NON-BANKING FINANCIAL COMPANY - NBFC Non-banking financial companies, or NBFCs, are financial institutions that provi de banking services,

but do not hold a banking license. These institutions are n ot allowed to take deposits from the public. Nonetheless, all operations of thes e institutions are still covered under banking regulations. NBFCs do offer all sorts of banking services, such as loans and credit facilitie s, retirement planning, money markets, underwriting, and merger activities. The number of non-banking financial companies has expanded greatly in the last sever al years as venture capital companies, retail and industrial companies have ente red the lending business. A Non-Banking Financial Company (NBFC) is a company re gistered under the Companies Act, 1956 and is engaged in the business of loans a nd advances, acquisition of shares/stock/bonds/debentures/securities issued by G overnment or local authority or other securities of like marketable nature, leas ing, hire-purchase, insurance business, chit business but does not include any i nstitution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A non-banking instit ution which is a company and which has its principal business of receiving depos its under any scheme or arrangement or any other manner, or lending in any manne r is also a non-banking financial company (Residuary non-banking company). NBFCs are doing functions akin to that of banks; however there are a few differe nces: (i) an NBFC cannot accept demand deposits; (ii) an NBFC is not a part of the payment and settlement system and as such an NBFC cannot issue cheques drawn on itself; and (iii) (iii) deposit insurance facility of Deposit Insurance and Credit Guarant ee Corporation is not available for NBFC depositors unlike in case of banks.

ROLE OF NBFCs: According to EPW Research Foundation (EPWRFThe Indian economy is going through a period of rapid `financial liberalisation'. Today, the `intermediation' is bein g conducted by a wide range of financial institution through a plethora of custo mer friendly financial products. The segment consisting of Non-Banking Financial Companies (NBFCs), such as equipment leasing/hire purchase finance, loan and in vestment companies, etc. have made great strides in recent years and are meeting the diverse financial needs of the economy. In this process, they have influenc ed the direction of savings and investment. The resultant capital formation is i mportant for our economic growth and development. Thus, from both the macroecono mic perspective and the structure of the Indian financial system, the role of NB FCs has become increasingly important. The crucial role of Non Banking Finance I nstitutions (NBFIs) in broadening access to financial services, and enhancing co mpetition and diversification of the financial sector has been well recognized. The main advantages of these companies lie in their ability to lower transaction s costs of their operations, their quick decision-making ability, customer orien tation and prompt provision of services. While NBFIs are sometimes accurate, as more often, NBFIs play a range of roles that complement banks. Further, Status N ote on NBFCs NBFIs can add to economic strength to the extent they enhance the r esilience of the financial system to economic shocks. A well developed and prope rly regulated NBFI sector is thus an important component of broad, balanced, eff icient financial system that spreads risks and provides a sound base for economi c growth and prosperity. A robust banking and financial sector is critical for activating the economy an d facilitating higher economic growth. Financial intermediaries like NBFCs have a definite and very important role in the financial sector, particularly in a de veloping economy like ours. They are a vital link in the system. After the proli

