ACKNOLEGMENT

WE THE STUDENTS OF NIRMILA MEMORIAL FOUNDATION

COLLEGE OF COMMERCE AND SCIENCE. 2ST YEAR IN
MANAGEMENT STUDIES HAVE A GREAT PLEASURE IN
PRESENTING OUR EFFORTS OF DEVELOPING A COMPLET
PROJECT IN A VERRY SATASFACTORY MANNER OUR EFFORTS
HAS BEEN A SUCCESS DUE TO THE COOPERATION OF THE
ENTIRE DEPARTMENT WITH WHICH THE PROJECT OF THIS
MAGNITUDE , GIVEN RISTRECTION IN TIME COUD NOT HAVE
BEEN POSSIBLE WE OVE A DEBTH OF GRATITUDE TO OUR
PROJECT GUIDE PROFFESOR MS. NIDHI WITH OUT HER HELP
EXPERT GUIDANCE AND IN VALUABLE COOPERATION THIS
PROJECT HAVE NOT BEEN POSSIBLE WE ARE GREATLY
THANKFUL TO OUR HONORABLE PRICIPAL DR. MADHUR.NAIK
SIR AND THE MANAGEMENT FOR PROVIDING THE FACILITY TO
COMPLET THE PROJECT

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 GROUPMEMBERS

NAME ROLL.NO
ALFAN. KOTADIA 21
TEJAS. KADAM 18
MAYANK. ARORA 1

TABLE OF CONTEND

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SR.NO TOPIC PG.NO
1 INTRODUCTION TO NBFC 4
2 IMPORTANCE 7
3 9
CLASSIFICATION
4 ROLES 11
5 HOW NBFCS ARE DIFFERENT FROM BANKS 13
6 ELIGIBILITY CRITERIA FOR STARTING NBFC 16
7 CLASSIFICATION OF NBFCS ACCORDING TO 18
RBI
8 GENERAL NORMS: BY RBI 20
9 RECOMMENDATION & CONCLUSION 22
10 BIBLOGRAPHY 24

1. INTRODUCTION

India growth story is most talked about and why not? The country’s GDP is pegged to
grow at a rate of more than 7.5%. India’s Stock market has given the best returns in the
last 6-8 months of more than 60%. The household savings continues to be as high as 35%

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inspite of slowdown and recessionary pressures. Forex reserves have increased by more
than 10billion $ in the 1st quarter and the total reserves are up, to 262 billion $. Current
Budget focuses on reducing fiscal deficit by the measures of disinvestments and
improving the infrastructure of the country. Overall the country is all set to grow at a
rapid pace and the government has laid a strong foundation for this. Having realized this,
one can strongly say that sufficient liquidity has to be maintained in the system to
enhance credit and economic growth.

NFBIs (Non Banking Financial Institutions) play an important role in realizing the
economic growth. They have access to larger markets and provide financing for almost
all activities.

Think of buying an automobile, and one will find financing companies that provide EMIs
at the doorstep. Think of buying any electronics, one would be amazed the number of
financing companies that one can approach to make a deal. Thus the competitiveness of
the companies combined with fierce penetration across the length of the country enables
NBFIs to grow at a rapid pace.

In the following document, NBFIs in India are discussed with a focus on NBFCs. The
total assets managed by NBFCs amount to 95,727 crore as on June 2009. This accounts
for around 9.1 % of assets of the total financial system [1]. Hence the business carried out
by NBFCs is of great importance for overall development of the country. Thus RBI is
implementing various schemes and policies for maintaining enough liquidity for funding
requirements. Also various regulations are levied on NBFCs for making the overall
system robust.
Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial
system given their unique position of providing complimentary and competitiveness to
banks. They score over the traditional banks by providing enhanced equity and risk-based
products.

