AMANUALONNONBANKINGFINANCIAL INSTITUTIONS

CONTENTS 1. Introduction 2. NonBankingFinancialInstitutions(NBFIs)andInternationalRegulatorySystem 3. EmergenceofNBFCsIndianHistoricalPerspective 4. NonBankingFinancialCompanyMeaning 5. PrerequisitesforcarryingonbusinessofNBFC 6. RegulatoryFrameworkforNBFCsinIndia 7. AcceptanceofPublicDeposits 8. SubmissionofReturns 9. AntiMoneyLaunderingStandards 10. FairPracticesCode 11. MonitoringofFrauds 12. CorporateGovernance 13. MicroFinance 14. ChitFunds 15. MoneyLending 16. HousingCompanies 17. MortgageGuaranteeCompanies 18. ForeignExchangeinvestmentinNBFCs 19. TheFinancialCompaniesRegulationBill,2000

1.0INTRODUCTION NonBankingFinanceInstitutionsisaconstituentoftheinstitutionalstructureofthe organizedfinancialsysteminIndia ThetermFinanceisoftenunderstoodasbeingequivalenttomoney.However,finance exactlyisnotmoney;itisthesourceofprovidingfundsforaparticularactivity.Providing 1

orsecuringfinancebyitselfisadistinctactivityorfunction,whichresultsinFinancial Management,FinancialServicesandFinancialInstitutions.Financethereforerepresents theresourcesbywayfundsareneededforaparticularactivity.Wethusspeakof'finance' onlyinrelationtoaproposedactivity.Financegoeswithcommerce,business,bankingetc. Financeisalsoreferredtoas"Funds"or"Capital",whenreferringtothefinancialneedsof acorporatebody. TheFinancialSystemofanycountryconsistsoffinancialmarkets,financialintermediation andfinancialinstrumentsorfinancialproducts.Alltheseitemsfacilitatetransferoffunds andarenotalwaysmutuallyexclusive.Interrelationshipsbetweentheseareapartofthe systeme.g.FinancialInstitutionsoperateinfinancialmarketsandare,therefore,apartof suchmarkets. Thewordsystem,inthetermfinancialsystem,impliesasetofcomplexandclosely connectedorinterlinkedInstitutions,agents,practices,markets,transactions,claims,and liabilitiesintheeconomy.

TheFinancialIntermediariesintheFinancialSystemcanbroadlybesaidtocompriseof: Banks;and NBFCs AndNBFCscanbefurtherclassifiedintodifferenttypesdependingontheirnatureof business. Further,totalFinancesectorinIndiamaybeclassifiedintoFormalandInformalFinance. 2

Theinformalsectoroffinancemaybesaidtorefertoalleconomicactivitiesthatfall outsidetheformalsectorthatisregulatedbyeconomicandlegalinstitutionse.gmoney lenders,somechannelsofmicrofinanceandtheothernotnecessarilyregulatedsectors. Landlords,localshopkeepers,traders,suppliersandprofessionalmoneylenders,and relativesaretheinformalsourcesofmicrofinanceforthepoor,bothinruralandurban areas. TheFormalsectorcanbesaidtocompriseoftheFormalandnecessarilyregulated channelsoffinancinglike,financeprovidedbyBanks,FinancialInstitutions,NonBanking FinancialInstitutions,andMicrofinanceinstitutions.

2.0NONBANKINGFINANCIALINSTITUTIONSANDINTERNATIONAL REGULATORYSYSTEM Inmostcountries,thefinancialsystemextendsbeyondtraditionalbankinginstitutionsto includeNonBankingFinancialIntermediarieslikeinsurancecompanies,mutualfunds, marketmakersandotherfinancialserviceproviders. Therehasbeentremendousgrowthworldwideinthemobilizationoffinancialresources outsidetraditionalbankingsystems.Channeledmainlythroughcapitalmarkets,suchrapid financialdiversificationisposingnewchallengesforregulatorsinmanyemergingmarkets. Thesenonbanksfinancialinstitutionsprovideservicesthatarenotnecessarilysuitedto banks,serveascompetitiontobanks,andspecializeinsectorsorgroups.Havingamulti facetedfinancialsystem,whichincludesnonbankfinancialinstitutions,canprotect economiesfromfinancialshocks.However,indevelopingcountriesthatlackacoherent policyframeworkandeffectiveregulations,nonbankfinancialinstitutionscanexacerbate thefragilityofthefinancialsystem.

Tosummarize: NBFIshavemuchtocontribute,buttheyalsobringsomerisks; Thoserisksarebestcontainedbysoundregulationthatseekstocreateagenerally levelplayingfield,withoutstiflingeitherthegrowthorindividualityofNBFIs; Theseobjectivesnotwithstanding,NBFIregulationisgenerallyunderdeveloped throughoutmostoftheworld; Thethreeareasinwhichimprovementsaremostneededare: 3

1.InthelegalpowersgrantedtoNBFIregulators 2.Intheprudentialstandards,regulationsandruleswhich,ingeneral,needto becomemoreriskbasedtocatchupwithbankingstandards; 3.Intheinternalpracticesandprocessesofregulatorswherethereisageneralneed forstrongergovernancestandardsandforagreatercommitmenttoenforcement amongprudentialregulatorsandconductregulatorsalike.

WhatisaNonBankingFinancialInstitution(NBFI)? ANonBankingFinancialInstitution/NonBankingFinancialIntermediaryhasdifferent definitionsindifferentcountries: Anyinstitutionwhichisnotabankbutisinvolvedinfinance.... Financialinstitutionsnottakingdemanddeposits Financialinstitutionsnottakinganydeposit

NBFIsaredifferenttypesoffinancialinstitutionsthatprovidethefollowingtypesof services: Payments Liquidity/credit Divisibility:breakuplargedenominationandaggregatesmalldenomination Storeofvalue Information:processingandassessingrisks Riskpooling:lowertherisksofinvestors ManyNBFIprovideservicesthatarealsoprovidedbybanks,hencethedistinction betweenbanksandNBFIhasbecomeblurred.ManyNBFIbelongtosupervised conglomerates(orconglomeratesthatshouldbesupervised).

TypesofNBFIs NBFIscanbeclassifiedbythemainservicestheyprovide: Deposittakinginstitutions(e.gThrifts,creditunions,savings&loans.) Riskpoolinginstitutions(e.ginsuranceco.) 4

Contractualsavingsinstitutions(e.gMutualfunds,pensionfunds,otherinvestment institutions) Marketmakers(e.gInvestmentbanks,stockbrokers.) Specializedsectoralfinanciers(e.gleasingcompanies,realstatefinanceco.,micro financeinstitutions.) Financialserviceproviders(e.gBrokers,investmentadvisers.)

ContributionsbyNBFIsandBanks Financialinstitutions,includingbanksandnonbanks,providesomeorallofthe followingcorefinancialservices.Theseservicesareoftenprovidedincombinations:

1.Somefinancialinstitutionsprovidepaymentsservicesbyissuingclaimsthathavethe capacitytobeusedinsettlingtransactions.Toserveasaneffectivemeansofpayments,a claimmusthaveahighlystableandreliablevalue,bewidelyacceptedinexchangeand mustbelinkedtothearrangementsforultimatesettlementofvalue. 2.Liquidityistheeasewithwhichanassetsfullmarketvaluecanberealizedoncea decisiontosellhasbeenmade.Financialinstitutionsenhanceliquiditythrough specializationandscale. 3.DivisibilityDivisibilityistheextenttowhichanassetcanbetradedin smalldenominations.Financialinstitutionsbreakuplargedenomination(lumpy)claims andaggregatesmalldenominationclaimstomeetdivisibilitypreferencesofthe community. 4.Storeofvalueistheextenttowhichanassetprovidesareliablestoreof purchasingpowerovertimethisisfundamentaltosatisfyingsavings preferences. 5.Informationiscostlytoaccessandprocess.Providingeconomiesofscaleinprocessing andassessingrisksisanimportantroleoffinancialinstitutions. 6.Riskpoolingistheextenttowhichanassetspreadsthedefaultriskoftheunderlying promisesbypooling.Bypoolingassets,financialinstitutionshavemuchmorescopetorisk poolthandoindividuals. 5

Banksprovideanattractivebundleofmostofthecorefinancialservicesintheirdeposit product: Abilitytowritechequesondepositsmeansthatbanksofferpaymentsservicesand liquidityequaltothatofcurrency. Depositsalsoofferexceptionallyhighdivisibility(atleasttothesamelevelas currency). Thestoreofvalueserviceisthatofadebtpromiseinthatdepositspromise repaymentat(nominal)facevalueplusinterest. Banksresolvetheinformationconflictfacedbyborrowersandgenerallyenjoy substantialeconomiesofscaleinprocessingandanalyzinginformation. Finally,banksriskpoolborrowerspromisesintoasinglepromisebythe intermediaryitself. RationaleforNBFIs BanksofferalloftheservicesthatNBFIsoffer,thenwhydoweNeedNBFIs?TheAnswer tothisquestionemergesifweanalysethedifferencesbetweenBanksandNBFIs. DifferencebetweenBanksandNBFIsinIndia: NBFCsaredoingfunctionsakintothatofbanks,howeverthereareafewdifferences: (i)aNBFCcannotacceptdemanddeposits; (ii)itisnotapartofthepaymentandsettlementsystemandassuchcannotissuecheques toitscustomers;and (iii)depositinsurancefacilityofDepositInsuranceandCreditGuaranteeCorporation (DICGC)isnotavailableforNBFCdepositorsunlikeincaseofbanks.

1.InefficiencyofBanks Inprinciple,thereisnoreasonwhybankscantprovideallservicesindeedtoanextent theydo.Howevertheyareextremelyinefficientinprovidingsomeservicesandevenface conflictingincentivesinprovidingallservices. Inshort,thewayinwhichbanksprovidetheircoreservicesmeansthattheycannotprovide allservicesequallyefficiently. Inordertoprovidecertaintyofvalueforpayments,bankdepositsmustbelow risk.Thislimitstherangeandnatureofassetsthatbankscanholdontheasset 6

sideoftheirbalancesheetsandtherebytheextenttowhichtheycanofferrisk pooling.Italsolimitstheirabilitytoofferawiderangeofstoreofvalueservices, especiallyequitytypestoresofvalueservices. Moregenerally,NBFIsplayarangeofrolesthatarenotsuitabletobanks: throughtheenhancementofequitypromises(addingliquidity,divisibility, informationalefficienciesandriskpoolingservices),NBFIsbroadenthespectrum ofrisksavailabletoinvestors; inthiswaytheyencourageinvestmentandsavingsandimprovetheefficiencyof investmentandsavings; throughtheprovisionofcontingentpromisestheyfosterariskmanagementculture byencouragingthosewhoareleastabletobearrisktosellthoseriskstothose betterabletomanagethem;and theycanenhancetheresilienceofthefinancialsystemtoeconomicshocks NBFIscomplementbanksbyprovidingservicesthatarenotwellsuitedtobanks; theyfillthegapsinfinancialservicesthatotherwiseoccurinbankbasedfinancialsystems. 2.ServeasCompetitionforBanks Equallyimportant,NBFIsprovidecompetitionforbanksintheprovisionof financialservices.NBFIsunbundlebankservicesandcompetewiththemas providers.Theyspecializeinparticularsectorsandtargetparticulargroups. 3.EconomicDevelopment Thereisagrowingbodyofhardevidencetosuggestthat: Thedevelopmentoffinancialintermediariescontributesstronglytoeconomic growth; Thatcontributionisincreasedwhereintermediationisprovidedthroughabalanced combinationofNBFIsandbanksinparticular,thereisastrongcorrelation betweenthedepthandactivenessofnonbanksandstockmarketsontheonehand, andeconomicdevelopmentontheother.

Inthefirstplace,banksofferassets(deposits)thatclaimtobecapitalcertain.Ifthis promiseistobehonored,thentheremustbelimitstotherangeandnatureofassetsthata bankcanreasonablytakeontoitsbalancesheets.Notwithstandingtheexistenceof universalbankinginmanypartsoftheworld(i.e.,banksalsoengagedinsecuritiesmarket 7

activities),thisconsiderationimpliesthatbankbasedfinancialsystemwilltendtohavea smallerrangeofequitytypeassetsthanthosewithamorebroadlybasedstructure includingawiderangeofNBFIs.Moregenerally,NBFIsplayrangeofrolesthatarenot suitableforbanksandthroughtheirprovisionofliquidity,divisibility,informational efficiencies,andriskpoolingservices,theybroadenthespectrumofrisksavailableto investors.Inthisway,theyencourageandimprovetheefficiencyofinvestmentand savings.Throughtheprovisionofabroaderrangeoffinancialinstruments,theyareableto fosterariskmanagementculturebyattractingcustomerswhoareleastabletobearrisks andfillthegapsinfinancialservicesthatotherwiseoccurinbankbasedfinancialsystems.

4.FinancialStability InafinancialsectorinwhichNBFIsarecomparativelyundeveloped,bankswillinevitably berequiredtoassumerisksthatotherwisemightbebornebythestockmarket,collective investmentschemesorinsurancecompanies.However,thereisbasicincompatibility betweenthekindsoffinancialcontractsofferedbythebanksandthoseofferedbythe financialinstitutions.Thus,banksaremorelikelytofailasaresult.Onewayof minimizingfinancialfragilityinthedevelopingeconomiesmaybetoencourageadiversity offinancialmarketsandinstitutions,whereinvestorsareabletoassumeavarietyofrisks outsidethebankingsystemitself.Withoutthisdiversity,thereisatendencyforallrisksto bebundledwithinthebalancesheetofthebankingsystem,whichmayleadtosevere financialcrisesmorelikely.Thispointwaswidelynotedbypolicymakersintheiranalysis ofthelessonsoftheAsiancurrencycrisis,forinstance. AsAlanGreenspan(1999)pointedout,theimpactofthecurrencycrisisinThailandmight havebeensignificantlylesssevereifsomeoftherisksbornebytheThaibankshadinstead beenbornebythecapitalmarkets.

RisksAssociatedwithNBFIsAndWhyweNeedtoRegulatetheNBFIs: WhileNBFIscancontributetotheeconomy,theyalsobringrisksandtheonlywayto contoltheserisksisthroughproperregulation.Riskwillvarydependinguponthe economicfunctionsperformedbyNBFIs. Thechallengeforregulationisstrikingtherightbalancebetweentherisksandbenefits.

Ontheonehand,toolittleornoregulationcanleadtocrisisandseverelyimpactthe vulnerableandtheeconomy.ThishasbeenamajorattributetotheAsiancrisisinthelate 90sfinancecompaniesinThailandandmerchantbanksinKorea.Ontheotherhand,too strictorinappropriateregulationcanhinderinnovationanddevelopment.Thecallfor deregulationindevelopedeconomiesreflectsthis. Gettingtherightbalanceisaperpetualchallengeforfinancialregulatorsandsupervisors, notonlyinthedevelopingcountries,butalsoindevelopedandadvancedeconomies.

1.ToPreventSystemicRisk Systemicmeans,affectingtheentirebodyororganization(thecomplexwhole.) SystemicRiskmeansthemarketriskortheriskthatcannotbediversifiedaway,as opposedto"idiosyncraticrisk",whichisspecifictoindividualstocks.Itreferstothe movementsofthewholeeconomy. Asystemicproblemcanbesaidtoarisewhenafailureofoneinstitutioncreateslarge socialcosts(contagion,generalizedpanic,interruptionofthepaymentssystem,etc): Theessenceofsystemicriskisthereforethecorrelationoflosses.Forexample,ifonebank goesbankruptandsellsallitsassets,thedropinassetpricesmayinduceliquidityproblems ofotherbanks,leadingtoageneralbankingpanic. RegulationofNBFIstopreventsystemicriskisnecessarybecauseNBFIstendnotto adequatelyinternalizesystemicrisks.

2.Guardagainstregulatoryarbitragewhendifferentinstitutionssubject todifferentregulatoryconstraintscanofferthesametypeofproducts. NBFIscanbeusedasameansofoutwittingorevadingtheintentofregulationsimposed onbanks. CompetitionbetweenNBFIsandbanksinprovidingfinancialservicesishealthy. Butcompetitionbasedonlaxregulationisunhealthyandcanhavedisastrous consequencesthatmayaffecteconomicgrowthandfinancialstabilityforyears.

