Beruflich Dokumente
Kultur Dokumente
INTRODUCTION:
We studied about banks, apart from banks the Indian Financial System has a large number of
privately owned, decentralized and small sized financial institutions known as Non-banking
financial companies. In recent times, the non-financial companies (NBFCs) have contributed
to the Indian economic growth by providing deposit facilities and specialized credit to certain
segments of the society such as unorganized sector and small borrowers. In the Indian
Financial System, the NBFCs play a very important role in converting services and provide
credit to the unorganized sector and small borrowers.
NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund
companies etc. NBFCs can be classified into deposit accepting companies and non-deposit
accepting companies. NBFCs are small in size and are owned privately. The NBFCs have
grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as
service oriented companies. Their main companies are banks and financial institutions.
According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of
India.
The NBFCs in advanced countries have grown significantly and are now coming up in a very
large way in developing countries like Brazil, India, and Malaysia etc. The non-banking
companies when compared with commercial and co-operative banks are a heterogeneous
(varied) group of finance companies. NBFCs are heterogeneous group of finance companies
means all NBFCs provide different types of financial services.
NBFCs supplement the role of the banking sector in meeting the increasing financial need of
the corporate sector, delivering credit to the unorganized sector and to small local borrowers.
NBFCs have more flexible structure than banks. As compared to banks, they can take quick
decisions, assume greater risks and tailor-make their services and charge according to the
needs of the clients. Their flexible structure helps in broadening the market by providing the
saver and investor a bundle of services on a competitive basis.
Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of
the organized financial system in India. The Financial System of any country consists of
financial Markets, financial intermediation and financial instruments or financial products.
All these Items facilitate transfer of funds and are not always mutually exclusive. Interrelationships Between these are parts of the system e.g. Financial Institutions operate in
financial markets and are, therefore, a part of such markets.
NBFCs at present providing financial services partly fee based and partly fund based. Their
fee based services include portfolio management, issue management, loan syndication,
merger and acquisition, credit rating etc. their asset based activities include venture capital
financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short
they are now providing variety of services. NBFCs differ widely in their ownership: Some
are subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd).
Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital
Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in Kerala
financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI
Custodial Services Ltd (Devdas, 2005).
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public
2
debt
Finance is monetary resources comprising debt and ownership funds of the state,
company or person.
HISTORICAL BACKGROUND.
The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve
Bank Amendment Act, 1963 to include provisions relating to non-banking institutions
receiving deposits and financial institutions. It was observed that the existing legislative and
regulatory framework required further refinement and improvement because of the rising
number of defaulting NBFCs and the need for an efficient and quick system for Redressal of
grievances of individual depositors. Given the need for continued existence and growth of
NBFCs, the need to develop a framework of prudential legislations and a supervisory system
was felt especially
to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to
review the existing framework and address these shortcomings, various committees were
formed and reports were submitted by them.
Introduction of a supervisory rating system for the registered NBFCs. The ratings
assigned to NBFCs would primarily be the tool for triggering on-site inspections at
ii.
various intervals.
Supervisory attention and focus
iv.
of the
NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they
were subjected to one-shot examination by different regulatory authorities.
v.
vi.
Introduction of a system whereby the names of the NBFCs which had not complied
with the regulatory framework / directions of the Bank or had failed to submit the
prescribed returns consecutively for two years could be published in regional
newspapers.
DEFINITIONS OF NBFC.
Non-Banking Financial Company has been defined as:
A non-banking institution, which is a company and which has its principal business the
receiving of deposits under any scheme or lending in any manner.
(ii) Such other non-banking institutions, as the bank may with the previous approval of the
central government and by notification in the official gazette, specify.
NBFCS provide a range of services such as hire purchase finance, equipment lease finance,
loans, and investments. NBFCS have raised large amount of resources through deposits from
public, shareholders, directors, and other companies and borrowing by issue of nonconvertible debentures, and so on.