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 The Hierarchy of NBFCs in India

NBFIs

Non-banking
Development Insurance Primary
financial Mutual
Finance companie dealers
companies Funds
Institutions (DFIs) s (PDs)
(NBFCs)

Hire
Investment Equipment Loan
Purchase
Company Leasing Company
Leasing

Non-Banking Financial Company (NBFC)

Non-Banking Financial Company (NBFC) is a company registered under the Companies

Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc
They also provide products/services that includes margin funding, leasing and hire
purchase, corporate loans, investment in non-convertible debentures, IPO funding, small
ticket loans, venture capital etc.
As in the diagram, NBFCs are classified into four categories
1. Hire- Purchase Leasing

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 2. Loan Company
3. Investment Company
4. Equipment Leasing Company

Some of the prominent NBFCs in India are

 Infrastructure Development Finance Corporation (IDFC)

 Rural Electric Corporation ( REC)
 Industrial Finance corporation of India (IFCI )
 GE Capital

Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were permitted to
accept public deposits

2. IMPORTANCE OF NBFC’S
According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the
institutional structure of the organized financial system in India. NBFCs perform a
significant and important role in our financial system. They facilitate the process of
channelising of public savings and provide better return to the depositors. We are aware
that due to liberalization and globalisation, banking industry and financial sector has gone
through many reforms. In the present economic environment it is very difficult to cater
need of society by Banks alone so role of Non Banking Finance Companies and Micro
Finance Companies become indispensable. The activities of non-banking financial
companies (NBFCs) in India have undergone qualitative changes over the years through
functional specialisation. The role of NBFCs as effective financial intermediaries has

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been well recognised as they have inherent ability to take quicker decisions, assume
greater risks, and customise their services and charges more according to the needs of the
clients. While these features, as compared to the banks, have contributed to the
proliferation of NBFCs, their flexible structures allow them to unbundle services
provided by banks and market the components on a competitive basis. The distinction
between banks and non-banks has been gradually getting blurred since both the segments
of the financial system engage themselves in many similar types of activities. At present,
NBFCs in India have become prominent in a wide range of activities like hire-purchase
finance, equipment lease finance, loans, investments, etc. By employing innovative
marketing strategies and devising tailor-made products, NBFCs have also been able to
build up a clientele base among the depositors, mop up public savings and command
large resources as reflected in the growth of their deposits from public, shareholders,
directors and their companies, and borrowings by issue of nonconvertible debentures, etc.

According to KPMG survery The Indian Non Banking Finance Company (NBFC) sector
has often been relegated to the shadows, in most discussions on the Indian Financial
Services (FS) industry. Banks, insurance companies and capital market players take
centre stage and invariably, NBFCs attract public attention only during times of crisis.
Little attention has been paid to the silent but effective manner in which NBFCs have
spread their operations across the country. NBFCs have provided financial solutions to
sections of society who hitherto were at the mercy of unorganized players for credit and
savings products, which were delivered on economically and socially usurious terms.
ronically, in recent times, NBFCs are once again in the spotlight for their perceived
strengths and capabilities rather than their problems. While this re-rating ought to bring
cheer to a much maligned sector, a degree of caution needs to be instilled within potential
investors in NBFCs, who need to clearly understand the true drivers of value for finance
companies. This understanding is imperative to enable a better judgment of the intrinsic
worth of NBFCs. This article proceeds to illustrate the key factors responsible for the
strong re-rating of the NBFC sector, as well as discuss the validity of each of these
factors, as actual drivers of value. Today, the NBFC sector is as financially sound as it
has ever been.To an extent, this can be attributed to the very problems affecting the sector

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which have resulted in the purging of several players, leaving the fittest few to dominate
the landscape. Taking the Reserve Bank of India‘s (RBI) definition of ‗reporting NBFCs‘
as a proxy for non-dormant players, a mere 24 NBFCs held 92.7 percent of the total
assets of all NBFCs in 2005-2006. The balance assets, amounting to less than 8 percent
of the total, were fragmented across 439 NBFCs. In addition to this consolidation, at
present, NBFCs in general are well-capitalized with strong parent support. A majority of
active NBFCs reported capital adequacy ratios exceeding 12 percent.

