NBFC in India and Their Future

1. NBFCs --Role And FutureWhat is a non-banking financial company (NBFC)?A N

on Banking Financial Company (NBFC) is a company registeredunder the Companies A
ct, 1956 of India, engaged in the business ofloans and advances, acquisition of
shares, stock, bond sire-purchase,insurance business, or chit business: but does
not include anyinstitution whose principal business is that includes agricultur
e orindustrial activity; or the sale, purchase or construction of immovableprope
rty.A non-banking financial company (NBFC) is a company registeredunder the Comp
anies Act, 1956 and is engaged in the business ofloans and advances, acquisition
ofshares/stock/bonds/debentures/securities issued by government orlocal authori
ty or other securities of like marketable nature, leasing,hire-purchase, insuran
ce business, chit business, but does not includeany institution whose principal
business is that of agricultureactivity, industrial activity, sale/purchase/cons
truction of immovableproperty.A non-banking institution which is a company and w
hich has itsprincipal business of receiving deposits under any scheme orarrangem
ent or any other manner, or lending in any manner is also anon-banking financial
company (residuary non-banking company).What is difference between banks & NBFC
s ? (i) a NBFC cannot accept demand deposits (demand deposits are funds deposite
d at a depository institution that are payable on demand -- immediately or withi
n a very short period -- like your current or savings accounts.) (ii) it is not
a part of the payment and settlement system and as such cannot issue cheques to
its customers; and
2. (iii) deposit insurance facility of DICGC is not available for NBFC depos
itors unlike in case of banks.Every NBFC should be registered with RBI In terms
of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be
registered with RBI to commence or carry on any business of non-banking financi
al institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. Ho
wever, to obviate dual regulation, certain category 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 reg
istered 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 Fun
ds Act, 1982 or housing finance companies regulated by National Housing Bank.Wha
t are the different types of NBFCs registered with RBI?With effect from December
6, 2006 the above NBFCs registered withRBI have been classified as(i) Asset Fin
ance Company (AFC) - AFC would be defined as anycompany which is a financial ins
titution carrying on as its principalbusiness the financing of physical assets s
upporting productive /economic activity, such as automobiles, tractors, lathe ma
chines,generator sets, earth moving and material handling equipments,moving on o
wn power and general purpose industrial machines.i) Investment Company (IC)(iii)
Loan Company (LC)NBFCs not Registered with RBI
3. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, C
ompanies 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 Se
ction 45-IA of the RBI Act, 1934 subject to certain conditions. Housing Finance
Companies are regulated by National Housing Bank, Merchant Banker/Venture Capita
l Fund Company/stock- exchanges/stock brokers/sub-brokers are regulated by Secur
ities and Exchange Board of India, Insurance companies are regulated by Insuranc
e Regulatory and Development Authority. Chit Companies are regulated by the resp
ective State Governments Nidhi Companies are regulated by Ministry of Company Af
fairs, Government of IndiaCan all NBFCs accept deposits and what are the require
ments foraccepting public deposits? All NBFCs are not entitled to accept public
deposits. Only those NBFCs holding a valid certificate of registration with auth
orization to accept public deposits can accept/hold public deposits.Some points
to note i) The NBFCs are allowed to accept/renew public deposits for a minimum p
eriod 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 ceili

ng rate prescribed by RBI from time to time. The present ceiling is

4. 11 per cent per annum. The interest may be paid or compounded at rests no
t shorter than monthly rests. iii) NBFCs cannot offer gifts/incentives or any ot
her additional benefit to the depositors. iv) NBFCs (except certain AFCs) should
have minimum investment grade credit rating. v) The deposits with NBFCs are not
insured. vi) The repayment of deposits by NBFCs is not guaranteed by RBI. vii)
There are certain mandatory disclosures about the company in the Application For
m issued by the company soliciting deposits.Whether NBFCs can accept deposits fr
om NRIs? Effective from April 24, 2004, NBFCs cannot accept deposits from NRI ex
cept deposits by debit to NRO account of NRI provided such amount do not represe
nt inward remittance or transfer from NRE/FCNR (B) account. However, the existin
g NRI deposits can be renewed.What are the requirements for registration with RB
I?A company incorporated under the Companies Act, 1956 and desirousof commencing
business of non-banking financial institution asdefined under Section 45 I(a) o
f the RBI Act, 1934 should have aminimum net owned fund of Rs 25 lakh (raised to
Rs 2 crore fromApril 21, 1999).The company is required to submit its applicatio
n for registration inthe prescribed format alongwith necessary documents for ban
ksconsideration. The bank issues certificate of registration aftersatisfying its
elf that the conditions as enumerated in Section 45-IA ofthe RBI Act, 1934 are s
atisfied.
