cycle is going to turn and that should in a sense benefit
NBFCs?
One of the key asset classes for these NBFCs as we highlighted in the report also is the heavy and medium commercial vehicles and based
on our study of the correlation of the sales of these vehicles with IIP and then in turn the correlation of the IIP with repo rates, we see there is
always a lag.
So, even if the interest rate starts to come down in the coming few months, there would be a lag of several months for this key asset class to
pick up and that's why we think the credit costs will remain high and at the same time, the growth in this key asset class will also be lower.
Besides, we have the construction equipment, financing and also like loans against property and small business loans and some of the
NBFCs where we remain negative.
You have listed out a few of the concerns, regulatory changes, the funding access worsening as well as profitability under
pressure, but would you say that amongst these as well as the asset quality deterioration that would be one of the biggest
concerns given the cyclical headwinds that would affect the asset quality, which in turn would slow down the loan growth for most
of these companies?
I do not think this is a game changer but of course this is a cyclical factor, which will increase the credit cost but this is not a game changer in
the medium term. As the economy again grows, interest rate cycle turns like gradually in the medium term, this is not a large concern for us.
We have got scores of NBFCs dotted across the country now with regulatory changes coming into force. Do you expect to see a
large scale consolidation in this sector or would you say that many of the very small players are just going to vanish?
Coming to the last point like the smaller plays, there would be like a consolidation at that segment. There is bound to be. The regulations of
about like increased asset sizes and increased net worth requirements would in itself lead to consolidation in that segment.
As per the report you are saying, Fitch expects the heavy and medium commercial vehicle financing to remain the weakest in 2012.
Could you just run us through the rationale for the same?
I explained it earlier as we talked of the correlation study that we have done between the sales of the heavy and medium commercial
vehicles and the index of industrial production. There has been a positive correlation. We have done another study with repo rates.
What factors should we expect will change your outlook on NBFCs going forward?
There are three factors. One is the cyclical impact on the credit costs, which if the economy turns down, then this should take care of the
credit cost like from the later half of this year and early part of next year. The second thing is about funding costs. Funding costs are linked to
regulation.
The third point, which is like the priority sector lending, which was like a key channel for the NBFCs that has basically from the start of this
year being close, so now we had another committee which has recommended that on selected basis and based on like increased due
diligence, the bank lending to NBFCs, there are all kinds of conditions could be considered as a priority sector.
Now, depending on how soon this recommendation and in what form this is finally implemented, this could have an impact on the funding
costs. So regulatory changes obviously are one of the major factors besides the cyclical factors. So we will have to see if the economy again
starts, like the GDP growth starts to increase and like in turn the IIP starts to increase, that would change the overall sentiment for the key
asset classes. And this can change the outlook.
Q.1. What is Factoring?
The Factoring Act, 2011 defines the Factoring Business as the business of acquisition of receivables of assignor by accepting assignment
of such receivables or financing, whether by way of making loans or advances or in any other manner against the security interest over any
receivables. However, credit facilities provided by banks in the ordinary course of business against security of receivables and any activity
undertaken as a commission agent or otherwise for sale of agricultural produce or goods of any kind whatsoever and related activities are
expressly excluded from the definition of Factoring Business. The Factoring Act has laid the basic legal framework for factoring in India.
Q 2. What is an NBFC-Factor?
Ans. NBFC- Factor means a non-banking financial company fulfilling the Principal business criteria i.e. whose financial assets in the factoring
business constitute at least 75 percent of its total assets and income derived from factoring business is not less than 75 percent of its gross
income, has Net Owned Funds of Rs. 5 crore and has been granted a certificate of registration by RBI under section 3 of the Factoring
Regulation Act, 2011.
Q 3. What are the entry point norms for NBFC-Factor?
Ans, Every company registered under Section 3 of the Companies Act 1956 seeking registration as NBFC-Factor shall have a minimum Net
Owned Fund (NOF) of Rs. 5 crore. Existing companies seeking registration as NBFC-Factor but do not fulfil the NOF criterion of Rs. 5 crore
may approach the Bank for time to comply with the requirement.
Q 4. What would happen with the existing companies registered with RBI as NBFCs and conducting factoring business that
constitute less than 75 percent of total assets / income?
Ans. Such a company shall have to submit to RBI, a letter of its intention either to become a Factor or to unwind the business totally, and a
road map to this effect. The company would be granted CoR as NBFC-Factor only after it complies with the twin criteria of financial assets
and income. If the company does not comply within the period as specified by the Bank, it would have to unwind the factoring business.
Q 5. Is it compulsory for all entities to get registered with RBI to conduct factoring business?
Ans. Yes. An entity not registered with the Bank may not conduct the business of factoring unless it is an entity mentioned in Section 5 of the
Act i.e. a bank or any corporation established under an Act of Parliament or State Legislature, or a Government Company as defined under
section 617 of the Companies Act, 1956.
Q.6. If a company does not fulfill the principal business criteria for factoring and has no intention of getting itself registered as a
Factor with the Bank, can it continue to do factoring activities with its group entities.
Ans : No. As per Section 3 of the Factoring Act 2011, no Factor can commence or carry on the factoring business without a) obtaining a
CoR from the Reserve Bank, b) fulfilling the principal business criteria.
Q.7. Can NBFC-Factors undertake Import and Export Factoring?
Ans : Yes, however, such NBFC-Factors will need to obtain the necessary authorization from the Foreign Exchange Department of the Bank
under FEMA 1999 as amended and adhere to all the FEMA regulations in this regard.
Q.8 Is it necessary for NBFC-Factors to register every factoring transaction with the Central Registry?
Under Section 19 of the Factoring Act, 2011 every Factor is under obligation to file the particulars of every transaction of assignment of
receivables in his favour with the Central Registry to be set-up under section 20 of the Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (54 of 2002), within a period of thirty days from the date of such assignment or from the date
of establishment of such registry, as the case may be.
Q.9 Do NBFC-Factors have to comply with a separate set of prudential regulations?
Ans : No, The provisions of Non-Banking Financial (Non-deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank)
Directions, 2007 or Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, as
the case may be and as applicable to a loan company shall apply to an NBFC-Factor.
Q.10. Are there a separate set of Returns that the NBFC-Factor has to submit?
Ans : The submission of returns to the Reserve Bank will be as specified presently in the case of registered NBFCs.

