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MEANING OF NBFC
Section 45I of the Reserve Bank of India Act, 1934 defines non-banking
financial company as
But does not include any institution whose principle business is that of
agricultural activity or any industrial activity or sale, purchase or
construction of immovable property.
[Trading in shares & securities in capital market is also falls under the
definition of the NBFC, and as a results required prior registration as a NBFC]
TYPE OF NBFC
Under the RBI Act, 1934, any Non-Banking Financial Company (NBFC) have to
get registered with Reserve bank of India (RBI). However, to obviate
dual regulation, certain category of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with RBI such
as:
Effective from April 2004, cannot accept deposits from NRIs except
deposits by debit to NRO account of NRIs provided such amount do not
represent inward remittance or transfer from NRE/FCNR (B) account,
however, the existing NRI deposits can be renewed (Note: different
foreign currency accounts opened by the Indian banks have been given
as the
Banks are permitted to extend need based working capital facilities as well
as term loans to all NBFCs registered with RBI and engaged in
infrastructure financing, equipment leasing, hire purchase, loan,
factoring and investment activities. Banks are also permitted to extend
finance to NBFCs against second hand assets financed by them.
Banks may formulate suitable loan policy with the approval of their Boards
within the prudential guidelines and exposure norms prescribed by the RBI to
extend various kinds of credit facilities to NBFCs for permitted activities.
Bank Finance to NBFCs not requiring Registration
NBFCs not requiring registration include:-
b) Nidhi Companies notified under Section 620A of the Companies Act, 1956.
Banks may take their credit decisions on the basis of usual factors like the
purpose of credit, nature and quality of underlying assets, repayment
capacity of borrowers as also risk perception, etc.
Banks satisfying the genuineness of the transaction and bona fides and
track record of NBFCs
a) Carry out all the components of standard factoring activity viz. financing of
receivables, sale-ledger management and collection of receivables.
b) At least 80 per cent of their income from factoring activity.
Other restrictions/Prohibitions
market or elsewhere.
Banks may also consider fixing internal limits for their aggregate exposure
to all NBFCs put together.
Banks should not invest in Zero Coupon Bonds (ZCBs) issued by NBFCs
without creating sinking fund by NBFCs for accrued interest and keeps it
invested in liquid investments/securities (Govt. Bonds).
Systematic Investment NBFC-ND with assets size of more than 500 Cr.
and; Non- Systematic Investment NBFC-ND with assets size of less than
500Cr
As per revised guidance, assets size of all the NBFCs in the group is to be
taken for the purpose of calculating assets size of NBFC, and if assets size of
all the NBFCs in a group exceeds 500 crore then guideline in respect of
Systematically important Non Banking financial (Non- Deposit accepting or
Holding) companies prudential norms ( Reserves Bank ) Direction, 2015 is to
be applicable.
Limit of minimum Net Owned Fund raised to 2 Crores for all NBFCs by
2017.
NBFCs with assets of less than Rs. 500 crores are exempted from the
requirement of maintaining Capital To Risk Asset Ratio (CRAR) and complying
with credit concentration norms.
Revised provisioning norms for Standard Assets: The provision for
standard assets for NBFCs-ND-SI and for all NBFCs-D, had been increased to
0.40% as follows
Returns to be file with RBI:- NBFCs-ND, with assets less than Rs. 500 crore,
including investment companies, shall henceforth be required to submit only
a simplified Annual Return the details of which shall be separately
communicated. Till such time, they are require to submit the existing
Returns.
On 27.03.2015 RBI has issued Circular no DNBR (PD) CC.No. 024/ 03.10.001/
2014-15 on Regulatory Framework for NBFCs :- RBI has issued the following
Notifications.
Loans against security of single product gold jewellery:- All NBFCs shall
maintain a Loan-to-Value (LTV) Ratio not exceeding 75 per cent for loans
granted against the collateral of gold jewellery.
Loans against security of shares:- 1. All NBFCs with asset size of `.100
crore and above shall,
(i) maintain a Loan to Value (LTV) ratio of 50% for loans granted against the
collateral of shares, and
(ii) accept only Group 1 securities (specified in SMD/ Policy/ Cir-9/ 2003 dated
March 11, 2003 as amended from time to time, issued by SEBI) as collateral
for loans of value more than Rs. 5 lakh, subject to review by the Bank.
All NBFCs with asset size of Rs.100 crore and above shall report on-line to
stock exchanges, information on the shares pledged in their favour, by
borrowers for availing loans. The infrastructure for on-line reporting to the
stock exchanges has been put in place. The exchanges may be approached
for creation of user IDs. The web links for the respective exchanges are
provided below:
As creation of DTA or DTL would give rise to certain issues impacting the
balance sheet of the company, it is clarified that the regulatory treatment to
be given to these issues are as under:
The balance in DTL account will not be eligible for inclusion in Tier I or Tier
II capital for capital adequacy purpose as it is not an eligible item of capital.