ThiseffecthasbeenclearestwhereNBFIshavebeeneithertotallyorlargelyunregulated andhavetherebygainedacompetitiveadvantageincompetingwithregulatedbankson theirownterritory. ThefalloutfromthistypeofbehaviourwaswidelyexperiencedintheAsianregioninthe late1990s. InThailand,financecompaniesissuedhighyieldingpromissorynotesand borrowedoffshore,thenloanedthefundsinlocalcurrencytohighriskborrowers whocouldnotmeetbankingstandardswhenthecrisishitinmid1997,the Governmentwasforcedtoclose69insolventfinancecompanies; Malaysiaexperiencedsimilarproblemswithfinancecompaniesthathadextended hirepurchaseloans; InKorea,NBFIsgrewverystronglyinthepre97periodpreciselybecausethey competeddirectlywithbanks,butwitharegulatoryadvantage.Theproblemre emergedinadifferentguisebetween97and99whenpoorlyregulated InvestmentTrustCompaniestookoverastheprimarysourceofcorporatefinance. ChinahasalsohadproblemsassociatedwithInvestmentTrustCompanies.

ThebusinessinwhichNBFIsarepermittedtoengageisultimatelyamatterofchoice.To illustratethepoint,followingthecrisisin1997,theKoreanAuthoritiesacceptedthat MerchantBanksinKoreaeffectivelyareinthesamebusinessasbanksandhavechanged theirregulatoryrequirementssothattheirmerchantbanksnowfaceessentiallythesame capital,provisioning,liquidity,largeexposureandforeignexchangerequirementsas banks. Incontrast,inAustraliathedecisionwastakenthatMerchantBanksshouldnotbeallowed todothebusinessofbanks(definedastakingdepositsfromthepublic)andsotheyare regulatedmuchmorelightlythanbanks. TopreventregulatoryarbitragebetweenbanksandNBFIsthereisaneedtohave acoherentregulatoryframeworkthatcoversthewholeofthefinancialsystemandwhich regulatessimilarrisksinsimilarwaysregardlessofwhichinstitutionsoffertheparticular services.

3.ConglomerateContamination AmajorriskwithNBFIsarisesfromtheirassociationwithbanksthrough 10

conglomerates. Whilemanycountrieshavequitesoundregulatoryframeworksforsupervising banks,veryfewhaveeitherthelegalpowerorthepolicyframeworkfor adequatelysupervisingconglomerategroupsinwhichbanksownandoperate largenonbanksubsidiaries. Thisproblemwasalsoacontributortothecrisisinthelate1990s,mostparticularlyin KoreaandIndonesia.Buttheproblemisbynomeansconfinedtoemergingmarkets. Australiahaslostonlytwobanksthroughoutrightfailureinthepastcentury.Bothfailed becauseofhighriskactivitiescarriedoutthroughtheirunregulatedandverylarge subsidiaries.

4.ToProtectconsumersagainstmarketmisconduct ThisisoneoftheprimaryreasonsforNBFIsupervisionandregulationthatdepositors areprotectedagainsttheNBFIsfailuretorepay. Inaperfectmarket,wewouldexpectindividualdepositors,policyholdersandinvestorsto haveinformationbasedonwhichtheycanassesstheinstitutionsbeforetheyenterintoany deals.Therealityisinformationisnotalwaysreliableandcustomerslackexpertiseto analysetheinformationtodeterminethevalueofpromisesmadetothembyfinancial institutions.Theregulatorsroleistoensurethatthosepromisesarereasonable, understandableandadequatelybackedbycapitalreserves. Toprotecttheconsumers,theregulatorsneedtolaydowncertainRulesofConductforthe NBFIswhichwillhelptopreventinsidertrading,conflictofinterest,falseadvertisement etc.ForthispurposetheRegulatorsgenerallyhavecertainnormslike: CertainEntryrestrictionslikelicensingetc. Disclosureofinformation Financialstrength(minimumcapitaletc.) GovernanceoftheNBFIs(responsibilitiesetc.) Rulesforconductofbusiness

5.ToenhanceefficiencyofNBFIs: ToenhancetheefficiencyofNBFIsandtopreventanticompetitivebehavior,the RegulatorsneedtolaydownRulesthatdealwithstructureofindustries 11

(mergerorantitrustlaws),Rulesthatpreventanticompetitivebehavior(collusion;free entryandexit).

6.ToPreventAsymmetricinformation AsymmetricInformationariseswhereproductsandservicesaresufficientlycomplexthat disclosureitselfisnotenoughtoallowconsumerstomakeinformedchoices(buyersand sellersnotequallyinformed) Ineconomicsandcontracttheory,informationasymmetrydealswiththestudyofdecisions intransactionswhereonepartyhasmoreorbetterinformationthantheother.Thiscreates animbalanceofpowerintransactionswhichcansometimescausethetransactionstogo awry.Informationasymmetrymodelsassumethatatleastonepartytoatransactionhas relevantinformationwhereastheother(s)donot. Topreventfromcreatingasituationofasymmetricinformation,Regulatorsneedtospecify normswithrespecttothefollowing: Entryandexitrules Minimumcapitalorliquidityrequirements Restrictionstooperationsandlimits Riskmanagementrequirementsandaccountability

7.Socialobjectives NBFIshaveanimportantroletoplayinfinancialandeconomicdevelopmentofacountry. Internationalexperiencewithgovernmentsponsoredentitiesorrulesgoestoshowthatitis notclearthatthesolutionisalwaysbetterthantheproblem.TheGovernmenthasto considervariousissueslikeNotenoughfinancingforasector?Housing?Agriculture? Others?Areinterestratestoohigh?Etc. However,undernegative(orpositive)externalities,privatedecisionsofanorganization provideless(ormore)thanthesociallydesirableoutcomeofaservice.Therefore regulationbytheGovernmentismostessentialsothattheNBFIdoesnotoverlookits importanceandthenecessityoffulfillingitssocialobjectives 8.NBFIscanbepopularvehiclesformoneylaunderingandfinancingofterrorismand hencetheneedforregulationonthatfrontisalsoinplace. 12

RegulatoryAuthoritiesforNBFIsinsomeCountries Thestructureoftheregulatorcananddoestakedifferentformsindifferentjurisdictions.A recenttrendhasbeenashifttowardsmoreintegratedsupervisionwithbanking,insurance andcapitalmarketregulationbeingbroughtwithinoneorganisation. TheUnitedKingdomsFinancialServicesAuthorityisanexampleofintegrated supervisionwhileAustralia'stwinregulators(ASICandAPRA)focusonprudentialand marketconductfunctions,respectively.

1.UnitedKingdom: FinancialServicesAuthority(FSA) FSAistheRegulatorofallprovidersoffinancialservicesintheUK However,BankofEnglandretainsresponsibilityforsystemicrisk.

2.Australia: Twinregulators 1.AustralianSecuritiesandInvestmentsCommission(ASIC): ASICisthecorporates,marketsconductandfinancialservicesregulator.ASICregulates Australiancompanies,financialmarkets,financialservicesorganisationsandprofessionals whodealandadviseininvestments,superannuation,insurance,deposittakingandcredit. 2.AustralianPrudentialRegulationAuthority(APRA): APRAistheprudentialregulatoroftheAustralianfinancialservicesindustry. APRAoverseesbanks,creditunions,buildingsocieties,generalinsuranceandreinsurance companies,lifeinsurance,friendlysocieties,andmostmembersofthesuperannuation industry. 3.Singapore: MonetaryAuthorityofSingapore(MAS) MAScoversbothprudentialsupervisionofthebankingandinsurancesectors,capital marketregulationandbusinessconductregulationacrossthefinancialsystem. 13

4.UnitedStates:

PrincipalRegulatoryAgenciesoftheUSFinancialSystem

5.India: ReserveBankofIndia(RBI) 6.Mauritius: FinancialServicesCommission(FSC). 7.Malaysia: BankNegaraMalaysia(BNM),theCentralBank 8.Bangladesh: BangladeshBank(theCentralBank)

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9.Phillipines: TheBangkoSentralngPilipinas(CentralBankofthePhilippines)

3.0EMERGENCEOFNBFCsINDIANHISTORICALPERSPECTIVE Thenonbankingfinancialcompanies(NBFCs)flourishedinIndiainthedecadeofthe 1980sagainstthebackdropofahighlyregulatedbankingsector.Thesimplifiedsanction proceduresandlowentrybarriersencouragedtheentryofahostofNBFCs.However,in manycasesmismanagement/lackofefficientmanagementresultedinproblemsarising outofadverseportfolioselection,unprudentoperations,inabilitytomanageriskbothon assetandliabilityside.Inmanycasesduetononavailabilityofadequatecreditfromthe bankingsectorNBFCshadtorelyexcessivelyonunsecuredpublicdepositsfortheir existence/survivalbypayinghigherrateofinterest.Toservicesuchhighcostdeposits, someNBFCswereforcedtodeploytheirfundswhichcarriedhighreturncoupledwith highrisk.Thisultimatelyresultedinhigherrisksfortheirdepositors,whichinsomecases hadculminatedinthecrisisofconfidenceandcredibility. TheReserveBankofIndiaAct,1934wasamendedon1stDecember,1964bytheReserve BankAmendmentAct,1963toincludeprovisionsrelatingtononbankinginstitutions receivingdepositsandfinancialinstitutions.Itwasobservedthattheexistinglegislative andregulatoryframeworkrequiredfurtherrefinementandimprovementbecauseofthe risingnumberofdefaultingNBFCsandtheneedforanefficientandquicksystemfor redressalofgrievancesofindividualdepositors. Also,itwasfeltnecessarytoinitiateimmediateactionfortheprotectionofdepositors interest.RBIissuedtheNonBankingCompanies(ReserveBank)Directions,1977, guidelinesonprudentialnormsandvariousotherDirectionsandclarifications,fromtime totimeforgoverningtheactivitiesofNBFCs.CentralGovernment,during1974, introduced58AintheCompaniesAct,1956whichempoweredCentralGovernmentto regulateacceptanceandrenewalofdepositsandtoframerulesinconsultationwith ReserveBankofIndia(RBI)prescribing(a)thelimitupto,(b)themannerand(c)the conditionssubjecttowhichdepositsmaybeinvitedoraccepted/renewedby companies.TheCentralGovernmentinconsultationwithRBIframedCompanies (AcceptanceofDeposits)Rules,1975.

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GiventheneedforcontinuedexistenceandgrowthofNBFCs,theneedtodevelopa frameworkofprudentiallegislationsandasupervisorysystemwasfeltespeciallyto encouragethegrowthofhealthyNBFCsandweedouttheinefficientones.Continuingthis process,RBIAct,1934wasamendedin1997whichauthorisedtheReserveBankto determinepolicies,andissuedirectionstoNBFCsregardingincomerecognition, accountingstandards,NPAs,capitaladequacy,etc.TheamendedAct,interalia,provided forcompulsoryregistrationofallNBFCsintothreebroadcategories,viz.,(i)NBFCs acceptingpublicdeposit;(ii)NBFCsnotaccepting/holdingpublicdeposit;and(iii)core investmentcompanies(i.e.,thoseacquiringshares/securitiesoftheirgroup/holding/ subsidiarycompaniestotheextentofnotlessthan90percentoftotalassetsandwhichdo notacceptpublicdeposit). Untilsomeyearsback,theprudentialnormsapplicabletobankingandnonbanking financialcompanieswerenotuniform.Moreover,withintheNBFCgroup,theprudential normsapplicabletodeposittakingNBFCs(NBFCsD)weremorestringentthanthosefor nondeposittakingNBFCs(NBFCsND).SincetheNBFCsNDwerenotsubjectedtoany exposurenorms,theycouldtakelargeexposures.Theabsenceofcapitaladequacy requirementsresultedinhighleveragebytheNBFCs.Since2000however,theReserve Bankhasinitiatedmeasurestoreducethescopeofregulatoryarbitragebetweenbanks, NBFCsDandNBFCsND.

NBFCsCommitteesformed VariouscommitteeswereformedinIndiatoreviewtheexistingframeworkandaddressthe shortcomings.Someofthecommitteesanditsrecommendationsaregivenhereunder: JamesRajCommittee(1974) 1. TheJamesRajCommitteewasconstitutedbytheReserveBankofIndiain1974.After studyingthevariousmoneycirculationschemeswhichwerefloatedinthecountryduring thattimeandtakingintoconsiderationtheimpactofsuchschemesontheeconomy,the CommitteeafterextensiveresearchandanalysishadsuggestedforabanonPrizechitand otherschemeswhichwerecausingagreatlosstotheeconomy.Basedonthese suggestions,thePrizeChitsandMoneyCirculationSchemes(Banning)Act,1978was enacted. 2.ChakravarthyCommittee(1984)

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ThisCommitteeheadedbyShriSukhamoyChakravartywasformedtoreviewthe WorkingoftheMonetarySystem.Itmadeseveralrecommendationsforthedevelopment ofmoneymarket. 3.VaghulCommittee(1987) AsafollowuptotheChakravartycommittee,theRBIsetupaWorkingGrouponMoney MarketundertheChairmanshipofShriN.Vaghul,whichsubmitteditsReportin1987 containingnumberofmeasurestowidenanddeepenthemoneymarket. 4.NarasimhanCommittee(1991) Thiscommitteewasformedtoexamineallaspectsrelatingtothestructure,organization& functioningofthefinancialsystem. 5.Dr.A.C.ShahCommittee(1992) TheWorkingGrouponFinancialCompaniesconstitutedinApril1992i.etheShah CommitteesetouttheagendaforreformsintheNBFCsector.Thiscommitteemadewide rangingrecommendationscovering,interaliaentrypointnorms,compulsoryregistration oflargesizedNBFCs,prescriptionofprudentialnormsforNBFCsonthelinesofbanks, stipulationofcreditratingforacceptanceofpublicdepositsandmorestatutorypowersto ReserveBankforbetterregulationofNBFCs. 6.KhannaCommittee(1995) ThisGroupwassetupwiththeobjectiveofdesigningacomprehensiveandeffective supervisoryframeworkforthenonbankingcompaniessegmentofthefinancialsystem. Theimportantrecommendationsofthiscommitteeareasfollows: i. IntroductionofasupervisoryratingsystemfortheregisteredNBFCs.Theratings assignedtoNBFCswouldprimarilybethetoolfortriggeringonsiteinspectionsat variousintervals. SupervisoryattentionandfocusoftheReserveBanktobedirectedina comprehensivemanneronlytothoseNBFCshavingnetownedfundsofRs.100 lakhsandabove. SupervisionoverunregisteredNBFCstobeexercisedthroughtheoffsite surveillancemechanismandtheironsiteinspectiontobeconductedselectivelyas deemednecessarydependingoncircumstances. Needtodeviseasuitablesystemforcoordinatingtheonsiteinspectionofthe NBFCsbytheReserveBankintandemwithotherregulatoryauthoritiessothat theyweresubjectedtooneshotexaminationbydifferentregulatoryauthorities. 17

ii.

iii.

iv.

v.

vi.

Someofthenonbankingnonfinancialcompanieslikeindustrial/manufacturing unitswerealsoundertakingfinancialactivitiesincludingacceptanceofdeposits, investmentoperations,leasingetctoagreatextent.Thecommitteestressedthe needforidentifyinganappropriateauthoritytoregulatetheactivitiesofthese companies,includingplantationandanimalhusbandrycompaniesnotfallingunder theregulatorycontrolofeitherDepartmentofCompanyAffairsortheReserve Bank,asfarastheirmobilisationofpublicdepositwasconcerned. IntroductionofasystemwherebythenamesoftheNBFCswhichhadnotcomplied withtheregulatoryframework/directionsoftheBankorhadfailedtosubmitthe prescribedreturnsconsecutivelyfortwoyearscouldbepublishedinregional newspapers.

MostoftherecommendationsoftheCommitteewereacceptedbytheReserveBankafter anindepthanalysisandtherevisedframeworkforeffectivesupervisionoftheNBFCs includingoffsitemonitoringofNBFCsisbeingputinplace. 7.VasudevCommittee(1998) ThiscommitteeemphasisedtheneedforstrengtheningoftheNBFCsectorincludingentry normsandprudentialnorms,anddealtwithframeworkforacceptanceofpublicdeposits, issuesconcerningunincorporatedfinancialintermediariesandaddressesissuesof supervisionofNBFCs. Theimportantrecommendationsofthiscommitteeareasfollows: i. PresentminimumcaptialrequirementofRs.25lakhstobereviewedupwards keepinginviewtheneedtoimpartgreaterfinancialsoundnessandachieve economiesofscaleintermsofefficiencyofoperationsandmanagerialskills. ii. AsoperationsofNBFCsareconcentratedinremoteareas,theRBImayapprisethe StateGovernmentsofthecompanieswhichhavebeengrantedregistrationaswell asthecompanieswhoseapplicationshavebeenrejected. iii. Thepresentcapitaladequacyratiorequirementmaybemaintainedat12%forall ratedNBFCs,higherrateofabout15%needtobeprescribedbyRBIforthose NBFCswhichseekpublicdepositwithoutcreditrating. iv. RBImaystipulatethattheNBFCsshouldinvestatleast25%oftheirreservesin marketablesecuritiesapartfromtheSLRsecuritiesalreadyheldbytheNBFCs. v. Linkingofquantumofpublicdepositswithcreditratingbecauseapartfromhaving theeffectofconferringregulatoryfunctionsontheratingagencies,italsoexposes theNBFCstofrequentassetliabilitymismatchesarisingoutofchangesincredit rating. 18

vi.

vii. viii. ix.

x.

xi.