5. Where one can find a list of registered NBFCs and instructionsissued to N
BFCs?The list of registered NBFCs is available on the web site of ReserveBank of
India [ Get Quote ] and can be viewed at www.rbi.org.in. Theinstructions issued
to NBFCs from time to time are also hosted at theabove site. Besides, instructi
ons are also issued through OfficialGazette notifications. Press releases are al
so issued to draw attentionof the public/NBFCs.Can all NBFCs accept deposits and
what are the requirements foraccepting public deposits?All NBFCs are not entitl
ed to accept public deposits. Only thoseNBFCs holding a valid certificate of reg
istration with authorisationto accept public deposits can accept/hold public dep
osits. The NBFCsaccepting public deposits should have minimum stipulated net own
edfund and comply with the directions issued by the bank.Is there any ceiling on
acceptance of public deposits? What is the rateof interest and period of deposi
t which NBFCs can accept?Yes, there is ceiling on acceptance of public deposits.
An NBFCmaintaining required NOF/CRAR and complying with the prudentialnorms can
accept public deposits as follows: Category of NBFC Ceiling on public deposits
AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and hav
ing minimum investment grade credit rating 1.5 times of NOF or Rs 10 crore which
ever is less 4 times of NOF LC/IC with CRAR of 15% and having minimum investment
grade credit rating 1.5 times of NOFPresently, the maximum rate of interest a N
BFC can offer is 11%.The interest may be paid or compounded at rests not shorter
thanmonthly rests.The NBFCs are allowed to accept/renew public deposits for ami
nimum period of 12 months and maximum period of 60 months.They cannot accept dep
osits repayable on demand.
6. The RNBCs have different norms for acceptance of deposits whichare explai
ned elsewhere in this booklet.What are the salient features of NBFCs regulations
which thedepositor may note at the times of investment?Some of the important re
gulations relating to acceptance of depositsby NBFCs are as under: i) The NBFCs
are allowed to accept/renew public deposits for a minimum period of 12 months an
d maximum period of 60 months. They cannot accept deposits repayable on demand.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by
RBI from time to time. The present ceiling is 11 per cent per annum. The intere
st 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 ra
ting. v) The deposits with NBFCs are not insured. vi) The repayment of deposits
by NBFCs is not guaranteed by RBI. vii) There are certain mandatory disclosures
about the company in the Application Form issued by the company soliciting depos
its.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 shal
l be deemed always to have includedany receipt of money by way of deposit or loa

n or in any other formbut does not include: amount raised by way of share capita
l, or contributed as capital by partners of a firm; amount received from schedul
ed bank, co-operative bank, a banking company, State Financial Corporation, IDBI
or any other institution specified by RBI; amount received in ordinary course o
f business by way of security deposit, dealership deposit, earnest money, advanc
e against orders for goods, properties or services;
7. amount received by a registered money lender other than a body corporate;
amount received by way of subscriptions in respect of a Chit. Paragraph 2(1)(xi
i) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserv
e 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: 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 auth
ority or foreign government or any foreign citizen/authority/person; any amount
received from financial institutions; any amount received from other company as
inter-corporate deposit; amount received by way of subscriptions to shares, stoc
k, bonds or debentures pending allotment or by way of calls in advance if such a
mount is not repayable to the members under the articles of association of the c
ompany; amount received from shareholders by private company; amount received fr
om directors or relative of the director of a NBFC; amount raised by issue of bo
nds or debentures secured by mortgage of any immovable property or other asset o
f the company subject to conditions; the amount brought in by the promoters by w