Non-banking Financial Institutions carry out financing activities but their resources are not
directly obtained from the savers as debt. Instead, these Institutions mobilize the public
savings for rendering other financial services including investment. All such Institutions are
financial intermediaries and when they lend, they are known as Non-Banking Financial
Intermediaries (NBFIs) or Investment Institutions:
CLASSIFICATION OF NBFCs:
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(a)
Equipment leasing company means any company which is carrying on the activity of
leasing of equipment, as its main business, or the financing of such activity.
(b)
The leasing business takes place of a contract between the lessor (lessor means the
leasing company) and the lessee (lessee means a borrower).
(c)
(d)
Hence, the lessee does not purchase the capital equipment, but he buys the right to
use it.
(e)
(i)
Operating leasing: In operating leasing the producer of capital equipment offers his
product directly to the lessee on a monthly rent basis. There is no middleman in
operating leasing.
(ii)
Finance leasing: In finance leasing, the producer of the capital equipment sells the
equipment to the leasing company, then the leasing company leases it to the final user
of the equipment. Hence, there are three parties in finance leasing. The leasing
company acts as a middleman between the producer of equipment and the user of
equipment.
Benefits/Advantages of Leasing:
(1)
100% finance:
They borrower in the equipment can get up to 100% finance for the use of capital
through leasing arrangement in the sense, that the leasing company provides the
equipment immediately and the borrower need not pay the full amount at once.
Hence, the borrower can use the amount for fulfilling other needs such as expansion
development, etc.
(2)
Payment is easier:
Leasing finance is costlier. However, the borrower finds it convenient (easy) as he has
to pay in installments out of the return from the investment in the equipment. Hence,
the borrower does not feel the burden of payment.
10
(3)
Tax concessions:
The borrower can get tax concessions in case of leasing equipments. The total
amounts of rent paid on leased equipment are deducted from the gross income. In
case of immediate purchase, interest on the loan and the depreciation are deducted
from the taxable income.
(a)
Hire purchase finance company means any company which is carrying on the main
business of financing, physical assets through the system of hire-purchase.
(b)
In hire-purchase, the owner of the goods hires them to another party for a certain
period and for a payment of certain installment until the other party owns it.
(c)
The main feature of hire-purchase is that the ownership of the goods remains with the
owner until the last installment is paid to him. The ownership of goods passes to the
user only after he pays the last installment of goods.
(d)
(e)
It is a less risky business because the goods purchased on hire purchase basis serve as
securities till the installment on the loan is paid.
(f)
(g)
The problem of recovery of loans does not occur in most cases, as the borrower is
able to pay back the loan out of future earnings through the regular generation of
11
In India, there are many individuals and partnership firms doing this business. Even
commercial banks, hire-purchase companies and state financial corporations provide
hire-purchase credit.
(a)
A housing finance company means any company which is carrying on its main
business of financing the construction or acquisition of houses or development of
land for housing purposes.
(b)
Housing finance companies also accept the deposits and lend money only for housing
purposes.
(c)
Even though there is a heavy demand for housing finance, these companies have not
made much progress and as on 31st March, 1990 only 17 such companies here
reported to the RBI.
(d)
The ICICI and the Canara Bank took the lead to sponsor housing finance companies,
namely, Housing Development Corporation Ltd. and the Canfin Homes Ltd.
(e)
All the information about the Housing finance companies is available with the
National Housing Bank. Housing finance companies also have to compulsorily to
register themselves with the Reserve Bank of India.
(f)
National Housing bank is the apex institution in the field of housing. It promotes
housing finance institutions, both on regional and local levels.
Investment Companies:
(a)
Investment company means any company which is carrying on the main business of
securities.
12
Loan company:
(a)
A loan company means any company whose main business is to provide finance
through loans and advances.
(b)
(c)
(d)
Loan companies have very little capital, so they depend upon public deposits as their
main source of funds. Hence, they attract deposits by offering high rates of interest.