RBIshouldconsidermeasuresforeasingtheflowofcreditfrombankstoNBFCs andthenconsiderprescribingasuitableratioasbetweensecuredandunsecured depositsforNBFCs. AppointmentofdepositorsgrievanceRedressalauthoritieswithspecified territorialjurisdiction. TheprocedureforliquidationofNBFCstobesubstantiallyinlinewiththose availableforbanks. AseparateinstrumentalityforregulationandsupervisionofNBFCsundertheaegis oftheRBIshouldbesetup,sothatthereisagreatfocusinregulationand supervisionoftheNBFCsector. TheCommitteefeltitwasnotjudicioustointroduceadepositinsuranceschemefor thedepositorsinNBFCsbecauseofthemoralhazardissues,likelihoodofassets strippingandlikelynegativeimpactonthegrowthofahealthyNBFCsector. ReserveBankcouldusetheservicesofcharteredaccountantswithsuitable experienceandcapabilitiestocarryoutinspectionofthesmallerNBFCs.

NBFCsomerecentmeasures 1.AdvisingNBFConAdvertisementinElectronicMedia Inordertoensuretransparencyintheinterestofdepositorsinthecontextofsuch advertisements,aprovisionwasincorporatedintheNonBankingFinancialCompanies AcceptanceofPublicDeposits(ReserveBank)Directions,1998,intermsofwhich companiesarerequiredtostatethattheyhaveavalidCertificateofRegistrationissuedby theReserveBank.However,theReserveBankdoesnotacceptanyresponsibilityor guaranteeaboutthepresentpositionastothefinancialsoundnessofthecompanyorforthe correctnessofanyofthestatementsorrepresentationsmadeoropinionsexpressedbythe companyandforrepaymentofdeposits/dischargeoftheliabilitiesbythecompany. 2.CorporateGovernance ListedNBFCswhicharerequiredtoadheretolistingagreementandrulesframedbySEBI onCorporateGovernancearealreadyrequiredtocomplywithSEBIprescriptionson CorporateGovernance.

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AspertheRBICircularRBI/200910/17DNBS(PD)CCNo.156/03.10.001/200910 datedJuly1,2009;guidelinesforcorporategovernancehavebeenproposedfor 1.AllDeposittakingNBFCswithdepositsizeofRs20croreandabove 2.AllnondeposittakingNBFCswithassetsizeofRs100croreandabove(NBFCND SI). Someoftheguidelinesinclude a)ConstitutionofAuditCommitteeincaseofNBFCDwithdepositsizeofRs20crore b)ConstitutionofNominationcommittee:Theguidelinesstatethatitwouldbedesirable thatNBFCDwithdepositsizeofRs20croreandaboveandNBFCNDSImayforma NominationCommitteetoensurefitandproperstatusofproposed/existingDirectors c)ConstitutionofRiskManagementCommitteeTomanagetheintegratedrisk,arisk managementcommitteemaybeformed,inadditiontotheALCO(AssetLiability ManagementCommittee)incaseoftheabovecategoryofNBFCs. d)Disclosure&TransparencyCertaininformationshouldbeputupbytheNBFCtothe BoardofDirectorsatregularintervalsasmaybeprescribedbytheBoardinthisregard. e)Compliancewithinstructionsonconnectedlendingrelationships

3.RevisingRateofInterestThemaximuminterestratepayableonpublicdepositsby NBFCswasrevisedto12.5percentperannumonandfromApril24,2007. 4.AdvisingNBFCsfor(a)notengagingtelemarketerswhodonothaveanyvalid registrationCertificatefromDepartmentofTelecommunications(DoT),Governmentof IndiaasTelemarketers,(b)furnishinglistoftelemarketersengagedbythemalongwiththe registeredTel.Nos.beingusedbythemformakingtelemarketingcallstoTRAIand(c) ensuringthatalltheagentspresentlyengagedbythemregisterthemselveswithDoT telemarketersinpursuancetotheTelecomRegulatoryAuthorityofIndia(TRAI)having framedTelecomUnsolicitedCommercialCommunications(UCC)Regulationsforcurbing UCCtothesubscriberswhodonotwanttoreceiveUCC. 5.ReportingofSecondaryMarketTransactions AllNBFCswereadvisedtoreporttheirsecondarymarkettransactionsincorporatebonds doneinOTCmarket,onTheFixedIncomeMoneyMarketandDerivativesAssociationof Indias(FIMMDAs)reportingplatformwitheffectfromSeptember1,2007 FIMMDAisanAssociationofCommercialBanks,FinancialInstitutionsandPrimary Dealers.FIMMDAisavoluntarymarketbodyforthebond,MoneyAndDerivatives 20

Markets 6.MonitoringofFraudsinNBFCs InMarch2008alldeposittakingNBFCs(includingRNBCs)wereadvisedthattheextant instructionswithregardtomonitoringoffraudswererevisedandassuchcasesof negligenceandcashshortagesandirregularitiesinforeignexchangetransactionswere tobereportedasfraudiftheintentiontocheat/defraudwassuspected/proved.However,in caseswherefraudulentintentionwasnotsuspected/provedatthetimeofdetectionbut involvecashshortagesofmorethantenthousandrupeesandcaseswherecashshortages morethanfivethousandrupeesweredetectedbymanagement/auditor/inspectingofficer andnotreportedontheoccurrencebythepersonshandlingcash,thensuchcasesmayalso betreatedasfraudandreportedaccordingly. 7.IssuingGuidelinesonRegistration,Operations,PrudentialNormsandInvestment DirectionsforMortgageGuaranteeCompanies 8.IssuingguidelinesonTreatmentofDeferredTaxAssets(DTA)andDeferredTax Liabilities(DTL)forComputationofCapital Ascreationofdeferredtaxassets(DTA)orDTLgivesrisetocertainissuesimpactingthe balancesheetofthecompany,NBFCswereadvisedonJuly31,2008regardingthe regulatorytreatmenttobegiventotheseissues.Aspertheseguidelines,thebalancein DTLaccountwillnotbeeligibleforinclusioninTierIorTierIIcapitalforcapital adequacypurposeasitisnotaneligibleitemofcapital.DTAwillbetreatedasan intangibleassetandshouldbedeductedfromTierIcapital.NBFCswereadvisedtoensure compliancewiththeseguidelinesfromtheaccountingyearendingMarch31,2009 9.InstructingontheobligationsofNBFCunderPMLAAct,2002 Cashtransactionreportingbybranches/officesofNBFCstotheirPrincipalOfficershould besubmittedonamonthlybasisandthePrincipalOfficer,inturn,shouldensuretosubmit cashtransactionreport(CTR)foreverymonthtotheFinancialIntelligenceUnitIndia (FIUIND)withintheprescribedtimeschedule. 10.UndertakingvariousPolicyInitiativesforNBFCsNDSIin200708suchas GuidelinesonCapitalAdequacy,LiquidityandDisclosureNorms;IssuanceofPerpetual DebtInstrumentsandAccesstoShortTermForeignCurrencyBorrowings 11.InstructionsonCapitaladequecynormsfornondeposittakingNBFCTheReserve BankofIndia(RBI)on2ndJune2008askednondeposittakingNBFCstoraisethe 21

minimumCapitaltoRiskweightedAssetsRatio(CRAR)from10%nowto12%with immediateeffectandfurtherto15%witheffectfromApril1,2009.

4.0NONBANKINGFINANCIALCOMPANYMEANING Nonbankingfinancialcompanies(NBFCs)engagedinvariedfinancialactivitiesarepart oftheIndianfinancialsystemprovidingarangeoffinancialservices. AlthoughthetermsNonBankingFinancialInstitution(NBFI)andNonBankingFinancial Company(NBFC)isgenerallyusedinterchangeablyinIndiaandwhenreferringtoeach themeaningimpliedisthesame,howevertechnicallythereliesadifferenceintheasthe termshavebeendefinedinspecifictermsintheReserveBankofIndiaAct(RBIAct)1934 andhencethenecessityforaseparatechapteronthesubject. ANonBankingFinancialInstitution/NonBankingFinancialIntermediary(NBFI)is prevalentinmostcountriesandmayhavedifferentformsanddifferentdefinitionsin differentcountries.NBFIwillthusservethepurposeofdescriptionofamoreuniversal classwhilewewillusethetermNBFCasmoresuitedtoIndiaasthedefinitionofNBFC inherentlyincorporatesthefactthatitisacompanyincorporatedundertheCompaniesAct, 1956. NBFCisacompanyincorporatedundertheCompaniesAct,1956anddesirousof commencingbusinessofnonbankingfinancialinstitutionasdefinedunderSection45I(a) oftheRBIAct,1934whichshouldhaveaminimumnetownedfundofRs25lakh(raised toRs200lakhw.e.fApril21,1999).

ANonBankingFinancialCompany(NBFC)isacompanyregisteredundertheCompanies Act,1956andisengagedinthebusinessofloansandadvances,acquisitionofshares/ stock/bonds/debentures/securitiesissuedbyGovernmentorlocalauthorityorother securitiesoflikemarketablenature,leasing,hirepurchase,insurancebusiness,chit businessbutdoesnotincludeanyinstitutionwhoseprincipalbusinessisthatofagriculture activity,industrialactivity,sale/purchase/constructionofimmovableproperty. NBFC,isdefinedundersec.45I(f)oftheAct,asunder "nonbankingfinancialcompany"means (i)afinancialinstitutionwhichisacompany; 22

(ii)anonbankinginstitutionwhichisacompanyandwhichhasasitsprincipalbusiness thereceivingofdeposits,underanyschemeorarrangementorinanyothermanner,or lendinginanymanner; (iii)suchothernonbankinginstitutionorclassofsuchinstitutions,asthebankmay,with thepreviousapprovaloftheCentralGovernmentandbynotificationintheOfficial Gazette,specify. Forthispurpose,thedefinitionofPrincipalBusinessgiven,videPressRelease1998 99/1269datedApril8,1999maybefollowed: Thecompanywillbetreatedasanonbankingfinancialcompany(NBFC)ifitsfinancial assetsaremorethan50percentofitstotalassets(nettedoffbyintangibleassets)and incomefromfinancialassetsismorethan50percentofthegrossincome.Boththesetests arerequiredtobesatisfiedasthedeterminantfactorforprincipalbusinessofacompany.

DefinitionsofNBFC WhereastheReservebankofIndiaAct1934itselfdefinesthetermNBFC,thereisa differentdefinitionofthesametermviz.NBFCintheNonBankingFinancialCompanies AcceptanceofPublicDeposits(ReserveBank)Directions,1988thattheRBIitselfhas issuedundertheaforesaidActof1934.

A.NBFCundertheRBIAct Undersection45I(a)oftheRBIAct,1934businessofnonbankingfinancialinstitution, isdefinedintermsofthebusinessofafinancialinstitutionandNBFC. NBFI Sec:45I(a):"businessofanonbankingfinancialinstitution"meanscarryingonofthe businessofafinancialinstitutionreferredtoinclause(c)andincludesbusinessofanon bankingfinancialcompanyreferredtoinclause(f);]

FI TheActdefinesFinancialInstitution(FI)u/s45I(c)as 23

"financialinstitution"meansanynonbankinginstitutionwhichcarriesonasitsbusinessor partofitsbusinessanyofthefollowingactivities,namely: (i)thefinancing,whetherbywayofmakingloansoradvancesorotherwise,ofanyactivity otherthanitsown; (ii)theacquisitionofshares,stock,bonds,debenturesorsecuritiesissuedbyagovernment orlocalauthorityorothermarketablesecuritiesofalikenature; (iii)lettingordeliveringofanygoodstoahirerunderahirepurchaseagreementasdefined inclause(c)ofsection2oftheHirePurchaseAct,1972(26of1972); (iv)thecarryingonofanyclassofinsurancebusiness; (v)managing,conductingorsupervising,asforeman,agentorinanyothercapacity,of chitsorkuriesasdefinedinanylawwhichisforthetimebeinginforceinanyState,or anybusiness,whichissimilarthereto; (vi)collecting,foranypurposeorunderanyschemeorarrangementbywhatevername calledmoniesinlumpsumorotherwise,bywayofsubscriptionsorbysaleofunits,or otherinstrumentsorinanyothermannerandawardingprizesorgifts,whetherincashor kind,ordisbursingmoniesinanyotherway,topersonsfromwhommoniesarecollected ortoanyotherperson, butdoesnotinclude. ThedefinitionofFIusesthedefinitionofaNonBankingInstitution.(NBI)

NBIhasbeendefinedundertheRBIAct1934asfollows: NBI Sec.45I(e):"nonbankinginstitution"meansacompany,corporationorcooperative society. NBFC NBFC,itselfisdefinedundersec.45I(f)oftheAct,asunder Sec.45I(f):)"nonbankingfinancialcompany"means (i)afinancialinstitutionwhichisacompany; (ii)anonbankinginstitutionwhichisacompanyandwhichhasasitsprincipalbusiness thereceivingofdeposits,underanyschemeorarrangementorinanyothermanner,or lendinginanymanner; 24

(iii)suchothernonbankinginstitutionorclassofsuchinstitutions,asthebankmay,with thepreviousapprovaloftheCentralGovernmentandbynotificationintheOfficial Gazette,specify. Forthispurpose,thedefinitionofPrincipalBusinessgiven,videPressRelease 199899/1269datedApril8,1999maybefollowed:Thecompanywillbetreatedasa nonbankingfinancialcompany(NBFC)ifitsfinancialassetsaremorethan50percentof itstotalassets(nettedoffbyintangibleassets)andincomefromfinancialassetsismore than50percentofthegrossincome.Boththesetestsarerequiredtobesatisfiedasthe determinantfactorforprincipalbusinessofacompany.

Ananalysisofforgoingprovisionsrevealsthatexceptforspecificallynotifiedcategories,a companythatisaFI,oraNBIreceivingdeposits,alonewouldqualifyasanNBFC. OnreadingjointlybothofthedefinitionsofFIandNBIrevealsthatforacompanytobe anNBFCitshouldeithercarryonanyofthebusinessesasenumeratedin(i)to(vi)ofFI Sec.45I(c)oritshouldotherwisereceivepublicdepositsinanymanner.

B.NBFCundertheNonBankingFinancialCompaniesAcceptanceofPublicDeposits (ReserveBank)Directions,1988 HeretheRBIhasadoptedanotherdefinitionofNBFC. NBFC Para2(1)(xi)oftheDirectionsdefinesNBFCas Nonbankingfinancialcompanymeansonlythenonbankinginstitutionwhichisaloan companyoraninvestmentcompanyoranassetfinancecompany(w.e.f6.12.2006)ora mutualbenefitfinancialcompany. ThetermsusedintheabovedefinitionarealsodefinedintheDirections,asunder: Loancompanypara2(1)(viii)ofthedirections Loancompanymeansanycompanywhichisafinancialinstitutioncarryingonasits principalbusinesstheprovidingoffinancewhetherbymakingloansoradvancesor otherwiseforanyactivityotherthanitsownbutdoesnotincludeanAssetFinance Company.

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Investmentcompanypara2(1)(vi)ofthedirections InvestmentCompanyisacompanywhichisafinancialinstitutioncarryingonasits principalbusinesstheacquisitionofsecurities. AssetFinanceCompanypara2(1)(ia)ofthedirections AssetFinanceCompanymeansanycompanywhichisafinancialinstitutioncarryingonas itsprincipalbusinessthefinancingofphysicalassetssupportingproductive/economic activity,suchasautomobiles,tractors,lathemachines,generatorsets,earthmovingand materialhandlingequipments,movingonownpowerandgeneralpurposeindustrial machines. MutualBenefitFinancialCompanypara2(1)(ix)ofthedirections meansacompanywhichisafinancialinstitutionnotifiedbyTheCentralGovernment undersection620AofTheCompaniesAct1956

EachcategoryofabovenotifiedcompaniesisanNBFCfortheDirections.Asperthe definitiongiveninthedirections,thesecompaniesareafinancialinstitution. However,thedirectionsdonotdefinefinancialinstitution. Thereforefinancialinstitutionmentionedunderimportsitsmeaningfromthedefinition insection45I(c)oftheRBIAct.ThisisconsequenttoPara2(2)ofthedirections. Asaconsequence,eachofthesefourcategoriesofNBFCsundertheDirectionsarealso withinthestatutorymeaningundertheActofthetermNBFC. Thus,NBFCsundertheReserveBankofIndiaDirectionsareasubsetoftheNBFCs undertheReserveBankofIndiaAct.