ay of unsecured loan; amount received from a mutual fund; any amount received as
hybrid debt or subordinated debt; any amount received by issuance of Commercial
Paper.Thus, the directions have sought to exclude from the definition ofpublic
deposit amount raised from certain set of informed lenderswho can make independe
nt decision.Are Secured debentures treated as Public Deposit? If not whoregulate
s them?Debentures secured by the mortgage of any immovable property orother asse
t of the company if the amount raised does not exceed themarket value of the sai
d immovable property or other asset areexcluded from the definition of public de
posit in terms of Non-Banking Financial Companies Acceptance of Public Deposits
8. (Reserve Bank) Directions, 1998. Secured debentures are debtinstruments a
nd are regulated by Securities & Exchange Board ofIndia.Is nomination facility a
vailable to the Depositors of NBFCs?Yes, nomination facility is available to the
depositors of NBFCs. TheRules for nomination facility are provided for in secti
on 45QB of theReserve Bank of India Act, 1934. Non-Banking Financial Companiesha
ve been advised to adopt the Banking Companies (Nomination)Rules, 1985 made unde
r Section 45ZA of the Banking Regulation Act,1949.Accordingly, depositor/s of NB
FCs are permitted to nominate, oneperson to whom, the NBFC can return the deposi
t in the event of thedeath of the depositor/s. NBFCs are advised to accept nomin
ationsmade by the depositors in the form similar to one specified under thesaid
rules, viz Form DA 1 for the purpose of nomination, and FormDA2 and DA3 for canc
ellation of nomination and variation ofnomination, respectively.What else should
a depositor bear in mind while depositing moneywith NBFCs?While making deposits
with a NBFC, the following aspects should beborne in mind: (i) Public deposits
are unsecured. (ii) A proper deposit receipt which should, besides the name of t
he depositor/s state the date of deposit, the amount in words and figures, rate
of interest payable and the date of maturity should be insisted. The receipt sha
ll be duly signed by an officer authorised by the company in that behalf. (iii)
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 cor
rectness 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.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 compani
es (AFC),cannot accept public deposits. An exception is made in case of
9. unrated AFC companies with CRAR of 15% which can accept publicdeposit up
to 1.5 times of the NOF or Rs 10 crore whichever is lowerwithout having a credit
rating. A NBFC may get itself rated by any ofthe four rating agencies namely, C
RISIL, CARE, ICRA and FITCHRatings India Pvt. Ltd.What are the symbols of minimu

m investment grade rating ofdifferent companies?The symbols of minimum investmen

t grade rating of the Creditrating agencies are:Name of rating agencies : Level
of minimum investment grade creditrating (MIGR) CRISIL: FA- (FA MINUS) ICRA: MA(MA MINUS) CARE: CARE BBB (FD) FITCH Ratings India Pvt. Ltd: tA-(ind)(FD) It ma
y be added that A- is not equivalent to A, AA- is not equivalent to AA and AAAis not equivalent to AAA.Can a NBFC which is yet to be rated accept public depos
it?No, a NBFC cannot accept deposit without rating except an EL/HPcompany comply
ing with prudential norms and having CRAR of 15%,though not rated, may accept pu
blic deposit up to 1.5 times of NOF orRs 10 crore whichever is less.When a compa
nys rating is downgraded, does it have to bring downits level of public deposits
immediately or over a period of time?If rating of a NBFC is downgraded to below
minimum investmentgrade rating, it has to stop accepting public deposit, report
theposition within fifteen working days to the RBI and reduce withinthree years
from the date of such downgrading of credit rating, theamount of excess public
deposit to nil or to the appropriate extentpermissible under paragraph 4(4) of N
on-Banking FinancialCompanies Acceptance of Public Deposits ( Reserve Bank) Dire
ctions,1998; however such NBFC can renew the matured public depositssubject to r
epayment stipulations specified above and compliancewith other conditions for ac
ceptance of deposits.In case a NBFC defaults in repayment of deposit what course
ofaction can be taken by depositors?