(e)
(f)
Most of their loans are given without any security. Hence, they are risky.
(g)
Due to this reason, the loan company charges high rate of interest on its loans. Loans
are generally given for short period of time but they can be renewed.
14
(b)
A mutual benefit financial company means any company which is notified under
section 620A of the Companies Act, 1956.
(c)
(d)
Usually, it is registered with only very small number of shares. The value of the
shares is often Rs. 1 only
(e)
It accepts deposits from its members and lends only to its members against tangible
securities.
Chit-fund Companies:
History:
The chit fund schemes have a long history in the southern states of India. Rural unorganized
chit funds may still be spotted in many southern villages. However, organized chit fund
companies are now prevalent all over India. The word is Hindi and refers to a small note or
piece of something. The word passed into the British colonial lexicon and is still used to
refer to a small piece of paper, a child or small girl
Chit Funds have the advantage both for serving a need and as an investment. Money can be
readily drawn in an emergency or could be continued as an investment.
Interest rate is determined by the subscribers themselves, based on mutual decisions and
varies from auction to auction.
The money that you borrow is against your own future contributions.
15
(a)
Chit funds companies are one of the oldest forms of local non-banking financial
institution in India.
(b)
(c)
These institutions have originated from south India and are very popular over there.
(d)
(e)
It helps the persons who save money regularly to invest their savings with good
chances of profit.
(f)
Chit funds have many defects as the rate of return given to each member is not the
same.
(g)
It differs from person to person, this leads in improper distribution of gains and
losses.
(h)
Also, the promoters of these funds do everything for their own benefit to get
maximum income.
(I)
Hence, the banking commission has made suggestions to pass uniform chit funds
16
(a)
The term "residue" means a small part of something that remains. As the meaning of
the term shows, a residuary company is one which does not fall in any of the above
categories.
(b)
(c)
Deposits are collected from a large number of people by promising them that their
money would be invested in banks and government securities
(d)
The collection of deposits is done at the doorsteps of depositors through bank staff,
who is paid commission.
(e)
These companies get the funds at low cost for longer terms, at they invest them in
investments which generates good amount of return.
(f)
(g)
(ii)
17
Non- Banking Financial Companies play an important role in promoting the utilization of
savings among public. NBFCs are able to reach certain deposit segments such as
unorganized sector and small borrowers were commercial bank cannot reach. These
companies encourage savings and promote careful spending of money without much wastage.
They offer attractive schemes to suit needs of various sections of the society. They also attract
idle money by offering attractive rates of interest. Idle money means the money which public
keep aside, but which is not used. It is surplus money.
(2)
NBFCs provide easy and timely credit to those who need it. The formalities and procedures
in case of NBFCs are also very less. NBFCs also provides unusual credit means the credit
which is not usually provided by banks such as credit for marriage expenses, religious
functions, etc. The NBFCs are open to all. Every one whether rich or poor can use them
according to their needs.
18
Financial Supermarket:
(4)
NBFCs invest the small savings in productive purposes. Productive purposes mean they
invest the savings of people in businesses which have the ability to earn good amount of
returns. For example In
industrialists can carry on their production with less capital and the leasing company can also
earn good amount of profit.
(5)
NBFCs, mainly the Housing Finance companies provide housing finance on easy term and
conditions. They play an important role in fulfilling the basic human need of housing finance.
Housing Finance is generally needed by middle class and lower middle class people. Hence,
NBFCs are blessing for them.
(6)
NBFCs, mainly investment companies provide advice relating to wise investment of funds as
well as how to spread the risk by investing in different securities. They protect the small
investors by investing their funds in different securities. They provide valuable services to
investors by choosing the right kind of securities which will help them in gaining maximum
rate of returns. Hence, NBFCs plays an important role by providing sound and wise
investment advice.
(7)
19
NBFCs accept deposits forms convenient to public. Generally, they receive deposits from
public by way of depositor a loaner in any form. In turn the NBFCs issue debentures, units
certificates, savings certificates, units, etc. to the public.