ClassificationofNBFCs ThereisalacunaintheformofaclassificationproblemofNonBankingFinance Institutions.TheRBIhasidentifiedasmanyas12categoriesofNBFIs.Fiveofthemare regulatedbytheRBI;onechitfundsjointlybytheRBIandtheRegistrarofChits andtwomutualbenefitfundsincludingnidhisandmicrofinancecompaniesbythe DepartmentofCompanyAffairs,GovernmentofIndia.TheNationalHousingBank(NHB) regulateshousingfinancecompanies.TheRBIhasalsoincludedinsurancecompanies, 26

stockbrokingcompaniesandmerchantbankingcompaniesamongNBFCs.Thelasttwo areregulatedbytheSecuritiesandExchangeBoardofIndiawhileinsurancecompanies comeundertheInsuranceRegulatoryandDevelopmentAuthority.Otherthanthefactthat allthesecomeunderthecategoryof"nonbanks,''therearenotmanycommonfeatures.

1.WitheffectfromDecember6,2006theNBFCsregisteredwithRBIhavebeen reclassifiedas (i)AssetFinanceCompany(AFC) (ii)InvestmentCompany(IC) (iii)LoanCompany(LC) Theabovetypeofcompaniesmaybefurtherclassifiedinto: NBFCsacceptingpublicdeposits(NBFCsD),and NBFCsnotaccepting/holdingpublicdeposits(NBFCsND) SystemicallyimportantNBFCs InternationalMonetaryFundhasframedprinciplesforregulationofthefinancialsector, whereitsuggeststhatinstitutionsperformingsimilarfunctionsshouldbesubjecttosimilar regulations.Accordingly,AllNBFCsNDwithanassetsizeofRs.100croreandmoreas perthelastauditedbalancesheetarenowconsideredassystemicallyimportantNBFCs ND(NBFCNDSI).NBFCsNDSIarerequiredtomaintainaminimumCRARof10per cent.NoNBFCNDSIisallowedto(i)lendtoanysingleborrower/groupofborrowers exceeding15percent/25percentofitsownedfund;(ii)investinthesharesofanother company/singlegroupofcompaniesexceeding15percent/25percentofitsownedfund; and(iii)lendandinvest(loans/investmentstakentogether) exceeding25percentofitsownedfundtoasinglepartyand40percentofitsownedfund toasinglegroupofparties. ThisclassificationisinadditiontothepresentclassificationofNBFCsintodeposittaking, andnondeposittakingNBFCs.[RBIonFinancialRegulationofSystemicallyImportant NBFCsandBanksRelationshipwiththemdated12.12.2006] 2.Residuarynonbankingcompanies(RNBCs) AseparatecategoryofNBFCscalledtheResiduarynonbankingcompanies(RNBCs)also existsastheycouldnotbecategorisedintoanyoneoftheabovethreecategories. RNBCsareacategoryofNBFCswhoseprincipalbusinessisacceptanceofdepositsand investinginapprovedsecurities.Thesecompaniesarerequiredtomaintaininvestmentsas 27

perdirectionsofRBI,inadditiontoliquidassets.Thefunctioningofthesecompaniesis differentfromthoseofNBFCsintermsofmethodofmobilisationofdepositsand requirementofdeploymentofdepositors'funds.However,PrudentialNormsDirectionsare applicabletothesecompaniesalso. ThereisnoceilingonraisingofdepositsbyRNBCsbuteveryRNBChastoensurethatthe amountsdepositedandinvestmentsmadebythecompanyarenotlessthattheaggregate amountofliabilitiestothedepositors. Tosecuretheinterestofdepositor,suchcompaniesarerequiredtoinvestinaportfolio comprisingofhighlyliquidandsecuredinstrumentsviz.Central/StateGovernment securities,fixeddepositofscheduledcommercialbanks(SCB),Certificateofdepositsof SCB/FIs,unitsofMutualFunds,etc.

3.MiscellaneousnonbankingcompaniesMNBCs(ChitFund), TheChitCompanies,althoughgovernedbytheMiscellaneousNonbankingCompanies (MNBCs)(ReserveBank)Directions,1977,issuedbytheReserveBankwithregardto acceptanceofdeposits,areregulatedbytheRegistrarofChitsoftherespectiveState Governments. Furthermore,MNBCs,notacceptingpublicdepositshavebeenexemptedfromsubmitting returnstotheReserveBanksinceDecember27,2005.

4.Mutualbenefitfinancialcompanies(NidhisandunnotifiedNidhis) MutualbenefitfundsincludingNidhicompaniesarenotregulatedbytheReserveBank (exceptaspertainingtodeposittakingactivities)astheycomeundertheregulatory purviewoftheMinistryofCorporateAffairs 5.Housingfinancecompanies. TheNationalHousingBank(NHB)regulateshousingfinancecompanies 6.Insurancecompanies InsuranceCompaniesareregulatedbytheInsuranceRegulatoryandDevelopment Authority. 7.StockbrokingcompaniesandMerchantbankingcompanies ThesecompaniesareregulatedbytheSecuritiesandExchangeBoardofIndia. 28

8.MortgageGuaranteeCompanies MortgageGuaranteeCompanieshavebeennotifiedasNonBankingFinancialCompanies underSection45I(f)(iii)oftheRBIAct,1934.

SupervisionofNBFCsbyReserveBank ThesupervisoryframeworkforNBFCsisbasedonthreecriteria,viz., (a)thesizeofNBFC, (b)thetypeofactivityperformed,and (c)theacceptanceorotherwiseofpublicdeposits. Towardsthisend,afourprongedsupervisorystrategycomprising (a) onsiteinspectionbasedonCAMELS(capital,assets,management,earnings, liquidity,systemsandprocedures)methodology, (b) computerisedoffsitesurveillancethroughperiodiccontrolreturns, (c) aneffectivemarketintelligencenetwork,and (d) asystemofsubmissionofexceptionreportsbyauditorsofNBFCs,hasbeenputin place. Theregulationandsupervisioniscomprehensiveforcompaniesacceptingorholding publicdepositstoensureprotectionofinterestsofdepositors. Companiesholdingoracceptingpublicdepositsarerequiredtocomplywithallthe directionsonacceptanceofpublicdeposits,prudentialnormsandliquidassets,andshould submitperiodicreturnstotheReserveBank.Theyaresupervisedusingallthesupervisory toolsindicatedabove. Companiesnotholdingoracceptingpublicdepositsareregulatedandsupervisedina limitedmanner.Theyarerequiredtocomplyonlywithprudentialnormsrelatingtoincome recognition,accountingstandards,assetclassificationandprovisioningagainstbadand doubtfuldebts.Theyarelessfrequentlyinspected.Suchcompaniesarenowrequiredto submitamonthlyreturntotheReserveBank.

5.0PREREQUISITESFORCARRYINGONBUSINESSOFNBFC

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ThecompanydesiringtoberegisteredasaNBFCisrequiredtosubmititsapplicationfor registrationintheprescribedformatalongwithnecessarydocumentsforRBIs consideration.RBIissuesCertificateofRegistrationaftersatisfyingitselfthatthe conditionsasenumeratedinSection45IAoftheRBIAct,1934aresatisfied. Thefollowingprerequisitesmentionedbelowarecumulativeandnotalternative. 1.RegistrationRequirement IntermsofSection45IAoftheRBIAct,1934,itismandatorythateveryNBFCshouldbe registeredwithRBItocommenceorcarryonanybusinessofnonbankingfinancial institutionasdefinedinclause(a)ofSection45IoftheRBIAct,1934. TheregistrationiscompulsoryforallNBFCs,irrespectiveoftheirholdingofpublic deposits.TheRBI(Amendment)Act,1997,whichintroducedcomprehensivechangesin ChapterIIIB,IIICandV,providesforanentrypointnormofRs.25lakhastheminimum netownedfund(NOF).Subsequently,fornewNBFCsseekingregistrationwiththeReserve BanktocommencebusinessonorafterApril21,1999,therequirementofminimumlevel ofNOFwasrevisedupwardstoRs.2crore.NoNBFCcancommenceorcarryonbusiness ofafinancialinstitutionincludingacceptanceofpublicdepositwithoutobtaininga CertificateofRegistration(CoR)fromtheReserveBank. Thecompanyisrequiredtosubmititsapplicationforregistrationintheprescribedformat alongwithnecessarydocumentsforRBIsconsideration.TheBankissuesCertificateof RegistrationaftersatisfyingitselfthattheconditionsasenumeratedinSection45IAofthe RBIAct,1934aresatisfied

RequirementstobecompliedwithanddocumentstobesubmittedtoRBIbyNBFCsfor obtainingcertificateandRegistrationfromRBI Anindicativelistofdocuments/informationtobefurnishedalongwiththeapplication.All documents/informationistobesubmittedinduplicate. 1. 2. 3. MinimumNOFrequirementRs.200lakh. Applicationtobesubmittedintwoseparatesetstiedupproperlyintwoseparate files. Annex II to the Application Form to be submitted duly signed by the director/Authorizedsignatoryandcertifiedbythestatutoryauditors. 30

4. 5. 6.

AnnexIII(directorsprofile)totheApplicationFormtobeseparatelyfilledupfor each director. Care should be taken to give details of bankers in respect of firms/companies/entitiesinwhichdirectorshavesubstantialinterest. Incasethedirectorsareassociatedorhavesubstantialinterestinothercompanies, indicateclearlytheactivityofthecompanies(whetherNBFCornot). BoardResolutionspecificallyapprovingthesubmissionoftheapplicationandits contentsandauthorisingsignatory. Board Resolutiontothe effect that the companyhas not accepted any public deposit,inthepast(specifyperiod)/doesnotholdanypublicdepositasonthedate andwillnotacceptthesameinfuturewithoutthepriorapprovalofReserveBank ofIndiainwriting. Board resolution stating that the company is not carrying on any NBFC activity/stoppedNBFCactivityandwillnotcarryon/commencethesamebefore gettingregistrationfromRBI. AuditorsCertificatecertifyingthatthecompanyis/doesnotaccept/isnotholding PublicDeposit. AuditorsCertificatecertifyingthatthecompanyisnotcarryingonanyNBFC activity. Certifyingcompliancewithsection45SofChapterIIICoftheRBIAct,1934in whichdirector/softhecompanyhassubstantialinterest.

7.

8. 9. 10.

11. Netownedfundasondate. 12.

13. DetailsofchangesintheMemorandumandArticlesofAssociationdulycertified. 14. LastthreeyearsAuditedbalancesheetalongwithdirectors&auditorsreport. 15. Detailsofclausesinthememorandumrelatingtofinancialbusiness. 16. 17. Detailsofchangeinthemanagementofthecompanyduringlastfinancialyeartill dateifanyandreasonsthereof. Details of acquisitions, mergers of other companies if any together with supportingdocuments. Detailsofinfusionofcapitalifanyduringlastfinancialyeartogetherwiththe copyofreturnofallotmentfiledwithRegistrarofCompanies. Details of the bank balances/bank accounts/complete postal address of the branch/bank,loan/creditfacilitiesetc.availed.

18. Detailsofgroupcompanies/associateconcerns/subsidiaries/holdingcompanies. 19. 20.

21. Business plan for next three years indicating market segment to be covered 31

withoutanyelementofpublicdeposits. 22. Cashflowstatement,asset/incomepatternstatementfornextthreeyears. 23. Briefbackgroundnoteontheactivitiesofthecompanyduringthelastthreeyears andthereasonsforapplyingforNBFCregistration.

II(b)isthecompanyengagedinanycapitalmarketactivity?Ifso,whetherthere 24. hasbeenanynoncompliancewithSEBIRegulations?(Statementtobecertified byAuditors). Whetheranyprohibitoryorderwasissuedinthepasttothecompanyoranyother 25. NBFC/RNBCwithwhichthedirectors/promotersetc.wereassociated?Ifyes, detailsthereof. Whetherthecompanyoranyofitsdirectorswas/isinvolvedinanycriminalcase, 26. includingundersection138(1)oftheNegotiableInstrumentsAct?Ifyes,details thereof. 27. WhetherthecompanywasgrantedanypermissionbyECDtofunctionasFull fledgedMoneyChangers?

28. Whetherthecompanywas/isauthorisedbyECDtoacceptdepositsfromNRIs. 29. WhetherFitandProperNormsforDirectorshavebeenfulfilled.

NBFCsexemptedfromRegistrationwithRBI However,toobviatedualregulation,certaincategoryofNBFCswhichareregulatedby otherregulatorsareexemptedfromtherequirementofregistrationwithRBIviz.Venture CapitalFund/MerchantBankingcompanies/Stockbrokingcompaniesregisteredwith SEBI,InsuranceCompanyholdingavalidCertificateofRegistrationissuedbyIRDA, NidhicompaniesasnotifiedunderSection620AoftheCompaniesAct,1956,Chit companiesasdefinedinclause(b)ofSection2oftheChitFundsAct,1982orHousing FinanceCompaniesregulatedbyNationalHousingBank. AslaiddowninRBIMasterCircularRBI/200910/6DNBS.PD.CC.No.148/03.02.004/ 200910datedJuly1,2009thefollowingaresomeexemptionsfromtheprovisionsofRBI Act,1934butsubjecttocertainconditions: (i)AHousingFinanceInstitutionshasbeenexemptedfromprovisionsofChapterIIIBof theRBIAct,1934 32

(ii)AmerchantbankingcompanyhasbeenexemptedfromtheprovisionsofSection45IA [Requirementofregistrationandnetownedfund],Section45IB [Maintenanceofliquidassets]and45IC[CreationofReserveFund]oftheRBI Act,1934,NonBankingFinancialCompaniesAcceptanceofPublicDeposits (ReserveBank)Directions,1998andNonBankingFinancialCompanies PrudentialNorms(ReserveBank)Directions,1998 (iii)InthecaseofMicroFinanceCompaniesandMutualBenefitCompaniesSections45 IA,45IBand45ICoftheReserveBankofIndiaAct,1934shallnotapply (iv)InthecaseofGovernmentCompaniesSections45IBand45ICoftheReserveBank ofIndiaAct,1934paragraphs4to7oftheNonBankingFinancial CompaniesAcceptanceofPublicDeposits(ReserveBank)Directions,1998and NonBankingFinancialCompaniesPrudentialNorms(ReserveBank)Directions, 1998exceptparagraph13Aofthesaiddirectionsrelatingtosubmissionof informationtoReserveBankinregardtochangeofaddress,directors,auditors, etcshallnotapply (v)InthecaseofVentureCapitalFundCompaniesSection45IAandSection45ICofthe ReserveBankofIndiaAct,1934shallnotapply (vi)InthecaseofInsurance/StockExchange/StockBroker/SubBrokerThe provisionsofSection45IA,45IB,45IC,45MBand45MCoftheReserveBankof IndiaAct,1934andprovisionsofNonBankingFinancialCompaniesAcceptance ofPublicDeposit(ReserveBank)DirectionscontainedinNotificationNo. DFC.118/DG(SPT)98datedJanuary31.1998,theNonBankingFinancial CompaniesPrudentialNorms(ReserveBank)Directions,1998datedJanuary31, 1998shallnotapply (vii)InthecaseofNidhiCompanies,theprovisionsofSections45IA,45IBand45ICof theReserveBankofIndiaAct,1934shallnotapply (viii)ChitCompaniesdoingthebusinessofchitsexclusivelyareexempted ThelistofregisteredNBFCsisavailableonthewebsiteofReserveBankofIndiaandcan beviewedatwww.rbi.org.in 2.IncorporationunderTheCompaniesAct1956 ItshouldbeacompanyincorporatedundertheCompaniesAct,1956anddesirousof commencingbusinessofnonbankingfinancialinstitutionasdefinedunderSection45I(a) oftheRBIAct,1934

3.MinimumNetOwnedFund 33

AcompanyincorporatedundertheCompaniesAct,1956anddesirousofcommencing businessofnonbankingfinancialinstitutionasdefinedunderSection45I(a)oftheRBI Act,1934shouldhaveaminimumnetownedfundofRs25lakhraisedtoRs200lakh w.e.fApril21,1999VideNotificationnoDNBS132/CGM(VSNM)99,dated2041999, bytheRBIforanNBFCwhichcommencesthebusinessofanNBFCafter21stApril1999. Thus,thisspecificationofhighernetownedfundisnotapplicabletoNBFCsthat commencedbusinessbefore21April1999. NetOwnedFundisdefinedintheExplanationtoSection45IAoftheRBIAct1934as follows (a)Theaggregateofthepaidupequitycapitalandfreereservesasdisclosedinthelatest balancesheetofthecompanyafterdeductingtherefrom (i)accumulatedbalanceofloss; (ii)Deferredrevenueexpenditure;and (iii)Otherintangibleassets;and (b)Furtherreducedbytheamountsrepresenting (1)Investmentsofsuchcompanyinsharesof (i)Itssubsidiaries; (ii)Companiesinthesamegroup; (iii)Allothernonbankingfinancialcompanies;and (2)Thebookvalueofdebentures,bonds,outstandingloansandadvances(includinghire purchaseandleasefinance)madeto,anddepositswith (i)Subsidiariesofsuchcompany;and (ii)Companiesinthesamegroup, totheextentsuchamountexceedstenpercent,of(a)above

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 GeneralComplianceRequirements AllNBFCs,beingcompaniesregisteredundertheCompaniesAct,havetofulfill compliancerelatingtotheBoardofDirectors,ShareCapital,ManagementStructure, Audits,Meetings,maintenanceaswellaspublicationofbooksofaccountsandgeneral conductaspertherequirementsoftheCompaniesAct1956. Inaddition,theyhavetofulfillthespecificrequirementsoftheReserveBankofIndia (RBI)assetoutintheDirectionsandvariousnotificationsandamendmentsbytheRBI. TheRBIalsoprescribesasetofcompliancenormsforallNBFCs.ThePrudentialNorms forNBFCsacceptingpublicdepositsaremorerigorous.