3. CLASSIFICATION OF NBFCS

From December 6, 2006 NBFCs registered with RBI have been reclassified as

1. Asset Finance Company (AFC)

2. Investment Company (IC)
3. Loan Company (LC)

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Asset finance Companies (AFC)
AFC are financial institutions whose principal business is of financing physical assets
such as automobiles, tractors, construction equipments material handling equipments and
other machines.
eg;
⇒ Bajaj Auto Finance corp
⇒ Fullerton India etc

Investment Companies (IC)

ICs generally are involved in the business of shares, stocks, bonds, debentures issued by
government or local authority that are marketable in nature
Eg:
⇒ Stock Broking Companies
⇒ Gilt firms

Loan Companies (LC)

LCs are loan giving companies which operate in the business of providing loans. These
can be housing loans, gold loans etc
Eg:

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 ⇒ Mannapuram Gold Finance
⇒ HDFC

4. ROLE OF NBFC’S
According to EPW Research Foundation (EPWRFThe Indian economy is going through
a period of rapid `financial liberalisation'. Today, the `intermediation' is being conducted
by a wide range of financial institution through a plethora of customer friendly financial
products. The segment consisting of Non-Banking Financial Companies (NBFCs), such
as equipment leasing/hire purchase finance, loan and investment companies, etc. have
made great strides in recent years and are meeting the diverse financial needs of the
economy. In this process, they have influenced the direction of savings and investment.
The resultant capital formation is important for our economic growth and development.
Thus, from both the macroeconomic perspective and the structure of the Indian financial
system, the role of NBFCs has become increasingly important. The crucial role of Non
Banking Finance Institutions (NBFIs) in broadening access to financial services, and

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enhancing competition and diversification of the financial sector has been well
recognized. The main advantages of these companies lie in their ability to lower
transactions costs of their operations, their quick decision-making ability, customer
orientation and prompt provision of services. While NBFIs are sometimes seen as akin to
banks in terms of the products and services offered, this is strictly not accurate, as more
often, NBFIs play a range of roles that complement banks. Further, Status Note on
NBFCs NBFIs can add to economic strength to the extent they enhance the resilience of
the financial system to economic shocks. A well developed and properly regulated NBFI
sector is thus an important component of broad, balanced, efficient financial system that
spreads risks and provides a sound base for economic growth and prosperity.

ON GLOBAL CRISIS
According to CARE: NBFC sector faced significant stresses on asset quality, liquidity
and funding costs due to the global economic slowdown & its impact on the domestic
economy. While all the NBFCs were affected, the impact varied according to the
structural features of each NBFC. Asset-liability maturity (ALM) profiles, type of assets
financed and origination / collection models followed were the primary differentiators
within NBFCs. The support provided by the Reserve Bank of India (RBI) highlighted the
explicit acceptance of the systemic importance of the sector. FY10 was marked by re-
aligning of the liability profiles, tightening of lending norms coupled with closing down
of many of the unsecured loan segments. On a structural basis, the sector is now more
robust due to the lessons learned by NBFCs from this crisis. Profitability is expected to
be lower than historical levels due to conservative ALM management, higher
provisioning and avoidance of high yielding unsecured loan segments. However profits
are at the same time expected to be much more stable & less susceptible.

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5. HOW NBFCS ARE DIFFERENT FROM BANKS

 A NBFC cannot issue cheques, to their customers and is not a part of the
payment and settlement system
 Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation
(DICGC) is not available for NBFC depositors
 They are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months.
 They cannot offer interest rates higher than the ceiling rate prescribed by RBI
from time to time. (Currently the ceiling rate is 12.5%)
 They cannot offer gifts/incentives or any other additional benefit to the
depositors.

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  They should have minimum investment grade credit rating, from the credit
rating agencies

Pulic Deposits in NBFCs & RNBCs

35000
30000
INR (Crores)

25000 Public Deposits

20000
15000 Expon. (Public
10000 Deposits)

5000
0
98

00

02

04

06

08

10
19

20

20

20

20

20

20
Year

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Residuary Non-Banking Companies (RNBCs)

They form a part of NBFCs however their functioning is different from the regular
NBFCs Residuary Non-Banking Company is a class of NBFC whose principal business
is receiving of deposits, under any scheme or arrangement. The deposits received do not
involve investment, asset financing, or loans.
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
• Sahara Mutual Fund was the first RNBC started in India.