(9)
NBFCs play a very important role in the economic growth of the country. They increase the
rate of growth of the financial market and provide a wide variety of investors. They work on
the principle of providing a good rate of return on saving, while reducing the risk to the
maximum possible extent. Hence, they help in the survival of business in the economy by
keeping the capital market active and busy. They also encourage the growth of wellorganized business enterprises by investing their funds in efficient and financially sound
business enterprises only. One major benefit of NBFCs speculative business means investing
in risky activities. The investing companies are interested in price stability and hence
NBFCs, have a good influence on the stock- market. NBFCs play a very positive and active
role in the development of our country.
Receiving benefits:
20
Lending money:
Another important function of nbfcs is lending money to public. Non- banking financial
companies provide financial assistance through.
(a) Hire purchase finance:
Hire purchase finance is given by nbfcs to help small important operators,
professionals, and middle income group people to buy the equipment on the basis on
Hire purchase. After the last installment of Hire purchase paid by the buyer, the
ownership of the equipment passes to the buyer.
(b) Leasing Finance:
In leasing finance, the borrower of the capital equipment is allowed to use it, as a
hire, against the payment of a monthly rent. The borrower need not purchase the
capital equipment but he buys the right to use it.
(c) Housing Finance:
NBFCs provide housing finance to the public, they finance for construction of
houses, development of plots, land, etc.
(v/s)
While commercial banks and non-banking financial companies are both financial
intermediaries (middleman) receiving deposits from public and lending them. Commercial
bank is called as Big brother while the NBFC is called as the Small brother. But there
are some important differences between both of them, they are as follows:
No.
Commercial Banks.
Issue of cheques:
In case of commercial banks, a cheque
Rate of interest:
Commercial bank offer lesser rate of
NBFCs.
banks.
Types of assets:
NBFCs specialize in one types of asset.
For e.g.: Hire purchase companies
commercial banks hold a variety of
companies meeting the criteria of asset base of Rs.100 crores, whether accepting
deposits or not, or holding public deposits of Rs.20 crores or more. Sl.No. Description /
Compliance requirement Comments.
As we are aware, the guidelines for introduction of ALM system by banks and all India
financial intuitions have already been issued by Reserve Bank of India and the system has
become operational. Since the operations of financial companies also give rise to Asset
24
In the normal course, NBFC'S are exposed to credit and market risks in view of the
asset-liability transportation. With liberalization in Indian financial markets over the
last few years and growing integration of domestic with external markets and entry of
MNC's for meeting the credit needs of not only the corporate but also the retail
segments, the risks associated with NBFC's operations have become complex and
large, requiring strategic management. NBFCs are now operating in a fairly
deregulated environment and are required to determine on their own, interest rates on
deposits, subject to the ceiling of maximum rate of interest on deposits they can offer
on deposits prescribed by the Bank; and advances on a dynamic basis. The interest
rates on investments of NBFC's in Government and other securities are also now
market related. Intense pressure on the management of NBFC's to maintain a good
balance among spreads, profitability and long-term viability. Imprudent liquidity
management can put NBFC's earnings and reputation at great risk.
2.
NBFC's need to address these risks in a structured manner by upgrading their risk
management and adopting more comprehensive Asset-Liability Management (ALM)
practices than has been done hitherto. ALM, among other function, is also concerned
with risk management and provides a comprehensive and dynamic framework for
measuring, monitoring and managing liquidity and interest rate equity and
commodity price risks of major operators in the financial system that needs to be
closely integrated with the NBFC's business strategy. It involves assessment of
various types of risks and altering the asset-liability portfolio in a dynamic way in
order to manage risks.
25
This note lays down broad guidelines in respect of interest rate and liquidity risks
management systems in NBFC's which form part of the Asset-Liability Management
(ALM) function. The initial focus of the ALM function would be to enforce the risk
management discipline i.e. managing business after assessing the risks involved. The
objective of good risk management systems should be that these systems will evolve
into a strategic tool for NBFC's management.