6.0REGULATORYFRAMEWORKFORNBFCsININDIA TheNBFCsectorischaracterisedbyitsheterogeneity.Itisheterogeneousintermofsize, business,spreadandownership.ItismorethanthreedecadessinceRBIhasstarted regulatingandsupervisingthefunctioningoftheNBFCsectorinIndia.RBI presentlyregulatestheNBFCswhetherundertaking,exclusivelyorincombination, theactivitiesofassetfinancing,loaningandinvestmentastheirprincipalbusiness, irrespectiveofwhethertheyacceptpublicdepositsornot. TheschemeofregulationofthedepositacceptanceactivitiesoftheNonBanking Companieswasconceivedinthesixtiesasanadjuncttomonetaryandcreditpolicy ofthecountryandalsotoprovideanindirectprotectiontothedepositorsby insertionintheyear1963,ofanewChapterIIIBintheReserveBankofIndiaAct, 1934.Theregulationstill1997empoweredtheReserveBankofIndia,onlyto regulateorprohibitissueofprospectusoradvertisementsolicitingdeposit,collect informationastodepositsandtogivedirectionsonmattersrelatingtodeposits. Duringtheninetiesaspurtwasobservedinthenumberofnonbankingcompaniesandthe volumeofdepositsaccepted.Proliferationofinstitutionsbothfinancialandnon financialdependingmainlyorwhollyondepositsfrompublicwasviewedwith concernbytheauthorities.Furtherintheabsenceofanyprudentialceiling,the 35

NBFCsdeployedtheirfundswheretheyhadlittleexperienceandexpertiseasalso lenttothosesectorswithhighrisks.TheresultanthighlevelofNonPerforming Assetsaggravatedtheliquiditycrunchfacedbymanycompaniesandledto significantfailures

AmendmentstoRBIActandNewRegulatoryFramework

Variouscommittees,whichwentintotheseaspects,stronglyrecommendedthatthere shouldbeanappropriateregulatoryframeworkoverNBFCsandthatmorepowers shouldbevestedwithRBItoregulateNBFCsinabettermanner.ChaptersIIIB, IIICandVoftheRBIActwerecomprehensivelyamendedinJanuary1997for vestingmorepowerswiththeRBIandproviding,interalia,forminimumentry pointnorm,compulsoryregistrationwiththeReserveBankofallexistingand newlyincorporatedNBFCsforcarryingonandcommencementoffinancial business.RBIputinplaceinJanuary1998anewregulatoryframeworkinvolving prescriptionofprudentialnormsforNBFCs,regulationofdeposittakingactivityto ensurethattheNBFCsfunctiononsoundandhealthylinesandstrengthenthe financialsystemofthecountry.Regulatoryandsupervisoryattentionwasfocused onNBFCsDwhichacceptpublicdepositssoastoenableRBItoefficiently dischargeitsresponsibilitiestoprotecttheinterestsofthedepositors.Theprocess hashelpedinensuringconsolidationofNBFCsectorasawhole. Withtheamendment,anycompanyseekingtocommence/carryonbusinessofNBFIwas requiredtoobtainCertificateofRegistrationfromtheBankunderSection45IAof theRBIAct,1934andalsohaveaminimumNetOwnedFund(NOF)ofRs25 lakhs.TheNOFrequirementwasincreasedtoRs200lakhsw.e.f.April21,1999. Whilegivingregistration,anevaluationofthequalityofmanagementisundertaken byapplyingfitandpropernormbasedontheinformationfurnishedbythe companyinrespectofthepromoters/directors,bankersreport,reportfromother regulatorslikeSEBI/IRDAetc.(incasethepromoters/directorsareinvolvedin activitiesregulatedbytheseinstitutions).NewCompaniesarenotallowedtoraise publicdepositsforperiodoftwoyearsfromthedateofregistration.Forallowing thesecompaniestoraisepublicdepositsafteraperiodoftwoyears,detailed appraisal/reviewisundertakenbytheBank.

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FurthertwosetsofdetaileddirectionsonPrudentialwereissuedbyRBIin2007.The directionsinteralia,prescribeguidelinesonincomerecognition,assetclassificationand provisioningrequirementsapplicabletoNBFCs,exposurenorms,constitutionofaudit committee,disclosuresinthebalancesheet,requirementofcapitaladequacy,restrictions oninvestmentsinlandandbuildingandunquotedshares.

AnOverviewofRegulationofNBFCs (1) Mission (3)BasicStructureofRegulatory andSupervisoryFramework Toensurethat Prescriptionofprudentialnorms i. thefinancialcompanies akintothoseapplicabletobanks, functiononhealthylines, * thesecompanies SubmissionofperiodicalReturns functioninconsonance forthepurposeofoffsitesurveillance,

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AnOverviewofRegulationofNBFCs(Concld.) withthemonetarypolicy Supervisoryframeworkcomprising framework,sothattheir (a)onsiteinspection(CAMELSpattern) functioningdoesnotleadto (b)offsiteMonitoringthroughreturns(c) systemicaberrations, marketintelligenceAnd(d)Exception reportsbystatutoryauditors,, * thequalityofsurveillance Punitiveactionlikecancellation andsupervisionexercised ofCertificateofRegistration bytheRBIovertheNBFCs (CoR),prohibition keepspacewiththedevelopments fromacceptanceofdepositsand inthissector. alienationofassets,filingcriminal complaintsandwindinguppetitions inextremecases,appointmentofthe RBIobserversincertaincases,etc. * comprehensiveregulationand CoordinationwithStateGovernments supervisionofAssetliability tocurbunauthorisedandfraudulent andriskmanagement activities,trainingprogrammes systemforNBFCs, forpersonnelofNBFCs,State GovernmentsandPoliceofficials. (2) Amendmentstothe (4)Otherstepsforprotectionof ReserveBankofIndia depositorsinterest (RBI)Act,1934 RBIActwasamended Publicityfordepositorseducation inJanuary1997 Andawareness,workshops/seminars fortradeandindustryorganisations, providingfor,interalia. depositorsassociations, charteredaccountants,etc. * EntrynormsforNBFCs andprohibitionofdeposit acceptance(savetothe extentpermittedunder theAct)byunincorporated bodiesengagedinfinancialbusiness, * Compulsoryregistration, maintenanceofliquid assetsandcreationofreservefund, 38

* PoweroftheRBItoissue directionstoanNBFCorto theNBFCsingeneral ortoaclassofNBFCs. * Comprehensiveregulation andSupervisionofdeposit takingNBFCsandlimited supervisionoverthosenot acceptingpublicdeposits. (sourcewww.rbi.org.in)

RegulatoryFrameworkofNBFC

1.ReserveBankofIndia GoverningBody:DepartmentofNonBankingSupervisionoftheReserveBankof India(DNBSRBI) GoverningLaws: a.CHAPTERIIIB,IIICandVofReserveBankofIndia(RBI)Act1934; b.RBIDirections c.RBICirculars;NotificationsandGuidelinesissuedfromtimetotime

a.CHAPTERIIIBOFRBIACT1934 ProvisionsrelatingtoNonbankingInstitutionsreceivingdepositsandFinancial Institutions 45H:ChapterIIIBnottoapplyincertaincases 45I:Definitions 45IA: RequirementofRegistrationandNetownedFund 45IB: Maintenanceofpercentageofassets 45IC: ReserveFund 45J: RegulationbyBankonProspectus 45JA: PowerofRBItodeterminePolicyandissueDirections 45K: PowerofRBItocollectinformationfromNBIastodepositsandgive Directions 45L: PowerofRBItocallinformationfromFIandgiveDirections 39

45M: DutyofNBItofurnishstatementsetc.requiredbyBank 45MA: Powers&DutiesofAuditors 45MB:PowerofRBItoprohibitacceptanceofdepositandalienationofassets 45MC:PowerofRBItofilewindinguppetition 45N:Inspection 45NA:Depositsnottobesolicitedbyunauthorizedperson 45NB:DisclosureofInformation 45NC:PowerofBanktoexempt 45Q:ChapterIIIBtooverrideotherlaws 45QA:PowerofCLBtoofferrepaymentofdeposit 45QB:NominationbyDepositors

b.RBIDirections i.NonBankingFinancialCompaniesAcceptanceofPublicDeposits(ReserveBank) Directions1998 ii.NonBankingFinancial(DepositAcceptingorholding)CompaniesPrudential Norms(ReserveBank)Directions2007 iii.NonBankingFinancial(NonDepositAcceptingorholding)Companies PrudentialNorms(ReserveBank)Directions2007 iv.NonBankingFinancialCompaniesAuditor'sReport(ReserveBank)Directions, 2008 [RBIDNBSCircularNo.DNBS(PD)CCNo.129/03.02.82/200809Dated 23.09.2008"NonBankingFinancialCompaniesAuditor'sReport(ReserveBank) Directions,2008" ReservebankofIndiahasissuedNonBankingFinancialCompaniesAuditor'sReport (ReserveBank)Directions,2008insupersessionoftheNonBankingFinancial CompaniesAuditor'sReport(ReserveBank)Directions,1998forthepurposeof properassessmentofbooksofaccountsofNBFCs.TheseDirectionsapplytoevery auditorofanonbankingfinancialcompanyintheReserveBankofIndiaActand DirectiondealswiththeprovisionsrelatingtoadditionalReporttobesubmittedto theBoardofDirectorsbyAuditorsanditscontent.Atthesametimeitimposes ObligationonauditortosubmitanexceptionreporttotheBank.Thesedirections willcomeintoforcewithimmediateeffect.]

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v.ReserveBankofIndia(NonBankingFinancialCompanies)ReturnsSpecifications1997 vi.ResiduaryNonBankingCompanies(ReserveBank)Directions1987 vii.MiscellaneousNonBankingCompanies(ReserveBank)Directions1977 viii.SecuritisationCompaniesandReconstructionCompanies(ReserveBank) GuidelinesandDirections,2003

c.RBICircularsissuedonJuly01,2009 NonBanking Financial (Deposit Acceptingor Holding) Companies Prudential Norms (ReserveBank)Directions,2007 NonBanking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms(ReserveBank)Directions,2007 NonBankingFinancialCompaniesAuditorsReport(ReserveBank)Directions,2008 Reserve Bank of India (NonBanking Financial Companies) Returns Specifications1997 ExemptionsfromtheprovisionsofRBIAct,1934 FraudsFutureapproachtowardsmonitoringoffraudsinNBFCs MiscellaneousNonBankingCompanies(ReserveBank)Directions,1977 'KnowYourCustomer'(KYC)GuidelinesAntiMoneyLaunderingStandards 'PreventionofMoneyLaunderingAct,2002ObligationsofNBFCsintermsofRules notifiedthereunder ResiduaryNonBankingCompanies TheSecuritisationCompaniesandReconstructionCompanies(ReserveBank)Guidelines andDirections,2003 directions/instructionsissuedtotheSecuritisationCompanies/ReconstructionCompanies MortgageGuaranteeCompanies FairPracticesCode alliedactivitiesentryintoinsurancebusiness,issueofcreditcardandmarketingand distributionofcertainproducts CorporateGovernance MiscellaneousinstructionstoNBFCNDSI MiscellaneousinstructionstoNonBankingFinancialCompanies NonBanking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions,1998

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2.StateLawsonprotectionofinterestsofdepositorsinfinancialestablishments SomeStateLaws a.TamilNaduProtectionofInterestofDepositor's(FinancialEstablishments)Act 1997[TamilNaduisthefirststatetoenactsuchanactinthecountry] b.MaharshtraProtectionofInterestsofDepositors(InFinancialEstablishments) Act1999 c.TheDelhiProtectionOfInterestsOfDepositors(InFinancialEstablishments) Act,2001 d.BiharProtectionofInterestsofDepositors(InFinancialEstablishments)Act 2002 e.GujaratProtectionofInterestsofDepositors(InFinancialEstablishments)Act 2003 f.TheMadhyaPradeshprotectionofDepositorsInterestAct2000

3.TheCompaniesAct1956 Someapplicablesectionsinclude: Section3:DefinitionsofCompany;existingcompany;privatecompany; andpubliccompany Section4:Meaningofholdingcompanyandsubsidiary Section4A:PublicFinancialInstitutions Section43A:PrivateCompanytobecomepubliccompanyincertaincases Section58A:Depositsnottobeinvitedwithoutissuinganadvertisement Section58AA:SmallDepositors Section58AAA:Defaultinacceptanceorrefundofdepositstobecognizable Section209(1):BooksofAccountstobekeptbycompany Section217(1):DirectorsReport Section227:PowersandDutiesofAuditors Section252:MinimumNumberofDirectors Section292A:AuditCommittee Section370(1B):Loansetc.tocompaniesunderthesamemanagement Section372(11):Purchasebycompanyofsharesetc.ofothercompanies Section620A:PowertomodifyActinitsapplicationtoNidhisetc. 42

Section637A:PowerofCentralGovernmentorTribunaltoaccordapprovaletc. subjecttoconditionsandtoprescribefeesonapplications

4.CompanysRules i.Companies(AcceptanceofDeposit)Rules,1975 ii.Companies(AcceptanceofDepositsAmendment)Rules,1997 iii.Companies(ApplicationforExtensionoftimeorExemptionundersubsection(8) ofsection58A)Rules,1979 5.ForeignExchangeRegulations i.ForeignExchangeManagement(Deposit)Regulations2000 ii.ForeignExchangeManagement(TransferorissueofSecuritybyaPersonResident outsideIndia)Regulations,2000 6.SecuritiesContracts(Regulation)Act1956 Someapplicablesectionsinclude: Section2(h):DefinitionofSecurities Section2(j):DefinitionofStockExchange Section4:GrantofRecognitiontoStockExchanges

7.HousingFinanceCompanies TheHousingFinanceCompanies(NHB)Directions2001 8.MortgageGuaranteeCompanies MortgageGuaranteeCompaniesInvestment(ReserveBank)Directions,2008 MortgageGuaranteeCompany(ReserveBank)Guidelines,2008 NotificationNo.DNBS(MGC)1/CGM(PK)2008datedJanuary15,2008 NotificationNo.DNBS(MGC)2/CGM(PK)2008datedJanuary15,2008 9.SecuritisationCompaniesandReconstructionCompanies i.TheSecuritisationCompaniesandReconstructionCompanies(ReserveBank)Guidelines andDirections,2003 ii.ExemptiontoSecuritisationorReconstructionCompaniesfromRBIActAugust28, 2003 iii.QuarterlyStatementtobesubmittedbySecuritisationCompanies/Reconstruction 43