Ceiling on RNBCs taking Deposits

• 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 that the aggregate amount of liabilities to the depositors
• To ensure the safely of public investments RNBCs are required to invest in a
portfolio comprising of highly liquid and secured instruments viz. Central/State
Government securities, fixed deposit of scheduled commercial banks (SCB),
Certificate of deposits of SCB/FIs, units of Mutual Funds, etc

Interest Payment on Deposits

• The amount payable by way of interest, premium, bonus or other advantage, by a
RNBC in respect of deposits received shall not be less than 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.

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• Further, an 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.

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6. ELIGIBILITY CRITERIA FOR STARTING NBFC

Initial Procedure
• The Start up NBFC should be incorporated under the Companies Act, 1956
• It should be registered with RBI, under Section 45-I of the RBI Act, 1934
• The company is required to submit the application for registration in the
prescribed format along with necessary documents for RBI's consideration. RBI
then issues certificate of registration after satisfying itself that the conditions as
enumerated in Section 45-IA of the RBI Act, 1934 are satisfied
• For registration with RBI, the company is required to fill the application, which
can be downloaded from www.rbi.org.in/scripts/BS/viewforms.aspx.
• After downloading the EXCEL based application form, data should be keyed in, it
can be uploaded in the RBI's Secure website https://secweb.rbi.org.in. Once
uploaded, the company will get a CoR (Company Application Reference
Number). Subsequently, the company should take the hard copy of the same with
the supported documents and submit it to the concerned regional office.

NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant Banking

Companies/Stock Broking Companies etc need not be registered with RBI they are
governed by SEBI. Insurance companies holding a valid certificate of registration are
regulated by IRDA, Housing finance companies regulated by National Housing Bank.

Nature of Business
The company should not have its principal business as
(a) Agricultural operations
(b) Industrial activity
(b) The purchase or sale of any goods (other than securities) or the providing of any
services

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(c) The purchase, construction or sale of immovable property, Moreover no portion of the
income should be derived from the financing of purchases, constructions or sales of
immovable property by other persons

Capital Requirement

The start up company should have a minimum net owned fund (NOF) of Rs 25 lakh
which is raised to Rs 200 lakh from April 21, 1999.
Net Owned Fund
Paid-up capital and free reserves, minus accumulated losses, deferred revenue
expenditure and other intangible assets
Less, (i) Investments in shares of subsidiaries/companies in the same group/ all other
NBFCs
(ii) The book value of debentures/bonds/ outstanding loans and advances, including hire
purchase and lease finance made to, and deposits with, subsidiaries/ companies in the
same group, in excess of 10% of the owned funds.

Note: NBFCs that were in existence who had previously NOF of Rs25 Lakhs (before the
act) are given a time period of 3 years to attain a NOF of 200 Lakhs. However RBI can
still extend this time period for an additional 3 years subject to the condition that such
NBFCs should intimate the RBI about attaining the NOF within 3 months from the date
of attainment

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7. Classification of NBFCs according to RBI

NBFCs are classified into two categories

(i) NBFC accepting deposits from customers
(ii) NBFC which does not take deposits from customers

• NBFCs taking deposits from public are referred to as NBFC-D and those who

dont take public deposits are referred to as NBFC- ND

• Those NBFCs NBFCs-ND with an asset size of Rs.100 crore and above (as per
the last audited balance sheet) are designated as systemically important NBFCs-
ND (NBFCs-ND-SI)
• NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent by March 31,
2010 and 15 per cent by March 31, 2011

Regulations on NBFCs taking Deposits

1. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a
valid certificate of registration with authorization to accept public deposits can
accept/hold public deposits
2. New NBFCs are not allowed to raise public deposits for period of two years from
the date of registration. After completion of two years, detailed review is taken of
the company by the regulator
3. 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
4. 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.

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 5. NBFCs cannot accept deposits from NRI except deposits by debit to NRO
account of NRI provided such amount do not represent inward remittance or
transfer from NRE/FCNR account.
6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without
credit rating) are not entitled to accept public deposits
Evaluation of the quality of management in respect of the promoters/directors is taken
into consideration while giving allowance for taking public deposits

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8. GENERAL NORMS: BY RBI

Maintenance of Liquid Assets:

Minimum level of liquid asset to be maintained by NBFCs is 15 % 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 10% 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.