Non-Banking Financial Companies
FOREWORD
The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue
of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to:
a) ensure healthy growth of the financial companies;
b) ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence
and functioning do not lead to systemic aberrations; and that
c) the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments
that take place in this sector of the financial system.
It has been felt necessary to explain the rationale underlying the regulatory changes and provide clarification on certain operational matters
for the benefit of the NBFCs, members of public, rating agencies, Chartered Accountants etc. To meet this need, the clarifications in the
form of questions and answers, is being brought out by the Reserve Bank of India (Department of Non-Banking Supervision) with the hope
that it will provide better understanding of the regulatory framework.
The information given in the FAQ is of general nature for the benefit of depositors/public and the clarifications given do not substitute the
extant regulatory directions/instructions issued by the Bank to the NBFCs.

Frequently Asked Questions on NBFCs
1. What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities
of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is
that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and
sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving
deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a
non-banking financial company (Residuary non-banking company).
2. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs ?
NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:
i. NBFC cannot accept demand deposits;
ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case
of banks.
3. Is it necessary that every NBFC should be registered with RBI?
In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking
financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of Rs. 25 lakhs
(Rs two crore since April 1999). However, in terms of the powers given to the Bank. to obviate dual regulation, certain categories of NBFCs
which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant
Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued
by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section
2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit
company.
4. What are the different types/categories of NBFCs registered with RBI?
NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by
their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity
they conduct. Within this broad categorization the different types of NBFCs are as follows:
i. Asset Finance Company(AFC) : An AFC is a company which is a financial institution carrying on as its principal business the
financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator
sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal
business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income
arising therefrom is not less than 60% of its total assets and total income respectively.
ii. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the
acquisition of securities,
iii. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing
of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset
Finance Company.
iv. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total
assets in infrastructure loans, b) has a minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of A or
equivalent d) and a CRAR of 15%.
v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of
acquisition of shares and securities which satisfies the following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in
group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not
exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of
dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment
in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group
companies or guarantees issued on behalf of group companies.

(e) Its asset size is Rs 100 crore or above and

(f) It accepts public funds
vi. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to
facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having
not less than 85%of its assets in the nature of qualifying assets which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and
semi-urban household income not exceeding Rs. 1,20,000;

b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;