10. If a NBFC defaults in repayment of deposit, the depositor canapproach Co
mpany Law Board or Consumer Forum or file a civil suitto recover the deposits.Wh
at is the role of Company Law Board in protecting the interest ofdepositors? How
one can approach it?Where a non-banking financial company fails to repay any de
posit orpart thereof in accordance with the terms and conditions of suchdeposit,
the Company Law Board (CLB) either on its own motion oron an application from t
he depositor directs, by order, the non-banking financial company to make repaym
ent of such deposit orpart thereof forthwith or within such time and subject to
suchconditions as may be specified in the order.As explained above the depositor
can approach CLB by mailing anapplication in prescribed form to the appropriate
bench of theCompany Law Board according to its territorial jurisdiction with th
eprescribed fee.We hear that in a number of cases official liquidators have been
appointed on the defaulting NBFCs. What is their role and how onecan approach th
em?Official Liquidator is appointed by the court after giving the companyreasona
ble opportunity of being heard in a winding up petition. Theliquidator performs
duties of winding up and such duties in referencethereto as the court may impose
.Where the court has appointed an official liquidator or provisionalliquidator,
he becomes custodian of the property of the company andruns the day-to-day affai
rs of the company.He has to draw up a statement of affairs of the company inpres
cribed form containing particulars of assets of the company, itsdebts and liabil
ities, names/residences/occupations of its creditors,the debts due to the compan
y and such other information as may beprescribed. The scheme is drawn up by the
liquidator and same is putup to the court for approval.The liquidator realises t
he assets of the company and arranges torepay the creditors according to the sch
eme approved by the court.The liquidator generally inserts advertisement in the
newspaperinviting claims from depositors/investors in compliance with court
11. orders. Therefore, the investors/depositors should file the claimswithin
due time as per such notices of the liquidator.The Reserve Bank also provides a
ssistance to the depositors infurnishing addresses of the official liquidator.Co
nsumer courts play a useful role in attending to depositorsproblems. Can one app
roach consumer forum, civil court, CLBsimultaneously?Yes, a depositor can approa
ch any or all of the redressal authoritiesi.e consumer forum, court or CLB.Is th
ere an Ombudsman for hearing complaints against NBFCs?No, there is no Ombudsman
for hearing complaints against NBFCs.What are various prudential regulations app
licable to NBFCs?The Bank has issued detailed directions on prudential norms, vi
deNon-Banking Financial Companies Prudential Norms (ReserveBank) Directions, 199
8. The directions interalia, prescribe guidelineson income recognition, asset cl
assification and provisioningrequirements applicable to NBFCs, exposure norms, c
onstitution ofaudit committee, disclosures in the balance sheet, requirement ofc
apital adequacy, restrictions on investments in land and buildingand unquoted sh

ares.Please explain the terms owned fund and net owned fund inrelation to NBFCs?
Owned Fund means aggregate of the paid-up equity capital and freereserves as dis
closed in the latest balance sheet of the company afterdeducting therefrom accum
ulated balance of loss, deferred revenueexpenditure and other intangible assets.
The amount of investments of such company in shares of itssubsidiaries, companie
s in the same group and all other NBFCs andthe book value of debentures, bonds,
outstanding loans and advancesmade to and deposits with subsidiaries and compani
es in the samegroup is arrived at. The amount thus calculated, to the extent ite
xceeds 10% of the owned fund, is reduced from the amount of ownedfund to arrive
at Net Owned Fund.What are the responsibilities of the NBFCs accepting/holding p
ublicdeposits with regard to submission of Returns and other informationto RBI?