feration phase of 1980s and early 90s, the NBFCs witnessed consolidation and now the number of NBFCs eligible to accept deposits is around 600, down from 40000 in early 1990s. The number of asset financing NBFCs would be even lower, around 350, the rest are investment and loan companies. Almost 90% of the asset financi ng NBFCs are engaged in financing transportation equipments and the balance are in financing equipments for infrastructure projects. Therefore, the role of nonbanking sector in both manufacturing and services sector is significant and they play the role of an intermediary by facilitating the flow of credit to end cons umers particularly in transportation, SMEs and other unorganized sectors. NBFCs due to their inherent strengths in the areas of fast and easy access to market i nformation for credit appraisal, a well-trained collection machinery, close moni toring of individual borrowers & personalized attention to each client as well a s minimum overhead costs, are in a better position to cater to these segments. Now, unlike in the past, NBFCs are very well regulated and supervised. Just like banks they are required to be registered with RBI, follow stringent prudential norms prescribed by RBI in the matters of capital adequacy, credit/investment no rms, asset-liability management, income recognition, accounting standards, asset classification, provisioning for NPA and several disclosure requirements. Besi des this, RBI also supervises the functioning of NBFCs by conducting annual on-s ite audits through its officials. Such a rigorous regulatory framework ensures t hat NBFCs function properly and follow all the guidelines of RBI. Thus in all re spect the monitoring of NBFCs is similar to or in some case more stringent than banks. The role of NBFCs in creation of productive national assets can hardly be underm ined. This is more than evident from the fact that most of the developed economi es in the world have relied heavily on lease finance route in their developmenta l process, e.g., lease penetration for asset creation in the US is as high as 30 % as against 3-4% in India. A conducive and enabling environment has been create d for the NBFC industry globally, which has helped it grow and become an essenti al part of the financial sector for accelerated economic growth of the countries . This is not the case in our country. It is, therefore, obvious that the develo pment process of the Indian economy shall have to include NBFCs as one of its ma jor constituents with a very significant role to play. NBFCs, as an entity, play a very useful role in channelising funds towards acqui sition of commercial vehicles and consequently, aid in the development of the ro ad transport industry. Needless to mention, the road transport sector accounts for nearly 70% of goods movement and 80% of passenger movement across the length and breadth of the country and the role of NBFCs in the growth and development of this sector has been historically acknowledged by several committees set up b y the Government and RBI, over the years. In fact, RBIs latest report titled Repo rt on trends on progress of banking in India 2002-2003" observes: Notwithstanding their diversity, NBFCs are characterised by their ability to prov ide niche financial services in the Indian economy. Because of their relative or ganisational flexibility leading to a better response mechanism, they are often able to provide tailor-made services relatively faster than banks and financial institutions. This enables them to build up a clientele that ranges from small b orrowers to established corporates. While NBFCs have often been leaders in finan cial innovations, which are capable of enhancing the functional efficiency of th e financial system, instances of unsustainability, often on account of high rate s of interest on their deposits and periodic bankruptcies, underscore the need f or reinforcing their financial viability. The report further adds, The regulatory challenge is, thus, to design a supervisory framework that is abl e to ensure financial stability without dampening the very spirit of manoeuvrabi lity and innovativeness that sustains the sector. As recognized by RBI & Expert Committees / Taskforce Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation Broad base economic development

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Irreplaceable supplement to bank credit in rural segments major thrust on semi-urban, rural areas & first time buyers / users To finance economically weaker sections Huge contribution to the State exchequer 70-80% of Commercial Vehicles are finance driven Indian economy is more dependent on roads Heavy Govt. outlay for mega road projects Heavy replacement demand anticipated 30 lacs commercial vehicles by the year 200

Another Rs.6000 Crores required for phasing out old commercial vehicles CRISIL in its study has placed commercial vehicle financing under low risk catego Each commercial vehicle manufactured, sold and financed gives employment to mini persons (direct and indirect)

IMPORTANCE OF NBFCS According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the i nstitutional structure of the organized financial system in India. NBFCs perform a significant and important role in our financial system. They facilitate the p rocess of channelising of public savings and provide better return to the deposi tors. We are aware that due to liberalization and globalisation, banking industr y and financial sector has gone through many reforms. In the present economic en vironment it is very difficult to cater need of society by Banks alone so role o f 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 funct ional specialisation. The role of NBFCs as effective financial intermediaries ha s 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 competitiv e basis. The distinction between banks and non-banks has been gradually getting blurred since both the segments of the financial system engage themselves in man y similar types of activities. At present, NBFCs in India have become prominent in a wide range of activities like hire-purchase finance, equipment lease financ e, loans, investments, etc. By employing innovative marketing strategies and dev ising tailor-made products, NBFCs have also been able to build up a clientele ba se among the depositors, mop up public savings and command large resources as re flected in the growth of their deposits from public, shareholders, directors and their companies, and borrowings by issue of non-convertible debentures, etc. According to KPMG survery The Indian Non Banking Finance Company (NBFC) sector h as often been relegated to the shadows, in most discussions on the Indian Financ ial Services (FS) industry. Banks, insurance companies and capital market player s take centre stage and invariably, NBFCs attract public attention only during t imes of crisis. Little attention has been paid to the silent but effective manne r in which NBFCs have spread their operations across the country. NBFCs have pro vided financial solutions to sections of society who hitherto were at the mercy of unorganized players or credit and savings products, which were delivered on e conomically and socially usurious terms. ronically, in recent times, NBFC are on ce 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 maligne d sector, a degree of caution needs to be instilled within potential investors i n NBFCs, who need to clearly understand the true drivers of value for finance co mpanies. This understanding is imperative to enable a better judgment of the int rinsic worth of NBFCs. This article proceeds to illustrate the key factors respo nsible for the strong re-rating of the NBFC sector, as well as discuss the valid ity 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 attribut ed to the very problems affecting the sector which have resulted in the purging

of several players, leaving the fittest few to dominate the landscape. Taking th e Reserve Bank of Indias (RBI) definition of reporting NBFCs as a proxy for non-dor mant 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 presen t, NBFCs in general are well-capitalized with strong parent support. A majority of active NBFCs reported capital adequacy ratios exceeding 12 percent.