c. total indebtedness of the borrower does not exceed Rs. 50,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower
viii. Non-Banking Financial Company Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the
principal business of factoring. The financial assets in the factoring business should constitute at least 75 percent of its total
assets and its income derived from factoring business should not be less than 75 percent of its gross income.
5. What are the requirements for registration with RBI?
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 comply with the following:
i. it should be a company registered under Section 3 of the companies Act, 1954
ii. It should have a minimum net owned fund of Rs 200 lakh. (The minimum net owned fund (NOF) required for specialized NBFCs like
NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs on specialized NBFCs)
6. What is the procedure for application to the Reserve Bank for Registration?
The applicant company is required to apply online and submit a physical copy of the application along with the necessary documents to the
Regional Office of the Reserve Bank of India. The application can be submitted online by accessing RBIs secured
website https://cosmos.rbi.org.in . At this stage, the applicant company will not need to log on to the COSMOS application and hence user
ids are not required.. The company can click on CLICK for Company Registration on the login page of the COSMOS Application. A
window showing the Excel application form available for download would be displayed. The company can then download suitable
application form (i.e. NBFC or SC/RC) from the above website, key in the data and upload the application form. The company may note to
indicate the correct name of the Regional Office in the field C-8 of the Annex-Identification Particulars in the Excel application form. The
company would then get a Company Application Reference Number for the CoR application filed on-line. Thereafter, the company has to
submit the hard copy of the application form (indicating the online Company Application Reference Number, along with the supporting
documents, to the concerned Regional Office. The company can then check the status of the application from the above mentioned secure
address, by keying in the acknowledgement number.
7. What are the essential documents required to be submitted along with the application form to the Regional Office of the
Reserve Bank?
A hard copy of the application form is available at www.rbi.org.in Site Map NBFC List Forms and Returns. An indicative checklist of
the documents required to be submitted along with the application can be accessed from www.rbi.org.in Site Map NBFC List
Forms and Returns Documents required for registration as NBFCs.
8. Where can one find list of Registered NBFCs and instructions issued to NBFCs?
The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in Sitemap
NBFC List. The instructions issued to NBFCs from time to time are also hosted at www.rbi.org.in Sitemap NBFC List. NBFC
Notifications, besides, being issued through Official Gazette notifications and press releases.
9. Can all NBFCs accept deposits?
All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation are allowed to
accept/hold public deposits.
10. Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can
accept?
Yes, there is a ceiling on acceptance of Public Deposits by NBFCs authorized to accept deposits.. An NBFC maintaining required minimum
NOF,/Capital to Risk Assets Ratio (CRAR) and complying with the prudential norms can accept public deposits as follows:
Category of NBFC having minimum NOF of
Rs 200 lakhs
Ceiling on public deposit
AFC* maintaining CRAR of 15% without credit
rating
1.5 times of NOF or Rs 10
crore whichever is less
AFC with CRAR of 12% and having minimum
investment grade credit rating
4 times of NOF
LC/IC** with CRAR of 15% and having minimum
investment grade credit rating
1.5 times of NOF
* AFC = Asset Finance Company
** LC/IC = Loan company/Investment Company
As has been notified on June 17, 2008 the ceiling on level of public deposits for NBFCs accepting deposits but not having minimum Net
Owned Fund of Rs 200 lakh is revised as under:
Category of NBFC having NOF more
than Rs 25 lakh but less than Rs 200 lakh
Revised Ceiling on public deposits
AFCs maintaining CRAR of 15% without credit rating Equal to NOF
AFCs with CRAR of 12% and having minimum investment grade credit rating 1.5 times of NOF
LCs/ICs with CRAR of 15% and having minimum investment grade credit rating Equal to NOF
Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than
monthly rests
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.
11. What are the salient features of NBFCs regulations which the depositor may note at the time of investment?
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
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 12.5 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. Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting
deposits.
12. What is deposit and public deposit? Is it defined anywhere?
The term deposit is defined under Section 45 I(bb) of the RBI Act, 1934. Deposit includes and shall be deemed always to have included
any receipt of money by way of deposit or loan or in any other form but does not include:
i. amount raised by way of share capital, or contributed as capital by partners of a firm;
ii. amount received from a scheduled bank, a co-operative bank, a banking company, Development bank, State Financial
Corporation, IDBI or any other institution specified by RBI;
iii. amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against
orders for goods, properties or services;
iv. amount received by a registered money lender other than a body corporate;
v. amount received by way of subscriptions in respect of a Chit.
Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a
public deposit as a deposit as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:
i. amount received from the Central/State Government or any other source where repayment is guaranteed by Central/State
Government or any amount received from local authority or foreign government or any foreign citizen/authority/person;
ii. any amount received from financial institutions specified by RBI for this purpose;
iii. any amount received by a company from any other company;
iv. amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance
if such amount is not repayable to the members under the articles of association of the company;
v. amount received from shareholders by private company;
vi. amount received from directors or relative of the director of an NBFC;
vii. amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company
subject to conditions;
viii. the amount brought in by the promoters by way of unsecured loan;
ix. amount received from a mutual fund;
x. any amount received as hybrid debt or subordinated debt;
xi. any amount received by issuance of Commercial Paper.
xii. any amount received by a systemically important non-deposit taking non-banking financial company by issuance of perpetual
debt instruments
xiii. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance Company
Thus, the directions exclude from the definition of public deposit, amount raised from certain set of informed lenders who can make
independent decision.
13. Are Secured debentures treated as Public Deposit? If not who regulatesthem?
Debentures secured by the mortgage of any immovable property of the company or by any other asset or with an option to convert them
into shares in the company, if the amount raised does not exceed the market value of the said immovable property or other assets, are
excluded from the definition of Public Deposit in terms of Non-Banking Financial Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 1998. Secured debentures are debt instruments and are regulated by Securities & Exchange Board of India.
14. Whether NBFCs can accept deposits from NRIs?
Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such
amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be
renewed.
15. Is nomination facility available to the Depositors of NBFCs?
Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the
Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination)
Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate
one person to whom the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept
nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination,
and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively.
16. What else should a depositor bear in mind while depositing money with NBFCs?
While making deposits with an NBFC, the following aspects should be borne in mind:
i. Public deposits are unsecured.
ii. A proper deposit receipt is issued, giving details such as the name of the depositor/s, the date of deposit, the amount in words
and figures, rate of interest payable and the date of repayment of matured deposit along with the maturity amount. Depositor/s
should insist on the above and also ensure that the receipt is duly signed and stamped by an officer authorised by the company
on its behalf.
iii. In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that
the brokers/agents are duly authorized by the NBFC.
iv. The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial
soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the
company and for repayment of deposits/discharge of the liabilities by the company.
v. Deposit Insurance facility is not available to the depositors of NBFCs.
17. It is said that rating of NBFCs is necessary before it accepts deposit? Is it true? Who rates them?
An unrated NBFC, except certain Asset Finance companies (AFC), cannot accept public deposits. An exception is made in case of unrated
AFC companies with CRAR of 15% which can accept public deposit without having a credit rating up to a certain ceiling depending upon its
Net Owned Funds (refer answer to Q 10). NBFC may get itself rated by any of the five rating agencies namely, CRISIL, CARE, ICRA and
FITCH, Ratings India Pvt. Ltd and Brickwork Ratings India Pvt. Ltd
18. What are the symbols of minimum investment grade rating of different companies?
The symbols of minimum investment grade rating of the Credit rating agencies are:
Name of rating agencies Nomenclature 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)
Brickwork Ratings India Pvt. Ltd. BWR FA (FD)
It may be added that A- is not equivalent to A, AA- is not equivalent to AA and AAA- is not equivalent to AAA.
19. Can an NBFC which is yet to be rated accept public deposit?
No, an NBFC cannot accept deposit without rating (except an Asset Finance Company complying with prudential norms and having CRAR
of 15%, as explained above in answer to Q 10).
20. When a companys rating is downgraded, does it have to bring down its level of public deposits immediately or over a period
of time?
If rating of an NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposits, report the position
within fifteen working days to the RBI and bring within three years from the date of such downgrading of credit rating, the amount of public
deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public
Deposits (Reserve Bank) Directions, 1998.
21. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?
If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a
court of law to recover the deposits.
22. What is the role of Company Law Board in protecting the interest of depositors? How can one approach it?
When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law
Board (CLB) either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make
repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order.
After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India.
As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company
Law Board according to its territorial jurisdiction along with the prescribed fee.
23. Can you give the addresses of the various benches of the Company Law Board (CLB) indicating their respective jurisdiction?
The details of addresses and territorial jurisdiction of the bench officers of CLB are as under:
ADDRESSES OF REGIONAL COMPANY LAW BOARD
S.
No.
Region Jurisdiction Telephone No. Fax No.
1. Company Law
Board
Principal Bench
Paryavaran
Bhawan
B-Block, 3rd
Floor
C.G.O. Complex
Lodhi Road,
New Delhi 110
003
All States & Union
Territories
011 24366126
011- 24363451
011 24366125
011 - 24366123
011
24366126
2. Company Law
Board
New Delhi
Bench
Paryavaran
Bhawan
B-Block, 3rd
Floor
C.G.O. Complex
Lodhi Road,
New Delhi 110
003
States of Delhi,
Haryana, Himachal
Pradesh, Jammu &
Kashmir, Punjab,
Rajasthan, Uttar
Pradesh, Uttaranchal
and Union Territories of
Chandigarh.
011
24363671
011- 24363451
011 24366125
011 - 24366123
011
24366126
3. Company Law
Board
Kolkata Bench
9 Old Post
Office Street
6th Floor,
Kolkata 700
001
States of Arunachal
Pradesh, Assam, Bihar,
Manipur, Meghalaya,
Nagaland, Orissa,
Sikkim, Tripura, West
Bengal, Jharkhand and
Union Territories of
Andaman and Nicobar
Island and Mizoram.
033 22486330 033
22621760
4. Company Law
Board
Mumbai Bench
States of Goa, Gujarat,
Madhya Pradesh,
Maharashtra,
022
22619636/
022 22611456
022
22619636
N.T.C. House,
2nd Floor,
15 Narottam
Morarjee Marg,
Ballard Estate,
Mumbai 400
038
Chhattisgarh and (Union
Territories of Dadra and
Nagar Haveli and
Daman and Diu)
5. Company Law
Board
Chennai Bench
Corporate
Bhawan (UTI
Building),
3rd Floor, No. 29
Rajaji Salai,
Chennai
600001.
States of Andhra
Pradesh, Karnataka,
Kerala, Tamil Nadu and
Union Territories of
Pondicherry and
Lakshadweep Island.
044 25262793 044
25262794
24. We hear that in a number of cases Official Liquidators have been appointed on the defaulting NBFCs. What is the procedure
adopted by the Official Liquidator?
An Official Liquidator is appointed by the court after giving the company reasonable opportunity of being heard in a winding up petition. The
liquidator performs the duties of winding up of the company and such duties in reference thereto as the court may impose. Where the court
has appointed an official liquidator or provisional liquidator, he becomes custodian of the property of the company and runs day-to-day
affairs of the company. He has to draw up a statement of affairs of the company in prescribed form containing particulars of assets of the
company, its debts and liabilities, names/residences/occupations of its creditors, the debts due to the company and such other information
as may be prescribed. The scheme is drawn up by the liquidator and same is put up to the court for approval. The liquidator realizes the
assets of the company and arranges to repay the creditors according to the scheme approved by the court. The liquidator generally inserts
advertisement in the newspaper inviting claims from depositors/investors in compliance with court orders. Therefore, the
investors/depositors should file the claims within due time as per such notices of the liquidator. The Reserve Bank also provides assistance
to the depositors in furnishing addresses of the official liquidator.
25. The Consumer Court plays useful role in attending to depositors problems. Can one approach Consumer Forum, Civil Court,
CLB simultaneously?
Yes, a depositor can approach any or all of the redressal authorities i.e consumer forum, court or CLB.
26. Is there an Ombudsman for hearing complaints against NBFCs?
No, there is no Ombudsman for hearing complaints against NBFCs. However, in respect of credit card operations of an NBFC, if a
complainant does not get satisfactory response from the NBFC within a maximum period of thirty (30) days from the date of lodging the
complaint, the customer will have the option to approach the Office of the concerned Banking Ombudsman for redressal of his grievance/s.
All NBFCs have in place a Grievance Redressal Officer, whose name and contact details have to be mandatorily displayed in the premises
of the NBFCs. The grievance can be taken up with the Grievance Redressal Officer. In case the complainant is not satisfied with the
settlement of the complaint by the Grievance Redressal Officer of the NBFC, he/she may approach the nearest office of the Reserve Bank
of India with the complaint. The details of the Office of the Reserve Bank has also to be mandatorily displayed in the premises of the NBFC.
27. What are various prudential regulations applicable to NBFCs?
The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial Companies Prudential Norms (Reserve Bank)
Directions, 1998. The directions interalia, prescribe guidelines on income recognition, asset classification and provisioning requirements
applicable to NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet, requirement of capital adequacy,
restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in
business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity
requirements. Details of the prudential regulations applicable to NBFC holding deposits and those not holding deposits is available in the
DNBS section of master Circulars in the RBI website www.rbi.org.in sitemap Master Circulars.
28. Please explainthe terms owned fund and net owned fund in relation to NBFCs?
Owned Fund means aggregate of the paid-up equity capital , preference shares which are compulsorily convertible into equity, free
reserves , balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding
reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other
intangible assets.'Net Owned Fund' is the amount as arrived at above, minus the amount of investments of such company in shares of its
subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances
including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it
exceeds 10% of the owned fund.
29. What are the responsibilities of the NBFCs accepting/holding public deposits with regard to submission of Returns and other
information to RBI?
The NBFCs accepting public deposits should furnish to RBI
i. Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the
annual general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on
accounts furnished by its Auditors;
ii. Statutory Quarterly Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise;
iv. Quarterly Return on prudential norms-NBS 2;
v. Quarterly Return on liquid assets-NBS 3;
vi. Annual return of critical parameters by a rejected company holding public deposits NBS4
vii. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or asset size of Rs. 100 crore and
above irrespective of the size of deposits holding
viii. Monthly return on exposure to capital market by deposit taking NBFC with total assets of Rs 100 crore and aboveNBS6; and
ix. A copy of the Credit Rating obtained once a year
30. What are the documents or the compliance required to be submitted to the Reserve Bank of India by the NBFCs not
accepting/holding public deposits?
The NBFCs having assets of Rs. 100 crore and above but not accepting public deposits are required to submit:
(i) Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for the company NBS 7
(ii) Monthly Return on Important Financial Parameters of the company
(iii) Asset- Liability Management (ALM) returns:
(iv) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,
(v) Statement of structural liquidity in format ALM [NBS-ALM2] Half Yearly
(vi) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearly
B. The non deposit taking NBFCs having assets of more than Rs.50 crore and above but less than Rs 100 crore are required to submit
Quarterly return on important financial parameters of the company. Basic information like name of the company, address, NOF, profit / loss
during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between Rs 50 crore and Rs 100
crore
All companies not accepting public deposits have to pass a board resolution to the effect that they have neither accepted public deposit nor
would accept any public deposit during the year.
However, all the NBFCs (other than those exempted) are required to be registered with RBI and also make sure that they continue to be
eligible to retain the Registration. Further, all NBFCs (including non-deposit taking) should submit a certificate from their Statutory Auditors
every year to the effect that they continue to undertake the business of NBFI requiring holding of CoR under Section 45-IA of the RBI Act,
1934
NBFCs are also required to furnish the information in respect of any change in the composition of its Board of Directors, address of the