CompaniesregisteredwiththeReserveBankofIndiaunderSection3(4)oftheSARFAESI ActSeptember26,2008 iv.GuidelinesondeclarationofNetAssetValueofSecurityReceiptsissuedby SecuritisationCompany/ReconstructionCompanyMay28,2007 v.MasterCircularondirections/instructionsissuedtotheSecuritisationCompaniesand ReconstructionCompaniesJuly01,2008 vi.RegulationofSCs/RCssubmissionofreturnsandauditedbalancesheetbySCs/RCs March5,2008

10.MiscellaneousNonBankingCompanies i.NonbankingFinancialCompaniesandMiscellaneousNonBankingCompanies (Advertisement)Rules,1977. ii.MiscellaneousNonBankingCompanies(ReserveBank)Directions,1977 iii.ChitFundsAct,1982 11.ResiduaryNonBankingCompanies ResiduaryNonBankingCompanies(ReserveBank)Directions,1987 12.MicroFinancialSector(DevelopmentandRegulation)Bill,2007 13.ReportsonMoneyLendingandNidhis

SalientfeaturesoftheRBIregulatoryframework TheReserveBankregulatesandsupervisesNBFCsasdefinedinChapterIIIBof theRBIAct,1934.Accordingly,theReserveBankhasissuedasetofdirectionstoregulate theactivitiesofNBFCsunderitsjurisdiction.SomefeaturesoftheRBIregulatory frameworkareasfollows:

AnNBFCmusthavespecificauthorizationtoacceptdepositsfromthepublic. NBFCmustdisplaytheCertificateofRegistrationoracertifiedcopythereofatthe Registeredofficeandotheroffices/branches. RegistrationofanNBFCwiththeRBImerelyauthorizesittoconductthebusiness ofNBFC.RBIdoesnotguaranteetherepaymentofdepositsacceptedbyNBFCs. NBFCscannotusethenameoftheRBIinanymannerwhileconductingtheir business. 44

TheNBFCwhoseapplicationforgrantofCertificateofRegistration(CoR)has beenrejectedorcancelledbytheRBIisneitherauthorizedtoacceptfreshdeposits norrenewexistingdeposit.Suchrejectionorcancellationisalsopublishedin newspapersfromtimetotime.Besides,alistofNBFCspermittedtoacceptpublic deposits,NBFCswhoseapplicationsforCoRhasbeenrejectedorwhoseCoRhas beencancelledbytheRBIisavailableontheRBI'swebsitewww.rbi.org.in(goto sitemapandthenNBFClist) NBFCswhichacceptdepositsshouldhaveminimuminvestmentgradecreditrating grantedbyanapprovedcreditratingagencyfordepositcollection,exceptcertain AssetFinance(equipmentleasingandhirepurchasefinance)companiesand ResiduaryNonBankingCompanies(RNBCs), NBFCsexcludingRNBCscannot

OfferarateofinterestondepositsmorethanthatapprovedbyRBIfromtimetotime(at present12.5%). Acceptdepositforaperiodlessthan12monthsandmorethan60months Offeranygifts/incentivestosolicitdepositsfrompublic.

RNBCsshould offerarateofinterestofnotlessthan5%perannumontermdepositsand3.5% ondailydeposits,bothcompoundedannually,underextantdirections. RNBCscannotacceptdepositsforaperiodlessthan12monthsandmorethan84 months. RNBCscannotofferanygifts/incentivestosolicitdepositsfrompublic

NBFCsincludingRNBCscan

acceptdepositonlyagainstissueofproperreceipt. Thereceiptshouldbearthenameofthecompanyandshouldbesignedbyanauthorized officialofthecompany. Thereceiptshouldmentionthenameofthedepositor,theamountinwordsaswellas figures,therateofinterestpayableonthedepositamountandthedateofrepaymentof matureddepositalongwiththematurityamount.

Inthecaseofbrokers/agentsetccollectingpublicdepositsonbehalfofNBFCs,the depositorsshouldsatisfythemselvesthatthebrokers/agentsaredulyauthorizedby theNBFC. 45

IfadeposittakingNBFCfailstorepaythedepositortheinterestaccruedthereonin accordancewiththetermsandconditionsofacceptanceofsuchdeposit,redressal ofgrievancecanbethrough, theRegionalBenchoftheCompanyLawBoardat Chennai/Delhi/Kolkata/Mumbai Acceptanceofdepositsbycompaniesengagedinactivitiesincludingplantation activities,commoditiestrading,multilevelmarketing,manufacturingactivities, housingfinance,nidhis(mutualbenefitfinancialcompanies),andpotentialnidhis (mutualbenefitcompany)andcompaniesengagedincollectiveinvestmentschemes donotcomeunderthepurview/regulationsoftheRBI. Individuals,firmsandotherunincorporatedassociationofindividualsorbodies shallnotacceptdepositsfromthepublic (i)ifhisoritsbusinesswhollyorpartlyincludesanyofthefinancialactivitiessuch asloansandadvances,acquisitionofsharesormarketablesecurities,leasingorhire purchaseactivities,or (ii)ifhisoritsprincipalbusinessisthatofreceivingdepositsorlendinginany manner.

7.0ACCEPTANCEOFPUBLICDEPOSITS AllNBFCsarenotentitledtoacceptpublicdeposits.OnlythoseNBFCsholdingavalid CertificateofRegistrationwithauthorisationtoacceptPublicDepositscanaccept/hold publicdeposits.NBFCsauthorisedtoaccept/holdpublicdepositsbesideshavingminimum stipulatedNetOwnedFund(NOF)shouldalsocomplywiththeDirectionssuchas investingpartofthefundsinliquidassets,maintainreserves,ratingetc.issuedbythe Bank.

PublicDeposit ThetermdepositisdefinedunderSection45I(bb)oftheRBIAct,1934.Deposit includesandshallbedeemedalwaystohaveincludedanyreceiptofmoneybywayof depositorloanorinanyotherformbutdoesnotinclude:

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amountraisedbywayofsharecapital,orcontributedascapitalbypartnersofa firm; amountreceivedfromscheduledbank,cooperativebank,abankingcompany, StateFinancialCorporation,IDBIoranyotherinstitutionspecifiedbyRBI; amountreceivedinordinarycourseofbusinessbywayofsecuritydeposit, dealershipdeposit,earnestmoney,advanceagainstordersforgoods,propertiesor services; amountreceivedbyaregisteredmoneylenderotherthanabodycorporate; amountreceivedbywayofsubscriptionsinrespectofaChit.

Paragraph2(1)(xii)oftheNonBankingFinancialCompaniesAcceptanceofPublic Deposits(ReserveBank)Directions,1998definesapublicdepositasadepositas definedunderSection45I(bb)oftheRBIAct,1934andfurtherexcludesthefollowing:

amountreceivedfromtheCentral/StateGovernmentoranyothersourcewhere repaymentisguaranteedbyCentral/StateGovernmentoranyamountreceived fromlocalauthorityorforeigngovernmentoranyforeigncitizen/authority/person; anyamountreceivedfromfinancialinstitutions; anyamountreceivedfromothercompanyasintercorporatedeposit; amountreceivedbywayofsubscriptionstoshares,stock,bondsordebentures pendingallotmentorbywayofcallsinadvanceifsuchamountisnotrepayableto themembersunderthearticlesofassociationofthecompany; amountreceivedfromshareholdersbyprivatecompany; amountreceivedfromdirectorsorrelativeofthedirectorofaNBFC; amountraisedbyissueofbondsordebenturessecuredbymortgageofany immovablepropertyorotherassetofthecompanysubjecttoconditions; theamountbroughtinbythepromotersbywayofunsecuredloan; amountreceivedfromamutualfund; anyamountreceivedashybriddebtorsubordinateddebt; anyamountreceivedbyissuanceofCommercialPaper.

MinimumNetOwnedFundDepositTakingNBFCs Toensureameasuredmovementtowardsstrengtheningthefinancialsofalldeposittaking NBFCsbyincreasingtheirNOFtoaminimumofRs.200lakhinagradual,nondisruptive andnondiscriminatorymanner,theRBIvideRBI/200708/369DNBS(PD)C.C.No.114 /03.02.059/200708datedJune17,2008prescribedthat: 47

Inordertostrengthenthefinancialsystemingeneralanddeposittakingentitiesin particularNBFCsacceptingdepositsshouldbeadequatelycapitalizedandatthesametime alsohaveauniformminimumNOF. Toensureameasuredmovementtowardsstrengtheningthefinancialsofalldeposittaking NBFCsbyincreasingtheirNOFtoaminimumofRs.200lakhinagradual,non disruptiveandnondiscriminatorymanner,ithasbeendecidedtoprescribethat: (a)Asafirststep,NBFCshavingminimumNOFoflessthanRs.200lakhmayfreezetheir depositsatthelevelcurrentlyheldbythem. (b)Further,AssetFinanceCompanies(AFC)havingminimuminvestmentgradecredit ratingandCRARof12%maybringdownpublicdepositstoalevelthatis1.5timestheir NOFwhileallothercompaniesmaybringdowntheirpublicdepositstoalevelequalto theirNOFbyMarch31,2009. PresentCeilingonpublic RevisedCeilingonpublic deposits deposits AFCsmaintainingCRARof15%without 1.5timesofNOForRs10 EqualtoNOF creditratingandhavingNOFmorethan crorewhicheverisless Rs25lakhbutlessthanRs200lakh AFCswithCRARof12%andhaving 4timesofNOF 1.5timesofNOF minimuminvestmentgradecreditrating andhavingNOFmorethanRs25lakhbut lessthanRs200lakh LCs/ICswithCRARof15%andhaving 1.5timesofNOF EqualtoNOF minimuminvestmentgradecreditrating andhavingNOFmorethanRs25lakhbut lessthanRs200lakh AFCsAssetFinanceCompanies LCsLoanCompanies ICsInvestmentCompanies (c)Thosecompanieswhicharepresentlyeligibletoacceptpublicdepositsuptoacertain level,buthave,foranyreason,notaccepteddepositsuptothatlevelwillbepermittedto acceptpublicdepositsuptotherevisedceilingprescribed CategoryofNBFC

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(d)CompaniesonattainingtheNOFofRs.200lakhmaysubmitstatutoryauditor's certificatecertifyingitsNOF. (e)TheNBFCsfailingtoachievetheprescribedceilingwithinthestipulatedtimeperiod, mayapplytotheReserveBankforappropriatedispensationinthisregardwhichmaybe consideredoncasetocasebasis.

CreditRating NononbankingfinancialcompanyhavingNetOwnedFundTwoHundredlakhofrupees andaboveshallacceptpublicdepositunlessithasobtainedminimuminvestmentgradeor otherspecifiedcreditratingforfixeddepositsfromanyoneoftheapprovedcreditrating agenciesatleastonceayearandacopyoftheratingissenttotheReserveBankofIndia alongwithreturnonprudentialnorms. AnunratedNBFC,exceptcertainAssetFinancecompanies(AFC),cannotacceptpublic deposits.AnexceptionismadeincaseofunratedAFCcompanieswithCRARof15% whichcanacceptpublicdepositupto1.5timesoftheNOForRs10crorewhicheveris lowerwithouthavingacreditrating.ANBFCmaygetitselfratedbyanyofthefourrating agenciesnamely,CRISIL,CARE,ICRAandFITCHRatingsIndiaPvt.Ltd. ApprovedCreditRatingAgenciesandMinimumInvestmentGradeCreditRating Thenamesofapprovedcreditratingagenciesandtheminimumcreditratingshallbeas follows: Nameoftheagency (a)TheCreditRatingInformation ServicesofIndiaLtd.(CRISIL) (b)ICRALtd. (c)CreditAnalysis&ResearchLtd.(CARE) (d)FitchRatingsIndia PrivateLtd. 49 MinimuminvestmentGradeRating FA(FAMinus)

MA(MAMinus) CAREBBB(FD) tA(ind)(FD)]

Upgrading/Downgradingofcreditrating Intheeventofupgradingordowngradingofcreditratingofanynonbankingfinancial companytoanylevelfromthelevelpreviouslyheldbythenonbankingfinancial company,itshallwithinfifteenworkingdaysofitsbeingsoratedinform,inwriting,of suchupgrading/downgradingtotheReserveBankofIndia. IfratingofaNBFCisdowngradedtobelowminimuminvestmentgraderating,ithasto stopacceptingpublicdeposit,reportthepositionwithinfifteenworkingdaystotheRBI andreducewithinthreeyearsfromthedateofsuchdowngradingofcreditrating,the amountofexcesspublicdeposittonilortotheappropriateextentpermissibleunder paragraph4(4)ofNonBankingFinancialCompaniesAcceptanceofPublicDeposits (ReserveBank)Directions,1998;howeversuchNBFCcanrenewthematuredpublic depositssubjecttorepaymentstipulationsspecifiedaboveandcompliancewithother conditionsforacceptanceofdeposits. NBFCsalsoissuefinancialproductslikeCommercialPaper,Debenturesetc.towhich ratingisassignedbyratingagencies.Theratingsassignedtosuchproductsmayundergo changesforvariousreasonsascribedtobytheratingagencies. ThereforeRBIvideNotificationRBI/200809/372DNBS(PD)CC.No.134/03.10.001/ 20082009dated4.02.2009,hasclarifiedthatallNBFCs(bothdeposittakingandnon deposittaking)withassetsizeofRs100croreandaboveexcludingRNBCs,shallfurnish theinformationaboutdowngrading/upgradingofassignedratingofanyfinancialproduct issuedbythem,withinfifteendaysofsuchachangeinrating,totheRegionalOfficeofthe Bankunderwhosejurisdictiontheirregisteredofficeisfunctioning.

PeriodofDeposit TheNBFCsareallowedtoaccept/renewpublicdepositsforaminimumperiodof12 monthsandmaximumperiodof60months.TheRNBCshavedifferentnormsfor acceptanceofdeposits.

Prohibitionfromacceptingdemanddeposit NoNBFCcanaccept/renewanypublicdepositwhichispayableondemand. 50

InterestonPublicDeposit NBFCscannotofferinterestrateshigherthantheceilingrateprescribedbyRBIfromtime totime.Thepresentceilingis12.5percentperannum(onandfromApril24,2007.The interestmaybepaidorcompoundedatrestsnotshorterthanmonthlyrests.Thisisthe maximumpermissiblerateanNBFCcanpayonitspublicdepositsandtheymayoffer lowerrates.

RegulationofexcessiveinterestchargedbyNBFCs RBIadvisedallNBFCs,interalia,thattheratesofinterestbeyondacertainlevelmaybe seentobeexcessiveandcanneitherbesustainablenorbeconformingtonormalfinancial practice.BoardsofNBFCswere,therefore,advisedtolayoutappropriateinternal principlesandproceduresindetermininginterestratesandprocessingandothercharges. RBIinexerciseofpowersunderSection45LoftheRBIAct,1934issuedDirections regardingexcessiveratesofinterestchargedbyNBFCsonJanuary2,2009.Thesaid directionslaiddowninNotificationNo.DNBS.204/CGM(ASR)2009datedJanuary2, 2009specified: a)TheBoardofeachNBFCshalladoptaninterestratemodeltakingintoaccountrelevant factorssuchas,costoffunds,marginandriskpremium,etcanddeterminetherateof interesttobechargedforloansandadvances.Therateofinterestandtheapproachfor gradationsofriskandrationaleforchargingdifferentrateofinteresttodifferentcategories ofborrowersshallbedisclosedtotheborrowerorcustomerintheapplicationformand communicatedexplicitlyinthesanctionletter. b)Theratesofinterestandtheapproachforgradationofrisksshallalsobemadeavailable onthewebsiteofthecompaniesorpublishedintherelevantnewspapers.Theinformation publishedinthewebsiteorotherwisepublishedshouldbeupdatedwheneverthereisa changeintheratesofinterest. c)Therateofinterestshouldbeannualisedratessothattheborrowerisawareoftheexact ratesthatwouldbechargedtotheaccount. 51

Paymentofbrokerage OnandfromJanuary31,1998nononbankingfinancialcompanyshallpaytoanybroker onpublicdepositcollectedbyorthroughhim, (i)brokerage,commission,incentiveoranyotherbenefitbywhatevernamecalled,in excessoftwopercentofthedepositsocollected;and (ii)expensesbywayofreimbursementonthebasisofrelativevouchers/billsproducedby him,inexcessof0.5percentofthedepositsocollected.