4.
ALM Organisation
Risk parameters
Risk identification
Risk management
26
ALM has to be support by a management philosophy which clearly specifies the risk policies
and tolerance limits. This framework needs to be built on sound methodology with necessary
information system as back up. Thus, information is the key to the ALM process. It is,
however, recognized that varied business profiles of NBFC's in the public and private sector
do not make the adoption of a uniform ALM System for all NBFC's feasible.
NBFC's have heterogeneous organizational structures, capital base, asset sizes management
profile, business activities and geographical spread. Some of them have large number of
branches and agents/ brokers whereas some have unitary offices.
ALM ORGANISATION
(a)
(b)
(c)
The ALM Support Groups consisting of operating staff should be responsible for
analyzing, monitoring and reporting the risk profiles to the ALCO. The staff should
also prepare forecasts (simulations) showing the effects of various possible changes
in market conditions related to the balance sheet and recommended the action needed
to adhere to NBFC's internal limits.
27
Measuring and managing liquidity needs are vital for effective operation of NBFCs. By
ensuring an NBFC's ability to meet its liabilities as they become due, liquidity management
can reduce the probability of an adverse situation developing. The importance of liquidity
transcends individual institution, as liquidity shortfall in one institution can have
repercussions on the entire system. NBFCs management should measure not only the
liquidity positions of NBFCs on an ongoing basis but also examine how liquidity
requirements are likely to involve under different assumptions.
Experience shows that assets commonly considered as liquid, like Government securities and
other money market instruments, could also become illiquid when the market and players are
unidirectional.
NBFCs holding public deposits are required to invest up to a prescribed percentage (15% as
on date) of their public deposits in approved securities in terms of liquid asset requirement of
section 45-IB of the RBI Act,1934. Residuary Non-Banking Companies (RNBCs) are
required to invest up to 80% of their deposits in a manner as prescribed in the Directions
issued under the said Act. There is no such requirements for NBFCs which are not holding
public deposits. Thus various NBFCs including RNBCs would be holding in their
investments portfolio securities which could be broadly classifiable as 'mandatory securities'
(under obligation of law) and other 'non-mandatory securities'.
28
name,
regulations.
29
on of
(ii)
(iii)
avoided.
30
(ii)
(iii)
(iv)
(v)
(vi)
31
business
of
these
companies, in the context of the obligations cast by the amended provisions of the RBI
Act on the NBFCs, viz., requirement of applying for registration in case of existing
32
The draft bill has been named as Financial Companies Regulations Bill, 2000. All
the NBFCs will be known as Financial Companies instead of NBFCs.
(ii)
The term 'public deposit' has been defined in the Bill for the first time and the
definition would mean the same as at present in the NBFC Directions.
(iii)
There would be a nine member Advisory Council for Financial Companies under the
Chairmanship of Depute Companies and other experts in related areas to advise the
Reserve Bank.
33
NBFCs holding /accepting public deposits would be prohibited from carrying on any
non- financial business without the prior approval of the Reserve Bank and the nonfinancial business presently carried on by them would have to be wound up or
transferred to a subsidiary within three years. Any other business or fee-based activity
like insurance agency business, portfolio management, etc., would require prior
approval of the Reserve Bank.
The requirement of obtaining the COR from the Reserve Bank would be compulsory
for all financial Companies, irrespective of whether the companies accept public
deposits or not. However, the nonpublic Deposit taking financial companies would
require minimum owned fund of Rs.25 Lakh, whereas the public deposit taking
financial companies would require minimum net owned fund (NOF) of Rs.2 Crores
and a specific authorization from the Reserve Bank to accept public deposits.
(ii)
(iii)
The requirement of creation of reserve fund would be applicable only to the financial
companies accepting public deposits, as against the earlier requirement applicable to
all NBFCs.