company and its Directors and the name/s and official designations of its principal officers and the name and office address of its Auditors.
With effect from April 1, 2007, non-deposit taking NBFCs with assets of Rs 100 crore and above were advised to maintain minimum CRAR
of 10% and also comply with single/group exposure norms. As on date, such NBFCs are required to maintain a minimum CRAR of 15%.
31. The NBFCs have been made liable to pay interest on the overdue matured deposits if the company has not been able to repay
the matured public deposits on receipt of a claim from the depositor. Please elaborate the provisions.
As per Reserve Banks Directions, overdue interest is payable to the depositors in case the company has delayed the repayment of
matured deposits, and such interest is payable from the date of receipt of such claim by the company or the date of maturity of the deposit
whichever is later, till the date of actual payment. If the depositor has lodged his claim after the date of maturity, the company would be
liable to pay interest for the period from the date of claim till the date of repayment. For the period between the date of maturity and the
date of claim it is the discretion of the company to pay interest.
32. Can a company pre-pay its public deposits?
An NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests for pre-mature payment, Reserve
Bank of India has prescribed Regulations for such an eventuality in the Non-Banking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998 wherein it is specified that NBFCs cannot grant any loan against a public deposit or make premature
repayment of a public deposit within a period of three months (lock-in period) from the date of its acceptance. However, 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
An NBFC, (which is not a problem company) subject to above provisions, may permit after the lockin period, premature repayment of a
public deposit at its sole discretion, at the rate of interest prescribed by the Bank
A problem NBFC is prohibited from making premature repayment of any deposits or granting any loan against public deposit/deposits, as
the case may be. The prohibition shallnot, however, apply in the case of death of depositor or repayment of tiny deposits i.e. up to Rs.
10000/- subject to lock in period of 3 months in the latter case.
33. What is the liquid assets requirement for the deposit taking companies? Where are these assets kept? Do depositors have
any claims on them?
In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid assets to be maintained by NBFCs is 15 per cent of public
deposits outstanding as on the last working day of the second preceding quarter. Of the 15%, NBFCs are required to invest not less than
ten percent in approved securities and the remaining 5% can be in unencumbered term deposits with any scheduled commercial bank.
Thus, the liquid assets may consist of Government securities, Government guaranteed bonds and term deposits with any scheduled
commercial bank.
The investment in Government securities should be in dematerialised form which can be maintained in Constituents Subsidiary General
Ledger (CSGL) Account with a scheduled commercial bank (SCB) / Stock Holding Corporation of India Limited (SHICL). In case of
Government guaranteed bonds the same may be kept in dematerialised form with SCB/SHCIL or in a dematerialised account with
depositories [National Securities Depository Ltd. (NSDL)/Central Depository Services (India) Ltd. (CDSL)] through a depository participant
registered with Securities & Exchange Board of India (SEBI). However in case there are Government bonds which are in physical form the
same may be kept in safe custody of SCB/SHCIL.
NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a
place where the registered office of the company is situated. However, if an NBFC intends to entrust the securities at a place other than the
place at which its registered office is located, it may do so after obtaining the permission of RBI in writing. It may be noted that liquid assets
in approved securities will have to be maintained in dematerialised form only.
The liquid assets maintained as above are to be utilised for payment of claims of depositors. However, deposits being unsecured in nature,
depositors do not have direct claim on liquid assets.
34. Please tell us something about the companies which are NBFCs, but are exempted from registration?
Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-
broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have
been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.
Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-
exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by
Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and
Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India.
It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking Financial Companies under Section 45
I(f)(iii) of the RBI Act, 1934.
35. There are some entities (not companies) which carry on activities like that of NBFCs. Are they allowed to take deposits? Who
regulates them?
Any person who is an individual or a firm or unincorporated association of individuals cannot accept deposits except by way of loan from
relatives, if his/its business wholly or partly includes loan, investment, hire-purchase or leasing activity or principal business is that of
receiving of deposits under any scheme or arrangement or in any manner or lending in any manner.
36. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under
any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are
required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from
those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions.
Besides, Prudential Norms Directions are applicable to these companies also.
37. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?
It is true that there is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure that the amounts deposited and
investments made by the company are not less than the aggregate amount of liabilities to the depositors
To secure the interest of depositor, such companies are required to invest in a portfolio comprising of highly liquid and secure instruments
viz. Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of deposits of SCB/FIs, units
of Mutual Funds, etc. to the extent of 100 per cent of their deposit liability.
38. Can RNBC forfeit deposit if deposit installments are not paid regularly or discontinued?
No Residuary Non-Banking Company shall forfeit any amount deposited by the depositor, or any interest, premium, bonus or other
advantage accrued thereon.
39. Please tell us something on rate of interest payable by RNBCs on deposits and maturity period of deposits
The amount payable by way of interest, premium, bonus or other advantage, by whatever name called by a RNBC in respect of deposits
received shall not be less than the amount calculated at the rate of 5% (to be compounded annually) on the amount deposited in lump sum
or at monthly or longer intervals; and at the rate of 3.5% (to be compounded annually) on the amount deposited under daily deposit
scheme. Further, a RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of
receipt of such deposit. They cannot accept deposits repayable on demand.
40. There are some companies like Multi-Level Marketing companies, Chit funds etc. Do they come under the purview of RBI?
No, Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies dont fall under the purview of RBI. Activities of
these companies fall under the regulatory/administrative domain of respective state government. A list of such companies and their
regulators are as follows:
Category of Companies Regulator
Chit Funds Respective State Governments
Insurance companies IRDA
Housing Finance Companies NHB
Venture Capital Fund / SEBI
Merchant Banking companies SEBI
Stock broking companies SEBI
Nidhi Companies Ministry of corporate affairs,
Government of India
41. What are Unincorporated Bodies (UIBs)? Has RBI any role to play in curbing illegal deposit acceptance activities of UIBs?
Unincorporated bodies (UIBs) include an individual, a firm or an unincorporated association of individuals. In terms of provision of section
45S of RBI act, these entities are prohibited from accepting any deposit. The state government has to play a proactive role in arresting the
illegal activities of such entities to protect interests of depositors/investors.
UIBs do not come under the regulatory domain of RBI. Whenever RBI receives any complaints against UIBs, it immediately forwards the
same to the state government police agencies (Economic Offences Wing (EOW)). The complainants are advised to lodge the complaints
directly with the state government police authorities (EOW) so that appropriate action against the culprits is taken immediately and the
process is hastened.
RBI on its part has taken various steps to curb activities of UIBs which includes spreading awareness through advertisements in leading
newspapers to sensitise public, organize various investors awareness programmes in various districts of the country, keeps close liaison
with the law enforcing agencies (Economic Offences Wing).
42. Companies registered with MCA but not registered with RBI as NBFCs also sometimes default in repayment of
deposit/amounts invested with them? What is the recourse available to the investors in such an event? Does RBI have any role to
play in such cases?
Companies registered with MCA but not required to be registered with RBI as NBFC are not under the regulatory domain of RBI. Whenever
RBI receives any such complaints about the companies registered with MCA but not registered with RBI as NBFCs, it forwards the
complaints to the Registrar of Companies (ROC) of the respective state for any action. The complainants are advised that the complaints
relating to irregularities of such companies should be promptly lodged with ROC concerned for initiating corrective action. However, in case
it comes to the knowledge of RBI those companies were required to be registered with the RBI, but have not done so and have accepted
deposits as defined under RBI Act, such action as is deemed necessary under the provisions of the RBI Act will be taken.

