Financial Companies

NBFCs
Non-banking financial institutions (NBFIs), engaged in varied financial activities are part of the Indian financial system providing a range of financial services. NBFCs are incorporated under the Companies Act, 1956. NBFCs can be classified into two broad categories, viz., (i) NBFCs accepting public deposit (NBFCs-D) and (ii) NBFCs not accepting/holding public deposit (NBFCs-ND).

 Residuary Non-Banking Companies(RNBCs) are another category of NBFCs whose principal business is acceptance of deposits and investing in approved securities. In the interest of depositors, RBI has evolved a regulatory framework the salient features of guidance of depositors.

 Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. 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 mobilisation of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.

 NBFCs include a loan company, an investment company, asset finance company ( i.e. a company conducting the business of equipment leasing or hire purchase finance) and Residuary NonBanking Companies. An NBFC must be registered with the Reserve Bank of India (RBI) and have specific authorization to accept deposits from the public. NBFC must display the Certificate of Registration or a certified copy thereof at the Registered office and other offices/branches.

 Registration of an NBFC with the RBI merely authorizes it to conduct the business of NBFC. RBI does not guarantee the repayment of deposits accepted by NBFCs.

 NBFCs excluding RNBCs cannot -Offer a rate of interest on deposits more than that approved by RBI from time to time (at present 12.5%). -Accept deposit for a period less than 12 months and more than 60 months -Offer any gifts/incentives to solicit deposits from public.

 RNBCs should

-offer a rate of interest of not less than 5% per annum on term deposits and 3.5% on daily deposits, both compounded annually, under extant directions. -RNBCs cannot accept deposits for a period less than 12 months and more than 84 months.

 NBFCs including RNBCs can -accept deposit only against issue of proper receipt. -The receipt should bear the name of the company and should be signed by an authorized official of the company.

RBI (Banker of Banks)

The Reserve Bank of India (RBI) is India's central banking institution, which controls the monetary policy of the Indian rupee. It was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934. The RBI plays an important part in the development strategy of the Government of India

Main functions
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government.

Monetary authority
The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors.

Issuer of currency
The bank issues and exchanges or destroys currency notes and coins that are not fit for circulation. The objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves. RBI maintains the economic structure of the country so that it can achieve the objective of price stability as well as economic development, because both objectives are diverse in themselves.

Policy rates and reserve ratios

Bank Rate RBI lends to the commercial banks through its discount window to help the banks meet depositors demands and reserve requirements for long term. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if RBI wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of 25 June 2012 the bank rate was 9.0%.

Cash Reserve Ratio

Every commercial bank has to keep certain minimum cash reserves with RBI. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to effect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 4.75%.

Liquidity Ratio (SLR)

Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

Statutory Liquidity Ratio (SLR)

Statutory Liquidity Ratio (SLR). Statutory Liquidity Ratio (SLR) is a term used in the regulation of banking in India. It is the amount which a bank has to maintain in the form of cash, gold or approved securities. The quantum is specified as some percentage of the total demand and time liabilities ( i.e. the liabilities of the bank which are payable on demand anytime, and those liabilities which are accruing in one months time due to maturity) of a bank. This percentage is fixed by the Reserve Bank of India.

Repo rate
The rate at which the RBI lends money to commercial banks is called repo rate. It is an instrument of monetary policy. Whenever banks have any shortage of funds they can borrow from the RBI. A reduction in the repo rate helps banks get money at a cheaper rate and vice versa.

Reverse Repo rate

Reverse Repo rate is the rate at which the RBI borrows money from commercial banks. Banks are always happy to lend money to the RBI since their money are in safe hands with a good interest. An increase in reverse repo rate can prompt banks to park more funds with the RBI to earn higher returns on idle cash. It is also a tool which can be used by the RBI to drain excess money out of the banking system.

 Bank Rate 9.00% 17.04.2012 Repo Rate 8.00% 17.04.2012 Rev. Repo Rate 7.00% 17.04.2012 CRR 4.5% 17.09.2012 S L R 23.00% 11.08.2012