NBFCs may keep the above clarifications in mind for all regulatory
requirements including computation of CRAR and ensure compliance with
effect from the accounting year ending March 31, 2009.
Prior written approval of the Reserve Bank would also be required before
approaching the Court or Tribunal under Section 391-394 of the Companies
Act, 1956 or Section 230-233 of Companies Act, 2013 seeking order for
mergers or amalgamations with other companies or NBFCs.
Previous studies had shown that the MFIs of Bangladesh have performed
better as compared to Indian MFIs until 2007. However, this study has found
that from last five years the Indian MFIs have performed better as compared
to the MFIs of Bangladesh in most of the financial indicators.
For ensuring prudential management, banks in India are expected by the RBI
to maintain Capital Adequacy Ratios (CAR - net worth as a proportion of risk-
weighted assets) of 9% and NBFCs of 15%. In case of the MFIs of
Bangladesh, the capital adequacy is higher than Indian MFIs; therefore, they
are much safer in economic downturn. However, the trend of this ratio is
upward in case of India and downward in case of Bangladesh. This trend is a
cause of concern for the MFIs of Bangladesh. One of the major reasons for
this trend is the legal form of MFIs. In order to serve the large population of
underserved poor, several Indian NGO
MFIs are converting themselves into NBFC MFIs. Therefore they are able to
raise their capital base. In case of Bangladesh, NBFC MFIs are not
operational; therefore, they have limited scope to increase their capital
base.
In order to serve the large poor population of India, Indian MFIs have to
further increase their capital base. The conversion from NGO to NBFC will
also enhance the capital adequacy for the sector.
In terms of outreach, India and Bangladesh are at the same level. However,
the growth rate of Indian MFIs is much higher (60% CAGR in the last five
years) as compared to Bangladesh
NBFC MFIs. However, at the same time the Indian MFIs will have to explore
the cost effective means to reach to the least densely populated area.
No significant differences found between the means of Indian MFIs and the
MFIs of Bangladesh on Operational Self Sufficiency, Yield to Gross Loan
Portfolio and Return on Asset indicators. Both countries (India and
Bangladesh) have above 90% client as women borrowers, which justify the
social commitment of MFIs of their respective countries.
It can also be concluded that the equity holders will be more interested in
investing into Indian MFIs than the MFIs of Bangladesh because; they will
earn higher return on their investment. The operating efficiency of Indian
MFIs is better and increasing because of higher growth in outreach and
better utilization of work force (the main operating expense of MFIs). Despite
Moreover, at the same time, there has been a substantial widening in the
margin available to the average MFIs for covering financial expenses, loan
loss provisions and surplus.
Portfolio quality of Indian MFIs (PAR>30 days = 2.4%) is far better than the
MFIs of Bangladesh (12.1%) and global median (3.1%). This may be because
of ever-greening resulting in under-reporting by branches to the head office.
Following the Andhra Pradesh crisis of 2006, there has been a significant
delinquency crisis in southern Karnataka since 2009 and growing issues with
portfolio quality even in states like U.P. with relatively recent microfinance
activity. Concerns about consumer protection have led to the state
governmentof Andhra Pradesh stepping in with a heavy-handed ordinance
that threatens to bring all microfinance activity to a halt. While this crisis
may blow over, greater introspection on issues of multiple lending, the
quality of internal control systems, malpractices in loan collection and how
to improve portfolio management are certainly called.
It is also concluded that the MFIs, which are converting themselves into
NBFC, are financially more viable and their outreach is high. The Young MFIs
of India are more profitable, creating better quality asset, and increasing
their outreach at a higher rate as compared to the Mature and old MFIs, while
Mature and Old MFIs are utilising administrative and personnel expenses in
a much better manner.
Through the analysis of the second objective, it is found that the outreach
and capital adequacy are the prominent factors, which are affecting the
financial sustainability of Indian
MFIs. Nevertheless, the capital structure does not affect the sustainability. In
case of Bangladesh, the asset quality and capital adequacy are the main
factors, which are affecting the sustainability of MFIs. Again, the capital
structure does not affect the sustainability of MFIs.
countries and help the regulator identifying the strong and weak areas of the
sector. In addition, the existence of the new model is also expected to
facilitate MFIs to access to capital markets. Having access to sustainability
information may reduce some of the transaction uncertainty.
it is likely that the portfolio yield will decline in response to the political and
media pressure on interest rates to end-clients. The implications of such
drastic interventions by the government for the long-term sustainability of
MFIs are difficult to predict. At best it will result in a decline in capital
available for microfinance, thereby slowing down the financial inclusion
effect of MFIs operations; at worst it could destroy microfinance altogether,
resulting in throwing low income families back into the not-so-benevolent
arms of moneylenders.