ifferent types of NBFCs:

There are different categories of NBFC's operating in India under the supervisory
control of RBI.

They are:

1. Non-Banking Financial Companies (NBFCs)
2. Residuary Non-banking Finance companies(RNBCs).
3. Miscellaneous Non-Banking Finance Companies (MNBCs) and

Residuary Non-Banking Company is a class of NBFC, which is a company and has as
its principal business the receiving of deposits, under any scheme or arrangement
or in any other manner and not being Investment, Leasing, Hire-Purchase, Loan
Company. These companies are required to maintain investments as per directions
of RBI, in addition to liquid assets. The functioning of these companies is different
from those of NBFCs in terms of method of mobilization of deposits and
requirement of deployment of depositors' funds. Peerless Financial Company is the
example of RNBCs.

Miscellaneous Non-Banking Financial Companies are another type of NBFCs and
MNBC means a company carrying on all or any of the types of business as
collecting, managing, conducting or supervising as a promoter or in any other
capacity, conducting any other form of chit or kuri which is different from the type
of business mentioned above and any other business similar to the business as
referred above.

Type of Services provided by NBFCs:

NBFCs provide range of financial services to their clients. Types of services under
non-banking finance services include the following:

1. Hire Purchase Services
2. Leasing Services
3. Housing Finance Services
4. Asset Management Services
5. Venture Capital Services
6. Mutual Benefit Finance Services (Nidhi) banks.

The above type of companies may be further classified into those accepting
deposits or those not accepting deposits.

Now we take a look at each type of service that an NBFC could undertake.

Hire Purchase Services

Hire purchase the legal term for a conditional sale contract with an intention to
finance consumers towards vehicles, white goods etc. If a buyer cannot afford to
pay the price as a lump sum but can afford to pay a percentage as a deposit, the
contract allows the buyer to hire the goods for a monthly rent. If the buyer defaults
in paying the installments, the owner can repossess the goods. HP is a different
form of credit system among other unsecured consumer credit systems and
benefits. Hero Honda Motor Finance Co., Bajaj Auto Finance Company is some of
the HP financing companies.

Leasing Services

A lease or tenancy is a contract that transfers the right to possess specific property.
Leasing service includes the leasing of assets to other companies either on
operating lease or finance lease. An NBFC may obtain license to commence leasing
services subject to , they shall not hold, deal or trade in real estate business and
shall not fix the period of lease for less than 3 years in the case of any finance lease
agreement except in case of computers and other IT accessories. First Century
Leasing Company Ltd., Sundaram Finance Ltd. is some of the Leasing companies in
India.

Housing Finance Services

Housing Finance Services means financial services related to development and
construction of residential and commercial properties. An Housing Finance Company
approved by the National Housing Bank may undertake the services /activities such
as Providing long term finance for the purpose of constructing, purchasing or
renovating any property, Managing public or private sector projects in the housing
and urban development sector and Financing against existing property by way of
mortgage. ICICI Home Finance Ltd., LIC Housing Finance Co. Ltd., HDFC is some of
the housing finance companies in our country.

Asset Management Company

Asset Management Company is managing and investing the pooled funds of retail
investors in securities in line with the stated investment objectives and provides
more diversification, liquidity, and professional management service to the
individual investors. Mutual Funds are comes under this category. Most of the
financial institutions having their subsidiaries as Asset Management Company like
SBI, BOB, UTI and many others.