Particularstobespecifiedinapplicationformsolicitingpublicdeposits Nononbankingfinancialcompanyshallacceptorrenewanypublicdepositexceptona writtenapplicationfromthedepositorintheformtobesuppliedbythecompany,which formshallcontainalltheparticularsspecifiedintheNonBankingFinancialCompanies andMiscellaneousNonBankingCompanies (Advertisement)Rules,1977,madeundersection58AoftheCompaniesAct,1956and alsocontainthespecificcategoryofthedepositor,i.e.whetherthedepositorisa shareholderoradirectororapromoterofthecompanyoramemberofpublic. Theapplicationformshouldalsocontainthefollowing: (a)thecreditratingassignedforitsfixeddepositandthenameofthecreditratingagency whichratedthecompany; (b)incaseofnonrepaymentofthedepositorpartthereofasperthe,thedepositormay approachCompanyLawBoard; (c)incaseofanydeficiencyofthecompanyinservicingitsdeposit,thedepositormay approachtheNationalConsumersDisputesRedressalForum,theStateLevelConsumers DisputesRedressalForumortheDistrictLevelConsumersDisputesRedressalForumfor relief; (d)astatementthatthefinancialpositionofthecompanyasdisclosedandthe representationsmadeintheapplicationformaretrueandcorrectandthatthecompanyand itsBoardofDirectorsareresponsibleforthecorrectnessandveracitythereof; (e)thefinancialactivitiesofthecompanyareregulatedbytheReserveBankofIndia; (f)attheendofapplicationformbutbeforethesignatureofthedepositor,thefollowing verificationclausebythedepositorshouldbeappended:

52

Ihavegonethroughthefinancialsandotherstatements/particulars/representations furnished/madebythecompanyandaftercarefulconsiderationIammakingthedeposit withthecompanyatmyownriskandvolition.

Furnishingofreceiptstodepositors Everynonbankingcompanyshallfurnishtoeverydepositororhisagent,areceiptfor everyamountwhichhasbeenorwhichmaybereceivedbythecompanybywayofdeposit Thesaidreceiptshallbedulysignedbyanofficerentitledtoactforthecompanyinthis behalfandshallstatethedateofdeposit,thenameofthedepositor,theamountinwords andfiguresreceivedbythecompanybywayofdeposit,therateofinterestpayablethereon andthedateonwhichthedepositisrepayable. LiquidAssetRequirement IntermsofSection45IBoftheRBIAct,1934,theminimumlevelofliquidassettobe maintainedbyNBFCsis15percentofpublicdepositsoutstandingasonthelastworking dayofthesecondprecedingquarter.Ofthe15%,NBFCsarerequiredtoinvestnotless thantenpercentinapprovedsecuritiesandtheremaining5%canbeinunencumberedterm depositswithanyscheduledcommercialbank.Thus,theliquidassetsmayconsistof Governmentsecurities,Governmentguaranteedbondsandtermdepositswithany scheduledcommercialbank. TheinvestmentinGovernmentsecuritiesshouldbeindematerialisedformwhichcanbe maintainedinConstituentsSubsidiaryGeneralLedger(CSGL)Accountwithascheduled commercialbank(SCB)/StockHoldingCorporationofIndiaLimited(SHICL).Incaseof Governmentguaranteedbondsthesamemaybekeptindematerialisedformwith SCB/SHCILorinadematerialisedaccountwithdepositories[NationalSecurities DepositoryLtd.(NSDL)/CentralDepositoryServices(India)Ltd.(CDSL)]througha depositoryparticipantregisteredwithSecurities&ExchangeBoardofIndia(SEBI). HoweverincasethereareGovernmentbondswhichareinphysicalformthesamemaybe keptinsafecustodyofSCB/SHCIL. NBFCshavebeendirectedtomaintainthemandatedliquidassetsecuritiesina dematerialisedformwiththeentitiesstatedaboveataplacewheretheregisteredofficeof thecompanyissituated.However,ifanNBFCintendstoentrustthesecuritiesataplace 53

otherthantheplaceatwhichitsregisteredofficeislocated,itmaydosoafterobtainingthe permissionofRBIinwriting.Itmaybenotedthatliquidassetsinapprovedsecuritieswill havetobemaintainedindematerialisedformonly. Theliquidassetsmaintainedasabovearetobeutilisedforpaymentofclaimsof depositors.However,depositbeingunsecuredinnature,depositorsdonothavedirect claimonliquidassets.

Registerofdeposits Everymiscellaneousnonbankingcompanyshallkeeponeormoreregistersinwhichshall beenteredseparatelyinthecaseofeachdepositorthefollowingparticulars,namely (a)nameandaddressofthedepositor, (b)dateandamountofeachdeposit, (c)durationandtheduedateofeachdeposit, (d)dateandamountofaccruedinterestorpremium oneachdeposit, (e)dateandamountofeachrepayment,whether ofprincipal,interestorpremium, (f)anyotherparticularsrelatingtothedeposit. Theregisterorregistersaforesaidshallbekeptattheregisteredofficeofthecompanyand shallbepreservedingoodorderforaperiodofnotlessthaneightcalendaryearsfollowing thefinancialyearinwhichthelatestentryismadeoftherepaymentorrenewalofany depositofwhichparticularsarecontainedintheregister:

InformationtobeincludedintheBoard'sreport IneveryreportoftheBoardofDirectorslaidbeforethecompanyingeneralmeetingunder subsection(1)ofsection217oftheCompaniesAct,1956thereshallbeincludedinthe caseofnonbankingcompany,thefollowingparticularsorinformation,namely: (a)thetotalnumberofdepositorsofthecompanywhosedepositshavenotbeenclaimedby thedepositorsorpaidbythecompanyafterthedateonwhichthedepositbecameduefor repaymentorrenewal;and

54

(b)thetotalamountduetothedepositorsandremainingunclaimedorunpaidbeyondthe datesreferredtoasaforesaid. (2)Thesaidparticularsorinformationshallbefurnishedwithreferencetothepositionas onthelastdateofthefinancialyeartowhichthereportrelatesandiftheamounts remainingunclaimedorundisbursedasreferredtoaboveexceedintheaggregatethesum ofrupeesfivelakhs,thereshallalsobeincludedinthereportastatementonthestepstaken orproposedtobetakenbytheBoardofDirectorsfortherepaymentoftheamountsdueto thedepositorsandremainingunclaimedorundisbursed.

NominationfacilityforDepositors NominationfacilityisavailabletothedepositorsofNBFCs.TheRulesfornomination facilityareprovidedforinsection45QBoftheReserveBankofIndiaAct,1934.Non BankingFinancialCompanieshavebeenadvisedtoadopttheBankingCompanies (Nomination)Rules,1985madeunderSection45ZAoftheBankingRegulationAct,1949. Accordingly,depositor/sofNBFCsarepermittedtonominate,onepersontowhom,the NBFCcanreturnthedepositintheeventofthedeathofthedepositor/s.NBFCsare advisedtoacceptnominationsmadebythedepositorsintheformsimilartoonespecified underthesaidrules,vizFormDA1forthepurposeofnomination,andFormDA2and DA3forcancellationofnominationandvariationofnominationrespectively. Interestonoverduematureddeposits AsperReserveBanksDirections,overdueinterestispayabletothedepositorsincasethe companyhasdelayedtherepaymentofmatureddeposits,andsuchinterestispayablefrom thedateofreceiptofsuchclaimbythecompanyorthedateofmaturityofthedeposit whicheverislater,tillthedateofactualpayment.Ifthedepositorhaslodgedhisclaimafter thedateofmaturity,thecompanywouldbeliabletopayinterestfortheperiodfromthe dateofclaimtillthedateofrepayment.Fortheperiodbetweenthedateofmaturityandthe dateofclaimitisthediscretionofthecompanytopayinterest. Prepaymentofdeposits ANBFCacceptsdepositsunderamutualcontractwithitsdepositors.Incaseadepositor requestsforprematurepayment,ReserveBankofIndiahasprescribedRegulationsfor suchaneventualityintheNonBankingFinancialCompaniesAcceptanceofPublic Deposits(ReserveBank)Directions,1998whereinitisspecifiedthatNBFCscannotgrant anyloanagainstapublicdepositormakeprematurerepaymentofapublicdepositwithina 55

periodofthreemonths(lockinperiod)fromthedateofitsacceptance,howeverinthe eventofdeathofadepositor,thecompanymay,evenwithinthelockinperiod,repaythe depositattherequestofthejointholderswithsurvivorclause/nominee/legalheironly againstsubmissionofrelevantproof,tothesatisfactionofthecompany. AnNBFCsubjecttoaboveprovisions,ifitisnotaproblemcompany,maypermitafterthe lockinperiodprematurerepaymentofapublicdepositatitssolediscretion,attherateof interestprescribedbytheBank. AproblemNBFCisprohibitedfrommakingprematurerepaymentofanydepositsor grantinganyloanagainstpublicdeposits/deposits,asthecasemaybe.Theprohibition shallnot,however,applyinthecaseofdeathofdepositororrepaymentoftinydepositsi.e. uptoRs.10000/subjecttolockinperiodof3monthsinthelattercase.

DefaultinrepaymentofDeposit IfaNBFCdefaultsinrepaymentofdeposit,thedepositorcanapproach a)CompanyLawBoard(CLB)or/and b)ConsumerForumorfileacivilsuittorecoverthedeposits. Adepositorcanapproachanyoralloftheseredressalauthoritiesi.econsumerforum, courtorCLB. a)DepositorapproachestheCLB Whereanonbankingfinancialcompanyfailstorepayanydepositorpartthereofin accordancewiththetermsandconditionsofsuchdeposit,theCompanyLawBoard(CLB) eitheronitsownmotionoronanapplicationfromthedepositordirects,byorder,thenon bankingfinancialcompanytomakerepaymentofsuchdepositorpartthereofforthwithor withinsuchtimeandsubjecttosuchconditionsasmaybespecifiedintheorder. ThedepositorcanapproachCLBbymailinganapplicationinprescribedformtothe appropriatebenchoftheCompanyLawBoardaccordingtoitsterritorialjurisdictionwith theprescribedfee. RelevantFormsaslaiddowninCompanylawBoardRegulations,1991are: Form1Formofpetitiontocompanylawboard 56

Form2Interlocutoryapplication Form3ReferencetoCompanyLawBoard Form4ApplicationByDepositor/DebentureHolderUnderSection58A(9)orSection 117C(4)oftheActOrSection45QAofTheReserveBankOfIndiaAct,1934 ThedetailsofaddressesandterritorialjurisdictionofthebenchofficersofCLBareas under: Sr.No. Addresses 1. BenchOfficer,CompanyLawBoard, NorthernRegionBench, ShastriBhavan,AWing,5thFloor, Dr.RajendraPrasadRoad, NewDelhi110001. BenchOfficer,CompanyLawBoard, SouthernRegionBench, ShastriBhavan,AWing,5thFloor, Block8,No26,HaddowsRoad, Chennai600006. BenchOfficer,CompanyLawBoard, WesternRegionBench, 2ndFloor,N.T.C.House, 15,NarottamMorarjeeMarg, BallardEstate, Mumbai400038. BenchOfficer,CompanyLawBoard, EasternRegionBench, 9,OldPostOfficeStreet, 6thFloor, Kolkata700001. BenchOfficer,CompanyLawBoard, PrincipalBenchatNewDelhi,Shastri Bhavan,AWing,5thFloor, Dr.RajendraPrasadRoad, NewDelhi110001. TerritorialJurisdiction UttarPradesh,Jammu&Kashmir, Punjab,HimachalPradesh, Rajasthan,HaryanaandUnion TerritoriesofChandigarhandDelhi TamilNadu,AndhraPradesh, Kerala,Karnataka,Union TerritoriesofAmindivi, MinicoyandLakshadweepIslands andPondicherry Maharashtra,Gujarat,Madhya Pradesh,GoaandUnion TerritoriesofDadra&Nagar Haveli,DamanandDiu.

2.

3.

4.

WestBengal,Orissa,Bihar, Assam,Tripura,Manipur, Nagaland,Meghalaya,Arunachal Pradesh,Mizoram,Union TerritoriesofAndamanand NicobarIslands. AllPrincipalBenchmattersallover India.

5.

57

b)DepositorapproachestheCourtandanofficialliquidatorisappointed: InanumberofcasesofficialliquidatorshavebeenappointedonthedefaultingNBFCs. OfficialLiquidatorisappointedbythecourtaftergivingthecompanyreasonable opportunityofbeingheardinawindinguppetition.Theliquidatorperformsdutiesof windingupandsuchdutiesinreferencetheretoasthecourtmayimpose. Wherethecourthasappointedanofficialliquidatororprovisionalliquidator,hebecomes custodianofthepropertyofthecompanyandrunsthedaytodayaffairsofthecompany. Hehastodrawupastatementofaffairsofthecompanyinprescribedformcontaining particularsofassetsofthecompany,itsdebtsandliabilities,names/residences/occupations ofitscreditors,thedebtsduetothecompanyandsuchotherinformationasmaybe prescribed.Theschemeisdrawnupbytheliquidatorandsameisputuptothecourtfor approval.Theliquidatorrealizestheassetsofthecompanyandarrangestorepaythe creditorsaccordingtotheschemeapprovedbythecourt.Theliquidatorgenerallyinserts advertisementinthenewspaperinvitingclaimsfromdepositors/investorsincompliance withcourtorders.Therefore,theinvestors/depositorsshouldfiletheclaimswithinduetime aspersuchnoticesoftheliquidator.TheReserveBankalsoprovidesassistancetothe depositorsinfurnishingaddressesoftheofficialliquidator. c)NoOmbudsmen ThereisnoOmbudsmanforhearingcomplaintsagainstNBFCs.However,inrespectof creditcardoperationsofanNBFC,ifacomplainantdoesnotgetsatisfactoryresponse fromtheNBFCwithinamaximumperiodof30daysfromthedateoflodgingthe complaint,thecustomerwillhavetheoptiontoapproachtheOfficeoftheconcerned BankingOmbudsmanforredressalofhisgrievance/s.

KeyPrudentialNormsforNBFCsacceptingpublicdeposits TheNonBankingFinancial(DepositAcceptingorHolding)CompaniesPrudentialNorms (ReserveBank)Directions,2007[ContainedinNotificationNo.DNBS(PD)CCNo.144/ 03.02.001/200910datedJuly1,2009)prescribeguidelinesonincomerecognition,asset classificationandprovisioningrequirementsapplicabletoNBFCs,exposurenorms, constitutionofauditcommittee,disclosuresinthebalancesheet,requirementofcapital adequacy,restrictionsoninvestmentsinlandandbuildingandunquotedshares. 58

KeyPrudentialnorms NetOwned Funds Capital Adequacy Ratio Non Performing Assets Credit Rating Periodof Public Deposit Interest Rateon Deposits Transferto Reserve Fund NBFCstakingPublicDeposits Rs2crore

Minimumof12%

Needtomakeprovisionsagainst nonperformingassets

Minimuminvestmentgradeor otherspecifiedcreditrating Between1yearand5years

Interestrateceilingspecified (now12.5%perannum)

20%ofprofits

Investment Minimum10%ofliquidassetin inApproved approvedsecuritiesand5%in unencumberedtermdeposits Securities withanyscheduledcommercial bank Limitof 4timesnetownedfundsfor 59

Deposits

assetfinancecompaniesand1.5 timesnetownedfundforloan andinvestmentcompanies

1.Framing&ImplementingPolicies:TheBoardofDirectorsshallframeinvestmentpolicy forthecompanyandimplementthesame.AlsoTheBODofeveryNBFC granting/intendingtograntdemand/callloansshallframeapolicyforthecompanyand implementthesame. 2.AccountingStandardsandGuidanceNotesissuedbyInstituteofCharteredAccountants ofIndia(ICAI)shallbefollowedinsofarastheyarenotinconsistentwithanythe Directions. 3.EveryNBFCshallseparatelydiscloseinitsbalancesheettheprovisionsmadeasper paragraph9oftheDirectionswithoutnettingthemfromtheincomeoragainstthevalueof assets.[AccordingtoPara9EveryNBFCshall,aftertakingintoaccountthetimelag betweenanaccountbecomingnonperforming,itsrecognitionassuch,therealisationof thesecurityandtheerosionovertimeinthevalueofsecuritycharged,makeprovision againstsubstandardassets,doubtfulassetsandlossassetsasprovidedintheParagraph] 4.ANBFChavingassetsofRs.50croreandaboveasperitslastauditedbalancesheet shallconstituteanAuditCommittee,consistingofnotlessthan3membersofitsBoardof Directors. 5.EveryNBFCshallprepareitsbalancesheetandprofitandlossaccountasonMarch31 everyyear.WhereaNBFCintendstoextendthedateofitsbalancesheetasperprovisions oftheCompaniesAct,itshouldtakepriorapprovaloftheRBIbeforeapproachingthe RegistrarofCompaniesforthispurpose. Further,evenincaseswheretheBankandtheROCgrantextensionoftime,theNBFC shallfurnishtotheBankaproformabalancesheet(unaudited)asonMarch31oftheyear andthestatutoryreturnsdueonthesaiddate. 6.EveryNBFCshallappendtoitsbalancesheet,theparticularsinthescheduleassetout inAnnextotheDirections.