(iv)
Unsecured depositors would have first charge on liquid assets and assets created out
of the deployment of the part of the reserve fund.
34
The financial companies would require prior approval of the Reserve Bank for any
change in the name, change in the management or change in the location of the
registered office.
(ii)
The Company Law Board (CLB) would continue to be authority to adjudicate the
claims of depositors
payment of a part of deposit, attach assets of the fraudulent financial company and
appoint Recovery Officer(s) for management of such asset. Financial company would
have no recourse to the CLB to seek deferment of the depositors' dues.
(iii)
The prohibitory provisions for unincorporated bodies would continue in the Financial
Companies Regulations Bill, but the role of exercising the powers for enforcement of
these provisions have been exclusively entrusted to State Governments, in addition to
the powers under the respective State Laws for protecting the interests of investors in
financial establishments.
(iv)
There would be powers vested in the District Magistrates to call for information and
to proceed against delinquent unincorporated bodies.
(v)
There would be a ban on the issue of advertisement for soliciting deposits by all
unincorporated bodies, irrespective of whether they are conducting financial business
or not.
35
Powers would be vested with a police officer of the rank not below that of the
Superintendent of Police Of any State to order investigations into the alleged
violations of requirement of registration by financial companies and prohibition from
acceptance of deposits by unincorporated bodies.
(viii)
Penalties have been rationalized in accordance with the severity of defaults, with the
objective that the penalty should serve as a deterrent to others. The Bill has been
introduced in the Parliament in 2000 and has since been referred to the Standing
Committee on finance.
The Government of India framed the Financial Companies Regulation Bill, 2000, to
consolidate the law relating to NBFCs and unincorporated bodies with a view to ensure
depositor protection.
38
Public deposit includes fixed or recurring deposits which are received from friends, relative,
shareholders of a public limited company and money raised in issued of unsecured
debentures or bond. It does not include money raised from issue of secured debentures and
bond or from borrowings of banks or financial institutions, deposits from directors or intercorporate deposits received from foreign national citizens and from shareholders of private
limited companies.
(2)
The NBFCs which have net owned capital of less than Rs. 25 Lakh will not be permitted to
accept deposit from public. In order to raise funds the NBFC can borrow from some other
sources also.
(3)
All NBFCs will have to submit their annual financial statements and returns if they accept
public deposits.
(4)
The RBI has given directions to NBFCs accepting public deposits to regulate the amount of
deposit, rate of interest, time period of deposits, brokerage and borrowings received by them.
The directions do not include amount received or generated by central bank or state
government. Amount received from IDBI, ICICI Nabard, Electricity Board and IFCI are also
not included in directions of RBI. Amount received from mutual funds, directors of firm and
shareholders also do not come under the category of amount received for regulation from
RBI.
(5)
39
Period of deposits:
The deposits can be accepted for a minimum period of 12 months and a maximum period of 2
year.
(7)
Register of depositors:
The NBFCs have to maintain a register of depositors with details like name, address, amount,
date of each deposit, maturity period and other details according to the required by RBI.
(8)
Credit rating:
To protect the public NBFCs are required to get themselves approved by the RBI through
credit rating agencies. The NBFCs which have not owned funds of Rs 25 Lakhs can obtain
public deposits if they are credit rated and they receive a minimum investment grade for their
fixed deposits from an approved rating agency.
The credit analysis and Research Limited (CARE) gives the minimum rating of BBB
in triple B rating.
The investment information and credit Rating Agency of India LTD. (ICRA) gives
rating of (FA-).
FITCH Rating India Pvt. Ltd. Provides (BBB-) as its acceptable rating.
If the credit rating is below the minimum investment grate the NBFCs has to send
report to the RBI within 15 days of received the grating. During that time the NBFC
has to stop accepted the deposits and within 3 years makes the repayment to the
depositors.