Venture Capital Companies

Venture capital Finance is a unique form of financing activity that is undertaken on
the belief of high-risk-high-return. Venture capitalists invest in those risky projects
or companies (ventures) that have success potential and could promise sufficient
return to justify such gamble. Venture capitalist not only provides finance but also
often provides managerial or technical expertise to venture projects. In India,
venture capital concentrate on seed capital finance for high technology and for
research & development. ICICI ventures and Gujarat Venture are one of the first
venture capital organizations in India and SIDBI, IDBI and others also promoting
venture capital finance activities.

Mutual Benefit Finance Companies (MBFC's),

A mutual fund is a financial intermediary that allows a group of investors to pool
their money together with a predetermined investment objective. The mutual fund
will have a fund manager who is responsible for investing the pooled money into
specific securities/bonds. Mutual funds are one of the best investments ever created
because they are very cost efficient and very easy to invest in. By pooling money
together in a mutual fund, investors can purchase stocks or bonds with much lower
trading costs than if they tried to do it on their own. But the biggest advantage to
mutual funds is diversification.

There are two main types of such funds, open-ended fund and close-ended mutual
funds. In case of open-ended fund, the fund manager continuously allows investors
to join or leave the fund. The fund is set up as a trust, with an independent trustee,
who keeps custody over the assets of the trust. Each share of the trust is called a
Unit and the fund itself is called a Mutual Fund. The portfolio of investments of the
Mutual Fund is normally evaluated daily by the fund manager on the basis of
prevailing market prices of the securities in the portfolio and this will be divided by
the number of units issued to determine the Net Asset Value (NAV) per unit. An
investor can join or leave the fund on the basis of the NAV per unit.

In contrast, a close-end fund is similar to a listed company with respect to its share
capital. These shares are not redeemable and are traded in the stock exchange like
any other listed securities. Value of units of close-end funds is determined by
market forces and is available at 20-30% discount to their NAV.

Financial Sector Reforms & Liberalization measures for NBFCs

During the period from 1992-93 to 1995-96 Indian Government took many steps to
reform the financial sector like liberalized bank norms, higher ceiling on term loans,
allowed to set their own interest rates, freed to fix their own foreign exchange open
position subject of RBI approval and guidelines issued to ensure qualitative
improvement in their customer service.

Foreign equity investments in NBFCs are permitted in more than17 categories of
NBFC activities approved for foreign equity investments such as merchant banking,
stock broking, venture capital, housing finance, forex broking, leasing and finance,
financial consultancy etc. Guidelines for foreign investment in NBFC sector have
been amended so as to provide for a minimum capitalization norm for the activities,
which are not fund based and only advisory, or consultancy in nature, irrespective
of the foreign equity participation level.

The objectives behind the reforms in the financial sector are to improve the
efficiency and competitiveness in the systems.

Recent trends in Non-Banking Financial Companies Sector

NBFCs initially cater to the needs of individual and small savings investors and later
developed into financial institutions, providing services similar to those of banks.
NBFCs have many tailor made services for their clients with lesser degree of
regulation. They have offered high rate of interest to their investors and atrracted
many small size investors. In 1998, Reserve Bank of India implemented
unprecedented regulatory measures to safeguard the public deposits.

The Bank has issued detailed directions on prudential norms, vide Non-Banking
Financial Companies Prudential Norms (Reserve Bank) Directions, 1998. The
directions interalia, prescribe guidelines on income recognition, asset classification
and provisioning requirements applicable to NBFCs, exposure norms, constitution of
audit committee, disclosures in the balance sheet, requirement of capital adequacy,
restrictions on investments in land and building and unquoted shares.

The RBI has issued guidelines for entry of NBFCs into insurance sector in June 2000
. Accordingly no NBFC registered with RBI having owned fund of Rs.2 Crore as per
the last audited Balance Sheet would be permitted to undertake insurance business
as agent of insurance companies on fee basis, without any risk participation.

The focus of regulatory initiatives in respect of financial institutions (FIs) during
2004-05 was to strengthen the prudential guidelines relating to asset classification,
provisioning, exposure to a single/group borrower and governance norms. Business
operations of FIs expanded during 2004-05. Their financial performance also
improved, resulting from an increase in net interest income. Significant
improvement was also observed in the asset quality of FIs, in general. The capital
adequacy ratio of FIs continued to remain at a high level, notwithstanding some
decline during the year.

Regulatory initiatives in respect of NBFCs during the year related to issuance of
guidelines on credit/debit cards, reporting arrangements for large sized NBFCs not
accepting/holding public deposits, norms for premature withdrawal of deposits,
cover for public deposits and know your customer (KYC) guidelines. Profitability of
NBFCs improved in 2003-04 and 2004-05 mainly on account of containment of
expenditure. While gross NPAs of NBFCs, as a group, declined during 2003-04 and
2004-05, net NPAs after declining marginally during 2003-04, increased
significantly during 2004-05.
op NBFC Companies in India

Top five NBFCs in India:

Housing Development Finance Corporation Limited

Power Finance Corporation Limited

Rural Electrification Corporation Limited

National Bank of Agricultural and Rural Development

Infrastructure Development Finance Company Limited

Some of the details regarding these top five NBFCs in India are given below:

Housing Development Finance Corporation Limited:

Housing Development Finance Corporation Limited is shortly called as HDFC, which was incorporated in the year 1997 with the objective of
offering long-term finance to households to meet their housing requirements. HDFC is basically engaged in the promotion of housing
ownership by offering long-term finance to households. Some of the products offered by them are land purchase loans, home equity loans,
short-term bridge loans, home extension loans, home improvement loans and home loans.

Power Finance Corporation Limited:

Power Finance Corporation Limited came into existence in the year 1986 with the objective of promoting the power sector in the nation. The
company is engaged in offering finance for implementation of power projects and for development of new power plants. The company offers
both non-financial and financial support to power equipment manufacturing firms, municipal bodies, co-operative societies, private sector
power companies, joint sector power companies, central power companies and state electricity departments.