Creation and Maintenance of Reserve fund:

All NBFCs are required to create a reserve fund and transfer not less than 20% of
their net profit (before declaration of dividend) to the fund

Submission of Certificate:
All NBFCs 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
(Company Application Reference Number) under Section 45-IA of the RBI Act,
1934.

Information Exchange:
NBFCs are 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.

Prudential Norms
NBFCs should comply with RBIs policies and directions regarding prudential norms
and Deployment of funds

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 o Income Reconition
o Accounting Standards
o Classification of Assets
o Provision for NPA (Non Performing assets)
o Capital Adequacy
o Declaration of Purpose, Quantum & Advances of Loan

Directions given to NBFCs and its Auditors by RBI

• RBI is empowered to give directions to NBFCs and their auditors in matters
related to
1) Profit and Loss account
2) Balance Sheet
3) Books of Accounts
4) Disclosure of liabilities
5) Any other matters or queries

• Special Audits can be done by the RBI of any NBFC and also appoint auditors for
the same
• RBI can prohibit any NBFC for taking public deposit for violation of any
provisions of RBI act
• Nomination facility for deposits held by a NBFC is introduced. It is on the lines of
bank deposits
• If an NBFC is downgraded to below minimum investment grade rating, it has to
stop accepting public deposit, report the position within fifteen working days to
the RBI.
• Once downgraded, within 3 years It has to reduce the amount of excess 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

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9. RECOMMENDATION & CONCLUSION

Recommendation:

⇒ Domestic Financial markets can be integrated by making NBFC‘s Channel

partners to Banks. It will help in better allocation and funds availability. It will
also help in better management of Financial services sector in India..
⇒ Enhancing the credit delivery mechanisms: The credit delivery mechanism needs
to be more transparent and hassle free. There should be more stringent norms for
the defaulters.
⇒ Strengthening the professionalism of NBFC sector through education and
training: NBFC‘s are organized players. Regulatory body needs to educate people
about NBFC.
⇒ To reduce in interest cost and hence benefit the ultimate consumer.

Conclusion
It is encouraging that the NBFC sector‘s importance is finally being acknowledged across
FS market constituents as well as the regulator. However, the importance attached to the
sector is often transcending into misplaced exuberance. Over simplified and vague
drivers for NBFC valuations such as strategic fit and customer base, can never substitute
dispassionate business analytics. A rational assessment of the intrinsic values of NBFCs
factoring issues such as past performance, structural weaknesses of the sector (for
instance funding disadvantages), along with an identification of real capabilities are
essential to ensure that the equilibrium between price paid and value realized is reached
to the extent possible. In the absence of this, India is sure to witness the re-opening of the
NBFC horror story albeit with a new chapter on the erosion of NBFC investment values
affecting investors across categories. Ratings of the NBFCs whose profitability and asset
quality was affected due to the crisis were supported by their strong parentage. Based on
the parental strength some players have raised further equity and also managed to re-align
their business models while maintaining their solvency. overall positive outlook on the

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sector due to the better ALM position, focus on relatively safer asset classes and the
demonstrated acceptance of the sector as systemically important by the regulator. The
crisis has imposed an overall sense of ‗caution‘ even for the newer entrants in the market.
Also going forward higher capital adequacy norms will put a fairly conservative cap on
the leverage of the sector thereby improving the credit profile of many entities (NBFC-
NDSI)

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10. BIBLOGRAPHY

Web References
• www.rbi.org.in, accessed from 19th April to 23rd April 2010
• nbfc.rbi.org.in, accessed from 19th April to 23rd April 2010
• www.economywatch.com, accessed from 19th April to 23rd April 2010
• www.forbes.com
• acronyms.thefreedictionary.com/MFI

Publications
• Statutory guide for Non Banking Financial Companies- Taxmann’s Publications
• RBI Annual Report 2008-2009
• business aspects in banking & insurance by CHAMPA. l

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