12. The NBFCs accepting public deposits should furnish to RBI: i. Audited ba
lance sheet of each financial year and an audited profit and loss account in res
pect of that year as passed in the general meeting together with a copy of the r
eport of the Board of Directors and a copy of the report and the notes on accoun
ts furnished by its Auditors; ii. Statutory Annual Return on deposits - NBS 1; i
ii. 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 liquid assets; v
. Half-yearly Return on prudential norms; vii. Half-yearly ALM Returns by compan
ies having public deposits of Rs 20 crore and above or with assets of Rs 100 cro
re and above irrespective of the size of deposits ; viii. Monthly return on expo
sure to capital market by companies having public deposits of Rs 50 crore and ab
ove; and ix. A copy of the Credit Rating obtained once a year along with one of
the Half-yearly Returns on prudential norms as at (v) above.What are the documen
ts or the compliance required to be submittedto the Reserve Bank of India by the
NBFCs not accepting/holdingpublic deposits?The NBFCs having assets size of Rs 1
00 crore and above but notaccepting public deposits are required to submit a Mon
thly Return onimportant financial parameters of the company. All companies notac
cepting public deposits have to pass a board resolution to the effectthat they h
ave neither accepted public deposit nor would accept anypublic deposit during th
e year.However, all the NBFCs (other than those exempted) are required tobe regi
stered with RBI and also make sure that they continue to beeligible to remain Re
gistered. Further, all NBFCs (including non-deposit taking) should submit a cert
ificate from their StatutoryAuditors every year to the effect that they continue
to undertake thebusiness of NBFI requiring holding of CoR under Section 45-IA o
f theRBI Act, 1934.RBI has powers to cause Inspection of the books of any compan
y andcall for any other information about its business activities.
13. For this purpose, the NBFC is required to furnish the information inresp
ect of any change in the composition of its board of directors,address of the co
mpany and its directors and the name/s and officialdesignations of its principal
officers and the name and office addressof its auditors. With effect from April
1, 2007 non-deposit takingNBFCs with assets size of Rs 100 crore and above have
been advisedto maintain minimum CRAR of 10% and shall also be subject tosingle/
group exposure norms.The NBFCs have been made liable to pay interest on the over
duematured deposits if the company has not been able to repay thematured public
deposits on receipt of a claim from the depositor.Please elaborate the provision
s.As per Reserve Banks directions, overdue interest is payable to thedepositors
in case the company has delayed the repayment ofmatured deposits, and such inter
est is payable from the date ofreceipt of such claim by the company or the date
of maturity of thedeposit whichever is later, till the date of actual payment. I
f thedepositor has lodged his claim after the date of maturity, thecompany would
be liable to pay interest for the period from the dateof claim till the date of
repayment. For the period between the date ofmaturity and the date of claim it
is the discretion of the company topay interest.Can a company pre-pay its public
deposits?A NBFC accepts deposits under a mutual contract with itsdepositors.In
case a depositor requests for pre-mature payment, Reserve Bankof India has presc
ribed Regulations for such an eventuality in theNon-Banking Financial Companies
Acceptance of Public Deposits(Reserve Bank) Directions, 1998 wherein it is speci
fied that NBFCscannot grant any loan against a public deposit or make prematurer
epayment of a public deposit within a period of three months (lock-in period) fr

om the date of its acceptance, however in the event ofdeath of a depositor, the
company may, even within the lock - inperiod, repay the deposit at the request o
f the joint holders withsurvivor clause / nominee / legal heir only against subm
ission ofrelevant proof, to the satisfaction of the company.An NBFC subject to a
bove provisions, if it is not a problem company,may permit after the lock-in per
iod premature repayment of a public
14. deposit at its sole discretion, at the rate of interest prescribed by th
eBank.A problem NBFC is prohibited from making premature repayment ofany deposit
s or granting any loan against public deposits/deposits, asthe case may be. The
prohibition shall not, however, apply in the caseof death of depositor or repaym
ent of tiny deposits i.e. up to Rs10,000 subject to lock-in period of 3 months i
n the latter case.What is the liquid asset requirement for the deposit takingcom