Rural Electrification Corporation Limited:

Rural Electrification Corporation Limited shortly called as REC came into existence in the year 1969 for the purpose of promotion of rural
electrification projects in the country. The company became an NBFC in the year 1998 and it plays a crucial role in expansion, modernization
and creation of power infrastructure in all segments of power sector in the nation covering distribution, transmission and generation as well.
It is also offering financial support to emerging areas like non-conventional energy and decentralized distributed generation.

National Bank of Agricultural and Rural Development:

Shortly called as NABARD, this NBFC came into existence in the year 1982 for enabling flow of credit for promotion of rural non-farm and
agricultural sectors. It acts as an apex institution in rural development and agricultural credit. The functions of NABARD has been classified
into four categories namely supervision, promotion & development, financial services and credit planning.

Infrastructure Development Finance Company Limited:

Infrastructure Development Finance Company Limited shortly called as IDFC came into existence in the year 1997 in the Indian state of Tamil
Nadu. In the year 2005, it became a public entity and it is engaged in offering project finance, asset management, investment banking,
principal investment & treasury and project finance services. The business activities of this NBFC can be divided into two types namely fund-
based and non-fund based businesses.

There are several other NBFCs in India like Shriram Transport Finance Company Limited, IFCI Limited, etc
What is a non-banking financial company?
The financial sector in any economy consists of several intermediaries. Apart from banking entities, there are investment intermediaries (such as
mutual funds, hedge funds, pension funds, and so on), risk transfer entities (such as insurance companies), information and analysis providers (such
as rating agencies, financial advisers, etc), investment banks, portfolio managers and so on.
All such entities that offer financial services other than banking, may be broadly called non-banking financial institutions. What is banking? Banking is
commonly understood to mean taking of deposits withdrawable on demand or notice - that is, banks can hold people's deposits and promise to pay
them on demand. There are variety of other entities that may accept deposits - hence, acceptance of deposits is not the essence of banking.
In India, the term "non-banking financial companies" acquires a new meaning, and a huge significance. The meaning of the term is such entities which
are not banks, and yet carry lending activities almost at par with banks. They may also accept deposits - however, these deposits are term deposits
and not call deposits.
The significance of non-banking financial companies in India lies in the massive capabilities of NBFCs - short of acceptance of call deposits and
remittance function, NBFCs can virtually do everything that a bank can. Compared to this disability, the ease of entry and lightness of regulation
applicable to NBFCs makes it a tremendous focus of interest, particularly for foreign investors wanting to enter India's financial sector.
For instance, it is possible to hold 100% foreign ownership of NBFCs, while in case of banks, there are serious caps.
It is possible to either start an NBFC or buy one of the 17000-odd companies many of which are formed for sale. On the other hand, getting a banking
license requires a real penance.
There are numerous articles and presentations on this site as well as Staff Publications Page pertaining to NBFCs.
Our dedicated pages
Overview of the NBFC sector in India
Articles on NBFCs
Infrastructure Financing
Housing finance
Affordable housing finance
Core investment companies
SAMPADA- Our newsletter on NBFCs
Other Resources
Presentation on New Regulatory Regime for NBFCs, by Vinod Kothari, 13th December 2012-the presentation provides a comprehensive view of the
revised regulations applicable to NBFCs
Vinod Kothari's presentation on Regulatory Framework for NBFCs in India and abroad
Overview chart on NBFC Sector in India, by Nidhi Ladha, 03rd July 2012
Primer on NBFCs by Vinod Kothari : written in FAQ form, this write tries to answer several questions that querists commonly have regarding NBFCs.
Overview of the NBFC sector in India, by Nidhi Bothra and Kamil Sayeed:This 2011 write up traces the progress and performance of NBFCs in India
Core investment companies - Vinod Kothari's article appeared in Chartered Secretary, Feb 2011 issue. The article discusses the exemption from
registration requirements given to core investment companies.
Definition of NBFCs - concept of Principality of business: This article by Payel Jain, then of Vinod Kothari & Company, discusses the definition of NBFCs
and RBI circular requiring a certain percentage of assets and income, and was published in Chartered Secretary, August 2010.
http://www.india-financing.com/what-is-a-non-banking-financial-company.html
NBFCs default to peak by March 2015: India Ratings
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MUMBAI, FEB 10:
Despite the ease in asset quality pressures by second half of fiscal year 2015 for major Indian non-bank finance companies (NBFCs),
delinquencies will peak only by March 2015, as per India Ratings & Research report.
NBFCs defences in the form of solid pre-provision operating profit (PPOP) and capital buffers provide a strong cushion against
India Ratings stress tests on scenarios of spike in credit costs and elevated funding costs.
The agency expects the revival of certain infrastructure projects (cleared by the cabinet committee in recent months), pick-up in
industrial growth and corporate capex investments to benefit most of the commercial assets financed by the NBFCs, from 2QFY15
onwards.
This would ease the pressure on the cash flows of their borrowers through enhanced utilisation of their assets and contain
incremental delinquencies. New business growth, however, will likely remain subdued till 3QFY15, as it would require a longer
period of sustained growth in the index of industrial production to entice operators to buy new vehicles, the report said.
However, in a scenario of continued weak industrial growth and infrastructure projects remaining stalled, the asset quality pressures
could intensify and adversely impact the NBFCs with large unseasoned portfolios, in particular, it added.
Management focus is expected to increase on collection and recovery for the next two-three quarters as well as on controlling
operating costs, to contain the impact of lower loan growth. Nevertheless, rising credit costs and elevated funding costs will suppress
profitability, though it will still remain healthy, compared with commercial banks.
The rated major NBFCs steady operating performance (including stable asset quality) has facilitated their access to funding from
banks, institutional investors and capital markets.
The ratings agency has kept the outlook NBFC sector stable in 2014.
(This article was published on February 10, 2014)
http://www.thehindubusinessline.com/economy/macro-economy/nbfcs-default-to-peak-by-march-
2015-india-ratings/article5673788.ece