40
41
Banks are subject to income recognition, asset classification and provisioning norms;
capital adequacy norms; single and group borrower limits; prudential limits on capital
market exposures; classification and valuation norms for the investment portfolio;
CRR / SLR requirements; accounting and disclosure norms and supervisory reporting
requirements.
ii)
NBFCs D are subject to similar norms as banks except CRR requirements and
prudential limits on capital market exposures. However, even where applicable, the
norms apply at a rigour lesser than those applicable to banks. Certain restrictions
apply to the investments by NBFCs D in land and buildings and unquoted shares.
iii)
Capital adequacy norms; CRR / SLR requirements; single and group borrower limits;
prudential limits on capital market exposures; and the restrictions on investments in
land and building and unquoted shares are not applicable to NBFCs ND.
iv)
Current Status:
Financial Linkages between Banks and NBFC:
Banks and NBFCs compete for some similar kinds of business on the asset side. NBFCs
offer products/services which include leasing and hire-purchase, corporate loans, investment
in non-convertible debentures, IPO funding, margin funding, small ticket loans, venture
capital, etc. However NBFCs do not provide operating account facilities like savings and
current deposits, cash credits, overdrafts etc.
NBFCs avail of bank finance for their operations as advances or by way of banks
subscription to debentures and commercial paper issued by them.
43
types
of
loans/advances
by
NBFCs
to
their
subsidiaries,
group
companies/entities.
iv) Finance to NBFCs for further lending to individuals for subscribing to Initial Public
Offerings (IPOs).
v) Bridge loans of any nature, or interim finance against capital/debenture issues and/or in
the form of loans of a bridging nature pending raising of long-term funds from the
market by way of capital, deposits, etc. to all categories of Non-Banking Financial
Companies, i.e. equipment leasing and hire-purchase finance companies, loan and
investment companies, Residuary Non-Banking Companies (RNBCs).
vi) Should not enter into lease agreements departmentally with equipment leasing
companies as well as other Non-Banking Financial Companies engaged in equipment
leasing.
44
Current Status:
Structural Linkages between Banks and NBFCs:
Banks and NBFCs operating in the country are owned and established by entities in the
private sector (both domestic and foreign), and the public sector.
Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks including foreign
banks, which may or may not have a physical operational presence in the country. There has
been increasing interest in the recent past in setting up NBFCs in general and by banks, in
particular.
Investment by a bank in a financial services company should not exceed 10 per cent of the
banks paid-up share capital and reserves and the investments in all such companies, financial
institutions, stock and other exchanges put together should not exceed 20 per cent of the
banks paid-up share capital and reserves.
Banks in India are required to obtain the prior approval of the concerned regulatory
department of the Reserve Bank before being granted Certificate of Registration for
establishing an NBFC and for making a strategic investment in an NBFC in India. However,
foreign entities, including the head offices of foreign banks having branches in India may,
45
46
CURRENT NEWS.
1) MAT changes will hit NBFCs.
Tuesday, September 1, 2009
The Direct Taxes Code (DTC) is slowly being put to deeper scrutiny. As is always the case,
some of the changes may be ushered in with good intention, but inept drafting leaves the door
open for needless litigation.
The newly crafted Minimum Alternate Tax (MAT) is a case in point. Ever since Rajiv Gandhi
unleashed the book profits tax on India Inc. in 1987, it has generated controversies galore and
kept all the courts busy interpreting the intention and scope of the provision.
At present, MAT is applicable to corporate at 15 per cent on published profits. The nominal
tax rate for the corporate sector is 33.99 per cent and the effective rate after all
deductions/concessions stands at around 22.22 per cent.
MAT computation
MAT, despite the controversy surrounding its existence, has lived by the year for now 22
years and promises to open a new chapter from April 1, 2011.
The mechanics, as per the DTC, is simple. MAT will now be 2 per cent of the value of gross
assets as against 15 per cent on profits. For this purpose the value of gross assets would be
computed as shown in the Table.
It may be noted that even business assets such as sundry debtors, loans and advances will
now form part of the computation of gross assets for the purpose of the levy.