panies? Where these assets are kept? Does Depositors have anyclaims on them?In t
erms of Section 45-IB of the RBI Act, 1934 the minimum level ofliquid asset to b
e maintained by NBFCs is 15 per cent of publicdeposits outstanding as on the las
t working day of the secondpreceding quarter.Of the 15%, NBFCs are required to i
nvest not less than 10% inapproved securities and the remaining 5% can be in une
ncumberedterm deposits with any scheduled commercial bank. Thus, the liquidasset
s may consist of government securities, government guaranteedbonds and term depo
sits with any scheduled commercial bank.The investment in government securities
should be in dematerialisedform which can be maintained in Constituents Subsidia
ry GeneralLedger (CSGL) Account with a scheduled commercial bank (SCB) /Stock Ho
lding Corporation of India Limited (SHICL). In case ofGovernment guaranteed bond
s the same may be kept indematerialised form with SCB/SHCIL or in a dematerialis
ed accountwith depositories [National Securities Depository Ltd.(NSDL)/Central D
epository Services (India) Ltd. (CDSL)] through adepository participant register
ed with Securities & Exchange Boardof India (SEBI). However in case there are Go
vernment bonds whichare in physical form the same may be kept in safe custody of
SCB/SHCIL.NBFCs have been directed to maintain the mandated liquid assetsecuriti
es in a dematerialised form with the entities stated above at aplace where the r
egistered office of the company is situated.However, if a NBFC intends to entrus
t the securities at a place otherthan the place at which its registered office i
s located, it may do soafter obtaining in writing the permission of RBI. It may
be noted that
15. the liquid assets in approved securities will have to be maintained inde
materialised form only.The liquid assets maintained as above are to be utilised
for paymentof claims of depositors. However, deposit being unsecured in naturede
positors do not have direct claim on liquid assets.Please tell us something abou
t the companies which are NBFCs, butare exempted from registration?Housing Finan
ce Companies, Merchant Banking Companies, StockExchanges, Companies engaged in t
he business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi
Companies,Insurance companies and Chit Fund Companies are NBFCs but theyhave bee
n exempted from the requirement of registration underSection 45-IA of the RBI Ac
t, 1934 subject to certain conditions.Housing Finance Companies are regulated by
National HousingBank, Merchant Banker/Venture Capital Fund Company/stock-exchan
ges/stock brokers/sub-brokers are regulated by Securities andExchange Board of I
ndia, Insurance companies are regulated byInsurance Regulatory and Development A
uthority. Similarly, ChitCompanies are regulated by the respective State Governm
ents andNidhi Companies are regulated by Ministry of Company Affairs,Government
of India.There are some entities (not companies) which carry on activities liket
hat of NBFCs. Are they allowed to take deposit? Who regulatesthem?Any person who
is an individual or a firm or unincorporatedassociation of individual cannot ac
cept deposit except by way of loanfrom relatives, if his/its business wholly or
partly includes businessthat of loan, investment, hire-purchase or leasing compa
ny orprincipal business is that of receiving of deposits under any schemeor arra
ngement or in any manner or lending in any manner.What is a Residuary Non-Bankin
g Company (RNBC)? In what way itis different from other NBFCs?Residuary Non-Bank
ing Company is a class of NBFC which is acompany and has as its principal busine
ss the receiving of deposits,under any scheme or arrangement or in any other man
ner and notbeing investment, asset financing, loan company.

16. These companies are required to maintain investments as perdirections of

RBI, in addition to liquid assets. The functioning ofthese companies is differe
nt from those of NBFCs in terms of methodof mobilisation of deposits and require
ment of deployment ofdepositors funds. However, Prudential Norms Directions area
pplicable to these companies also.We understand that there is no ceiling on rais
ing of deposits byRNBCs, then how safe is deposit with them?It is true that ther
e is no ceiling on raising of deposits by RNBCs butevery RNBC has to ensure that
the amounts deposited andinvestments made by the company are not less that the
aggregateamount of liabilities to the depositors.To secure the interest of depos
itor, such companies are required toinvest in a portfolio comprising of highly l
iquid and securedinstruments viz. Central/State Government securities, fixed dep
ositof scheduled commercial banks (SCB), Certificate of deposits ofSCB/FIs, unit