REGULATORY SET UP OF NBFCs RBI sets three-tier NBFC regulation: MUMBAI, July 19: The Reserve Bank of India has formulated a 3-tier framework for the regulation of non-banking finance companies. This will include off-site mon itoring, on-site inspection and an expanded role of auditors in the supervision of NBFCs. It has also decided to set up a joint committee with the Institute of Chartered Accountants of India (ICAI) to suggest new formats of financial disclo sures to indicate the true financial health of NBFCs. Disclosing this to the officers incharge of the financial companies wing of the 15 regional offices of the Department of Supervision, the RBI governor Dr C Ran garajan admitted that the present balance sheets and profit and loss accounts of NBFCs do not indicate the true health of the NBFCs and also their compliance with the financial norms of RBI. A dialogue has been initiated with the ICAI and a committee will devise a form at of report, on the pattern of the long form of audit reports in the case of ba nks, in which the auditor of an NBFC will be required to give his opinion on cer tain specific aspects, he said. That apart, the RBI would ask all the auditors of NBFC to certify important returns from NBFCs. To carry out specific inspec tion of NBFCs, we are considering to engage firms of chartered accoutants to car ry out inspections, he said. The RBI has decided to regulate NBFCs on the basis of their size, nature of oper ations and acceptance of public deposits. Rangarajan said that the main thrust o f supervision of NBFCs will henceforth be through an appropriate mechanism of of f-site monitoring. He said that the formats of the annual returns have been revi sed to provide for certain data regarding the core assets and income of a compan y. In order to make the data furnished more acceptable and free from the errors noticed earlier, these returns would now have to be certified by auditors of the NBFC. Companies with an asset size of over Rs 100 crore have already been asked to fur nish an annual return giving the comparative position of their operational data for three years in regard to certain items in their balance sheets, profit & los s accounts and key ratios. Till recently the supervisory mechanism was minimal and confined to finding ou t whether the companies were complying with the directions issued with regard to their deposit acceptance activities, Rangarajan said. Stating that the NBFCs were not a homogenous group, Rangarajan said since the NBFCs operations were di fferent besides size variations, one could not have a uniform prudential regulat ion and place a fixed limit on raising public deposits. As per the new RBI regulatory framework, those companies which were registered u nder the earlier scheme and those which will be issued registration certificates will be required to furnish a half-yearly return on the prudential norms, certi fied by their auditors. A proper analysis of the data contained in these returns will provide valuable information as to the working of the companies and their financial health which will also trigger off on-site inspections of some of the companies. "It is recognised that the receipt of returns and their prompt and ef fective scrutiny would be the means to exercise effective off-site surveillance over the NBFCs," said Rangarajan. Since a system of computer processing and anal ysis of the data would be required towards this end, the central bank will soon appoint an information technology firm to develop an appropriate software packag

e, select necessary hardware and train the bank staff. NBFCs that have sizeable assets and also those NBFCs whose off-site monitoring throws up signals of unhea lthy financial position or non-compliance with the prudential norms will be insp ected periodically by the RBI. The emphasis on on-site inspection will be direct ed towards the examination of quality of assets, besides checking if the NBFCs a re complying with the regulatory and supervisory stipulations. Rangarajan said that decisions on issue or refusal of registration certificates, issue of prohibitory order and initiation of winding up proceedings will be tak en on the basis of the inspection reports. Based on the recommendations of the S hah and Khanna Committees, the RBI has decided to expand the role of the auditor s in the supervision of NBFCs."In view of the urgent needs to carry out inspecti ons of some of the NBFCs, a proposal ius under consideration to engagage firms o f chartered accountants to carry out a round of special examination of these NBF Cs," said the governor. He however added that the reports will be further examin ed and scrutinised by the Department of Supervision and the auditors will be use d only as special vehicles.