Further, while in the vertical form of the balance sheet the current assets are disclosed net of
current liabilities, the proposed MAT computation mechanism does not envisage a reduction
of current liabilities from current assets.
47
48
3) On AM ET advertisement:
(Start September 23, 2009 4:488.)
Reserve Bank of India's (RBI) latest guideline allowing non-banking finance companies
(NBFC) to issue semi-closed system pre-paid payment instruments will boost the growth of
m-commerce in India. Industry sources estimate that, in the next 3 years, India could have 25
mn m-commerce users up from the current 5 mn. The industry currently stands at a market
size of $10bn.
"The new guideline will increase the reach of the services to the people at the bottom of
pyramid. Now, people not having any bank account could pay their utility bill by electronic
transfer. We expect a five fold increase in number of people using m-commerce services,"
said Anil Gajwani, Senior Vice President - Technology, Comviva Technologies.
50
51
Deposits of NBFCs must have an adequate rating by one of the credit rating agencies
in India.
b)
c)
d)
Take a close and critical look at the financing activities of such NBFCs to decipher
their long run viability.
52
f)
Avoid any NBFC offering unusually high interest rates which seem `significantly
higher' than prevalent rates offered by banks on similar maturity periods.
g)
Must prefer an NBFC with a nationwide network and more oriented towards retail/
consumer finance activities due to significantly lower default rates Apart from these
dos and don'ts, the Reserve Bank of India also offers a good data bank of the NBFCs
which may be trusted. Particularly its website at www.rbi.org. in has a list of over
500 NBFCs all over India which are authorized by the RBI to accept public deposits.
Similarly, the site also gives out the names of hundreds of NBFCs which have been
denied registration. Also, there's substantial information on RBI rules and
notifications in the subject Overall and valuable source of information and
assessment regarding investment in NBFCs. Such an information base could
sometimes prompt investors to even look for alternatives.
Talking about alternatives, Sheer Singh says that private sector banks rapidly expanding their
branch network in urban centers of India may emerge as preferred alternatives to those
NBFCs which are not among the top 20 in India.
He adds that high quality service being offered by new private sector banks; beefing up of
service and product levels by public sector banks; and expansion of networks and product
lines of the top NBFCs should offer investors other alternatives.
On the future of NBFCs, Singh says: ``we foresee a bright future for the top 20 NBFCs in
India.'' But it's not going to be a cakewalk. Says Singh: ``Considering that in the future
consumer-led growth rather than institutional-led growth would be the trend, top NBFCs
which focus on retail lending predominantly can substantially leverage their networks to offer
similar lending products offered by banks.'' The focus has to be on marketing and service
initiatives, he adds. And the mantra for success: Offer cut-throat competition to banks.
53
ALAPUZHA DISTRICT
KERALA
AL BARR FINANCE HOUSE LTD
5, YESHWANT COLONY,
ROYAPETTAH,
6TH FLOOR,
54
ALTA BHAVAN,
DELHI - 110092
KAROL BAGH,
JALANDHR.
55
Conclusion:
NBFCs are gaining momentum in last few decades with wide variety of products and
services. NBFCs collect public funds and provide loan able funds. There has been significant
increase in such companies since 1990s. They are playing a vital role in the development
financial system of our country. The banking sector is financing only 40 per cent to the
trading sector and rest is coming from the NBFC and private money lenders. At the same line
50 per cent of the credit requirement of the manufacturing is provided by NBFCs. 65 per cent
of the private construction activities was also financed by NBFCs. Now they are also
financing second hand vehicles. NBFCs can play a significant role in channelizing the
remittance from abroad to states such as Gujarat and Kerala.
56
Bibliography
BOOKS:1) Statutory guidances for non- banking financial companies. Taxman.
WEBSITES:-
57
www.NBFC.com
www.RBI.com
www. How Stuff Works.com
www. Wikipedia.com
58