s of Mutual Funds, etc.Can RNBC forfeit deposit if deposit installments are not
paidregularly or discontinued?No Residuary Non-Banking Company shall forfeit any
amountdeposited by depositor, or any interest, premium, bonus or otheradvantage
accrued thereon.Please tell us something on rate of interest payable by RNBCs o
ndeposits and maturity period of deposits?The amount payable by way of interest,
premium, bonus or otheradvantage, by whatever name called by a residuary non-ba
nkingcompany in respect of deposits received shall not be less than theamount ca
lculated at the rate of 5% (to be compounded annually) onthe amount deposited in
lump sum or at monthly or longer intervals;and at the rate of 3.5% (to be compo
unded annually) on the amountdeposited under daily deposit scheme.Further, an RN
BC can accept deposits for a minimum period of 12months and maximum period of 84
months from the date of receipt ofsuch deposit. They cannot accept deposits rep
ayable on demand.Source: Reserve Bank of India
17. Recent years have witnessed significant increase in financialintermediat
ion by the NBFCs. This is reflected in the proposal madeby the latest Working Gr
oup on Money Supply for a new measure ofliquidity aggregate incorporating NBFCs
with public deposits worthRs.20 crore and above . For regulatory purposes, NBFCs
have been classified into 3categories:(a) those accepting public deposits,(b) t
hose not accepting public deposits but engaged infinancial business and(c) core
investment companies with 90 per cent of their total assetsas investments in the
securities of their group/ holding/subsidiarycompanies.The focus of regulatory
attention is on NBFCs accepting publicdeposits.Contribution of NBFCs in the econ
omy of India1. Development of sectors like Transport & Infrastructure2. Substant
ial employment generation3. Help & increase wealth creation4. Broad base economi
c development5. Irreplaceable supplement to bank credit in rural segments6. Majo
r thrust on semi-urban, rural areas & first time buyers / users7. To finance eco
nomically weaker sections8. Huge contribution to the State exchequerRole of NBFC
S in the economic development: A critical analysis
18. A robust banking and financial sector is critical for activating theecon
omy and facilitating higher economic growth. Financialintermediaries like NBFCs
have a definite and very important role inthe financial sector, particularly in
a developing economy like ours.They are a vital link in the system.After the pro
liferation phase of 1980s and early 90s, the NBFCswitnessed consolidation and no
w the number of NBFCs eligible toaccept deposits is around 600, down from 40000
in early 1990s. Thenumber of asset financing NBFCs would be even lower, around 3
50,the rest are investment and loan companies. Almost 90% of the assetfinancing
NBFCs are engaged in financing transportationequipments and the balance are in f
inancing equipments forinfrastructure projects. Therefore, the role of non-banki
ng sector inboth manufacturing and services sector is significant and they playt
he role of an intermediary by facilitating the flow of credit to endconsumers pa
rticularly in transportation, SMEs and otherunorganized sectors.The role of NBFC
s in creation of productive national assets canhardly be undermined. This is mor
e than evident from the fact thatmost of the developed economies in the world ha
ve relied heavily onlease finance route in their developmental process, e.g., le
asepenetration for asset creation in the US is as high as 30% as against3-4% in
India. A conducive and enabling environment has beencreated for the NBFC industr
y globally, which has helped it grow andbecome an essential part of the financia
l sector for acceleratedeconomic growth of the countries. This is not the case i

n our country.It is, therefore, obvious that the development process of the Indi
aneconomy shall have to include NBFCs as one of its major constituentswith a ver
y significant role to play.NBFCs, as an entity, play a very useful role in chann
elising fundstowards acquisition of commercial vehicles and consequently, aid in
the development of the road transport industry. Needless to mention,the road tra
nsport sector accounts for nearly 70% of goods movementand 80% of passenger move
ment across the length and breadth of thecountry and the role of NBFCs in the gr
owth and development of thissector has been historically acknowledged by several
committees setup by the Government and RBI, over the years. In fact, RBI?s late
streport titled Report on trends on progress of banking in India 2002-2003? obser
ves: Notwithstanding their diversity, NBFCs are characterised by theirability to p
rovide niche financial services in the Indian economy.
19. Because of their relative organisational flexibility leading to a better
response mechanism, they are often able to provide tailor-madeservices relativel
y faster than banks and financial institutions. Thisenables them to build up a c
lientele that ranges from smallborrowers to establish corporate. While NBFCs hav
e often beenleaders in financial innovations, which are capable of enhancing the
functional efficiency of the financial system, instances ofunsustainability, oft
en on account of high rates of interest on theirdeposits and periodic bankruptci
es, underscore the need forreinforcing their financial viability. NBFCs play a cru
cial and prominent role in the rural and socialsectors of the economy by providi
ng finance for the acquisition oftrucks, buses and tractors, which operate mainl
y in rural and semi-urban India. In fact, our exposure to the rural / social sec
tors is directand pronounced, since financing for acquisition of vehicles provid
es aspin-off benefit by creating jobs and opportunities in the rural partsof our
country.With the economic revival pegged to the development of the rural andsub
urban economies, NBFCs? role in deposit mobilisation and creditextension can har
dly be over-emphasized. Given India?s largeunorganized markets, there is a huge
demand for unsecured credit inareas where banks do not have adequate reach. NBFC
s fill this gap.Specialising in funding sectors where there is a credit gap, the
corestrengths of NBFCs lie in their strong customer relationships,excellent und
erstanding of regional dynamics, well-developedcollection systems, and personali
sed services. These institutions playa crucial role in extending credit to the c
ountryside, thus preventingthe concentration of credit risk in banks. In urban a
reas too, NBFCsfocus on segments neglected by banks-non-salaried individuals,tra
ders, transporters and stock brokers. These institutions are alsoinstrumental in
generating substantial employment in these regions.The report of the Standing C
ommittee of Parliament on Finance onThe Financial Companies Regulation Bill, 200
0, which was tabled inthe Lok Sabha, acknowledges, in more than one place, the l
audablerole played by NBFCs and in Para 1 of the report, it states
Further, high
r level of customer orientation, fewer pre andpost sanction requirements and sim
ple and speedy tailor madeservices assured them a loyal clientele notwithstandin
g higher costs.Besides, the higher rate of return offered by NBFCs have drawn a
20. large number of small savers to them. Thus they work like quasibanks and
provide fund to the sectors where a credit gap exists.NBFCs have become an acce
pted and integral part of the Indianfinancial system in view of their complement
ary as well ascompetitive role. In the past decade, NBFCs have played an important
role in theexpansion of the consumer durables, housing and transport sectors.Th
e industry is now witnessing a paradigm shift, as competition iseating into the
retail finance space, which has been traditionallydominated by NBFCs. As the tra
ditional boundaries betweendifferent financial intermediaries blur, market parti
cipants aremerging to increase their size and reach, while distributing risk ove
rthe large base in an attempt to survive. According to the latestavailable numbe
rs, registered NBFCs declined from more than13,000 in 2006 to 12,809 in June 200
8. The number of deposit-takingNBFCs also decreased to 364 in 2008 from over 450
in 2007ConclusionNBFCs are gaining momentum in last few decades with wide varie
tyof products and services. NBFCs collect public funds and provide loanable fund
s. There has been significant increase in such companiessince 1990s. They are pl
aying a vital role in the developmentfinancial system of our country. The bankin
g sector is financing only40 per cent to the trading sector and rest is coming f

rom the NBFCand private money lenders. At the same line 50 per cent of the credi
trequirement of the manufacturing is provided by NBFCs. 65 per centof the privat
e construction activities was also financed by NBFCs.Now they are also financing
second hand vehicles. NBFCs can play asignificant role in channelizing the remi
ttance from abroad to statessuch as Gujarat and Kerala.NBFCs in India have becom
e prominent in a wide range of activitieslike hire purchase finance, equipment l
ease finance, loans,investments, and so on. NBFCs have greater reach and flexibi
lity intapping resources. In desperate times, NBFCs could survive owing totheir
aggressive character and customized services. NBFCs are doingmore fee-based busi
ness than fund based. They are focusing now onretailing sector-housing finance,
personal loans, and marketing ofinsurance. Many of the NBFCs have ventured into
the domain ofmutual funds and insurance. NBFCs undertake both life and generalin
surance business as joint venture participants in insurancecompanies. The strong
NBFCs have successfully emerged as
21. Financial Institutions? in short span of time and are in the process ofco
nverting themselves into Financial Super Market?. The NBFCs aretaking initiatives
to establish a self-regulatory organization (SRO).At present, NBFCs are represe
nted by the Association of Leasing andFinancial Services (ALFS), Federation of I
ndia Hire PurchaseAssociation (FIHPA) and Equipment Leasing Association of India
(ELA). The Reserve Bank wants these three industry bodies to cometogether under
one roof. The Reserve Bank has emphasis onformation of SRO Particularly for the
benefit of smaller NBFCs. Thusto conclude in the view of above NBFCs play a impo
rtant role ineconomic development.