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7.NoNBFCshallundertakeanytransactioningovernmentsecurityinphysicalform throughanybroker.(ItcanundertakeonlythroughitsCSGLAccountoritsDemat Account) 8.SubmissionofStatutoryAuditorCertificate: EveryNBFCshallsubmitaCertificatefromitsStatutoryAuditorthatitisengagedinthe businessofNBFIrequiringittoholdaCertificateofRegistrationunderSection45IAof theRBIAct. AcertificatefromtheStatutoryAuditorinthisregardwithreferencetothepositionofthe companyasatendofthefinancialyearendedMarch31maybesubmittedtotheRegional OfficeoftheDepartmentofNonBankingSupervisionunderwhosejurisdictionthenon bankingfinancialcompanyisregistered,latestbyJune30,everyyear. Suchcertificateshallalsoindicatetheasset/incomepatternoftheNBFCformakingit eligibleforclassificationasAssetFinanceCompany,InvestmentCompanyorLoan Company. 9.CapitalAdequacyRequirement: Everynonbankingfinancialcompanyshallmaintainaminimumcapitalratioconsistingof TierIandTierIIcapitalwhichshallnotbelessthantwelvepercentofitsaggregaterisk weightedassetsonbalancesheetandofriskadjustedvalueofoffbalancesheetitems.The totalofTierIIcapital,atanypointoftime,shallnotexceedonehundredpercentofTierI capital. TierICapitalmeansownedfundasreducedbyinvestmentinsharesofothernon bankingfinancialcompaniesandinshares,debentures,bonds,outstandingloansand advancesincludinghirepurchaseandleasefinancemadetoanddepositswithsubsidiaries andcompaniesinthesamegroup exceeding,inaggregate,tenpercentoftheownedfund; TierIIcapitalincludesthefollowing: (a)preferencesharesotherthanthosewhicharecompulsorilyconvertibleintoequity; (b)revaluationreservesatdiscountedrateoffiftyfivepercent; (c)generalprovisionsandlossreservestotheextentthesearenotattributabletoactual diminutionin valueoridentifiablepotentiallossinanyspecificassetandareavailabletomeet unexpectedlosses,to theextentofoneandonefourthpercentofriskweightedassets; (d)hybriddebtcapitalinstruments;and 61

(e)subordinateddebt totheextenttheaggregatedoesnotexceedTierIcapital. 10.LoansagainstNBFCsownsharesisprohibited 11.Submissionofhalfyearlyreturn NBFCsincludingRNBCsshallsubmitahalfyearlyreturnwithin3monthsoftheexpiry oftherelativehalfyearasonSeptemberandMarcheveryyear,intheformatNBS2 providedinAnnex2totheRegionalOfficeoftheDepartmentofNonBanking SupervisionoftheRBIunderwhosejurisdictiontheregisteredofficeofthecompanyis locatedasperSecondScheduletotheNonBankingFinancialCompaniesAcceptanceof PublicDeposits(ReserveBank)Directions,1998andScheduleBtoResiduaryNon BankingCompanies(ReserveBank)Directions,1987. 12.ExposuretoCapitalMarket EveryNBFC(incldg.RNBC)withtotalassetsofRs.100croreandaboveaccordingtothe previousauditedbalancesheet,shallsubmitamonthlyreturnwithinaperiodof7daysof theexpiryofthemonthtowhichitpertainsintheformatNBS6providedinAnnex3to theRegionalOfficeoftheDepartmentofNonBankingSupervisionoftheRBIasindicated intheSecondScheduletotheNonBankingFinancialCompaniesAcceptanceofPublic Deposits(ReserveBank)Directions,1998andScheduleBtotheResiduaryNonBanking Companies(ReserveBank)Directions,1987.

RelevantProvisionsoftheCompaniesAct1956 ThefollowingSectionsintheCompaniesAct,1956relatetoPublicdeposits a) Sec58ADepositsnottobeinvitedwithoutissuinganadvertisement b) Sec58AASmalldepositors c) Sec58AAADefaultinacceptanceorrefundofdepositstobecognizable d) Sec58BProvisionsrelatingtoprospectustoapplytoadvertisement Therelevantrulesframedthereunderinclude: a) Companies(AcceptanceofDeposit)Rules,1975 b) Companies(ApplicationforExtensionoftimeorExemptionundersubsection(8) ofsection58A)Rules,1979 TheimportantprovisionsoftheActandtheRulesaresummarisedasunder: 62

1.TherulesdonotapplytobankingcompaniesandfinancialcompaniesforwhichRBI haveseparatelyprescribedrules. 2.Depositmeansdepositofmoneyandincludeanyamountborrowedbyacompany,but doesnotincludecertaintypesofborrowings;viz.amountreceived: i.FromGovernment,LocalAuthority,ForeignGovernmentoranyotherforeignperson, citizenorauthorityoranyamountguaranteedbyGovernment. ii.FromBanks. iii.FromvariousGovernmentorsemiGovernmentfinancialCos.Or Corporation/insuranceCos.OraPublicfinancialinstitutionasmaybenotifiedbytheCG. iv.Fromanyothercompany. v.Bywayofsecuritydepositfromanemployee./td> vi.Bywayofsecurityoradvancefromanypurchasing,sellingorotheragentsinthe courseofbusinessoranyadvancereceivedagainstordersforsupplyofgoods,properties orservices. vii.Bywayofsubscriptiontoanyshare,stock,bondsordebenturespendingallotment. Anyamountreceivedbywayofcallsinadvancesolongasthisisnotrepayableunderthe Articles. viii.Intrustorintransit. ix.Fromadirectorincaseofanycompanyorfromashareholderincaseofaprivate companyoutofhisownfunds(thatisnotborrowedoracceptedfromothers)includinga Companywhichhasbecomepublicu/s.43AsolongasitretainsS.3(1)(iii)conditionsin itsArticles.Thedirector/shareholderconcernedhoweverhastofurnishadeclarationin writingtotheeffectthattheamountisnotbeinggivenoutoffundsacquiredbyhimby borrowingoracceptingfromothers. x.Byissueofbondsordebenturessecuredbythemortgageofanyimmovablepropertyor withanoptiontoconvertthemintoshares.Providedtheamountdoesnotexceedthe marketvalueofproperty. xi.Frompromotersbywayofunsecuredloanspursuanttoagreementwithfinancial institutionsforloanssolongassuchloansareoutstanding. 3.Acceptanceofdeposits a)Nocompanyshallacceptorrenewanydepositwhichisrepayableondemandoron noticeorafteraperiodoflessthansixmonthsormorethanthirtysixmonthsfromthedate ofacceptanceorrenewalofsuchdeposit b)Nocompanyshallinviteoracceptorrenewanydepositsinanyform,onarateof interestexceeding12.5percentperannumatrestswhichshallnotbeshorterthanmonthly rests c)Nocompanyshallpaybrokeragetoanybrokeratarate,exceedingonepercentofthe depositsforaperioduptooneyear,oneandhalfpercentofthedepositsforaperiodof 63

morethanoneyearbutuptotwoyears,andtwopercentofthedepositsforaperiod exceedingtwoyearscollectedbyorthroughsuchbroker,andsuchpaymentshallbeonone timebasis. d)Nocompanywithanetownedfundoflessthanrupeesonecroreshallinvitepublic deposits e)Anypersonwhoisauthorisedbyacompany,inwriting,tosolicitdepositsonitsbehalf andthroughwhomdepositsareprocuredwillonlybeentitledtobrokerage 4.Invitationsofdepositsbyacompanycanbemadeonlybymeansofanadvertisement specifyingthefinancialposition,managementstructureandotherparticularsrelatingtoa company.Acompanywhichhasdefaultedinrepaymentofdepositorinterestthereonis prohibitedfrominvitingdeposits. 5.Thedepositorsshallfilltheapplicationformsuppliedbythecompany.Thecompanyin returnissuesadepositreceiptwhichisanacknowledgementofdebtbythecompany.The termsandconditionsofthedepositareprintedonthebackofthereceipt. 6.Thecompanyshallmaintainaregisterofdepositscontainingtheprescribedparticulars. Suchregistersshallbepreservedingoodorderforaperiodofnotlessthaneightcalendar yearsfromthefinancialyearinwhichthelatestentryismadeintheregister 7.Everycompanyshallfilereturnsofdepositsdulycertifiedbytheirauditorwitha Registraronorbefore30thJuneofeveryyear. 8.Theexpression'smalldepositor'means''adepositorwhohasdeposited(inafinancial year)asumnotexceedingtwentythousandrupeesinacompanyandincludeshis successors,nomineesandlegalrepresentatives".Incaseofanydefaultbythecompanyin payingbacktothem,itshallinformtheTribunalwithinsixtydaysfromthedateofdefault. TheTribunalwillthendirectthecompanytorepaytosmalldepositorswithinaperiodof thirtydaysfromthedateofreceiptofintimationofdefault.Onfailuretocomplywiththe ordersoftheBoard,thecompanyanditsdirectorsshallbepunishablewithimprisonment andpaymentofdailyfineduringtheperiodinwhichsuchnoncompliancecontinues. However,ifsuchadefaultingcompanywantstoinvitedepositsfromsmalldepositors,it shallstatethecompletenatureofdefaultinallitsfutureadvertisementsandapplication form. 9.Section58AAA,anydefault/contraventionundersections58Aand58AA,relatingto deposits,willbetreatedasacognizableoffence.Inotherwords,underthisprovision,the directorsofthedefaultingcompanycanbearrestedandputbehindbars.Incidentally,the courtswilltakecognizanceonlyofthecomplaint ofthecentralgovernmentoranyofitsauthorisedofficers.

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8.0SUBMISSIONOFRETURNS

TheNBFCsacceptingpublicdepositsshouldfurnishtoRBI: i.Auditedbalancesheetofeachfinancialyearandanauditedprofitandlossaccountin respectofthatyearaspassedinthegeneralmeetingtogetherwithacopyofthereportof theBoardofDirectorsandacopyofthereportandthenotesonaccountsfurnishedbyits Auditors; ii.StatutoryAnnualReturnondepositsNBS1; iii.CertificatefromtheAuditorsthatthecompanyisinapositiontorepaythedepositsas andwhentheclaimsarise; iv.QuarterlyReturnonliquidassets; v.HalfyearlyReturnonprudentialnorms; vii.HalfyearlyALMReturnsbycompanieshavingpublicdepositsofRs.20croreand aboveorwithassetsofRs.100croreandaboveirrespectiveofthesizeofdeposits; vii.Monthlyreturnonexposuretocapitalmarketbycompanieshavingpublicdepositsof Rs.50croreandabove;and viii.AcopyoftheCreditRatingobtainedonceayearalongwithoneoftheHalfyearly Returnsonprudentialnormsasat(v)above.

TheNBFCshavingassetsofRs.100croreandabovebutnotacceptingpublicdepositsare requiredtosubmitaMonthlyReturnonimportantfinancialparametersofthecompany. Allcompaniesnotacceptingpublicdepositshavetopassaboardresolutiontotheeffect thattheyhaveneitheracceptedpublicdepositnorwouldacceptanypublicdepositduring theyear. However,alltheNBFCs(otherthanthoseexempted)arerequiredtoberegisteredwith RBIandalsomakesurethattheycontinuetobeeligibletoretaintheRegistration.Further, allNBFCs(includingnondeposittaking)shouldsubmitacertificatefromtheirStatutory AuditorseveryyeartotheeffectthattheycontinuetoundertakethebusinessofNBFI requiringholdingofCoRunderSection45IAoftheRBIAct,1934. RBIhaspowerstocauseInspectionofthebooksofanycompanyandcallforanyother informationaboutitsbusinessactivities.Forthispurpose,theNBFCisrequiredtofurnish theinformationinrespectofanychangeinthecompositionofitsBoardofDirectors, addressofthecompanyanditsDirectorsandthename/sandofficialdesignationsofits principalofficersandthenameandofficeaddressofitsAuditors.WitheffectfromApril1, 65

2007,nondeposittakingNBFCswithassetsofRs100croreandabovewereadvisedto maintainminimumCRARof10%andalsocomplywithsingle/groupexposurenorms.The companieshavetoachieveCRARof12%byMarch31,2009and15%byMarch31,2010.

ReturnsandFormstobefiledbyNBFCs

a.ANNUAL

1.FORMNBS1 `(AnnualReturnondepositsason31stMarch20)

TobesubmittedbyallNBFCsaccepting/holdingpublicdepositsandMNBCs ExceptRNBCs TobesubmittedtotheRegionalOfficeofDeptt.OfNonBankingSupervision, RBI,wheretheNBFCs/MNBCsregisteredofficeissituated. TobesubmittedOnceayearafter31stMarchandlatestbySeptember30th,with referencetoitspositionason31stMarch,irrespectiveofthedateofclosingofthe financialyearoftheCompanyconcerned ACertificatefromtheAuditorsoftheCompanyshouldbeappendedtotheReturn intheprescribedformat InrespectofPart3oftheReturn(pertainingtoNetOwnedFund)theinformation shouldbefurnishedasperthelatestbalancesheetbutprecedingthedateofthe return. IntermsofNotificationNo.DNBS.135/CGM\(VSNM)2000,dated1312000, NBFCsshallpreparetheirbalancesheetsandprofitandlossaccountsason March31,everyyearwitheffectfromitsaccountingyearendingwith31stMarch 2001.Thereforewitheffectfromaccountingyearending31stMarch2001,the informationinPart3ofthereturnshallbeasonthedateofcurrentbalancesheet thuscoincidingwiththedateofreturn.

66

Submission of the Return should not be delayed for any reason such as the finalisation/completionoftheauditoftheannualaccounts.Thecompilationofthe Returnshouldbeonthebasisofthefiguresavailableinthebooksofaccountsof thecompanyandshouldbecertifiedbyitsStatutoryAuditors. Thenumberofaccountsshouldbegiveninactualfigureswhiletheamountsof depositsshouldbeshowninlakhsofrupees.Theamountshouldberoundedoffto thenearestlakh.Illustratively,anamountofRs.4,56,100shouldbeshownas5and notas4.6or5,00,000.Similarly,anamountofRs.61,49,500istobeshownas61 andnotas61.5or61,00,000. The Return should be signed by a Manager (as defined in Section 2 of the CompaniesAct,1956)andifthereisnosuchManager,byManagingDirectoror any official of the Company who has been duly authorised by the Board of DirectorsandwhoseSpecimenSignaturehasbeenfurnishedtotheReserveBank ofIndiaforthepurpose.IncasetheSpecimenSignaturehasnotbeenfurnishedin theprescribedcard,theReturnmustbesignedbytheauthorisedofficialandhis SpecimenSignaturefurnishedseparately. Incasethereisnothingtoreportinanypart/itemoftheReturn,therelevantpart/ itemmaybemarkedNilinthecolumnmeantforNo.ofaccountsand00smay beindicatedinthecolumnmeantforAmount. SubsidiariesandCompaniesinthesamegroupmentionedinthisReturnhave thesamemeaningsassignedtotheminSection4andSection372(11)respectively, oftheCompaniesAct,1956asappearingpriortoamendmenttotheCompanies Actdated31stOctober1998. Incasethisreturnisbeingfiledthroughelectronicmedia(internet),tothespecified WebServer,ahardcopyofthesamemaybesubmittedtotheconcernedRegional Officedulysigned.

2.FORMNBS7 (AnnualStatementofCapitalFunds,Riskassets/exposuresandRiskAsset Ratioetc.,asatendofMarch20)

67

IntroducedvideCircularNo.DNBS.PD/CC.No.93/03.05.002/20062007,dated 27.04.2007.

b.HALFYEARLY

FORMNBS2 (HalfYearlyStatementofCapitalFunds,RiskAssets/ExposuresandRiskAsset Ratioetc.asattheendofMarch/September20) FormNBS2introducedvideNotificationNo.DNBS.192/DG(VL)2007,dated222 2007. ThisReturnisdividedinto10partsA,B,C,D,E,F,G,H,I,J. IthastobeaccompaniedbyacertificationfromtheMD/CEOoftheCompany. IthastobeaccompaniedbyaAuditorsReportfromtheStatutoryauditorsofthe Company

c.QUARTERLYRETURN FORMNBS3 QuarterlyReturnonStatutoryLiquidAssetsforthe4quarters(ended March/June/September/December20) Itsdivideinto3partsA,BandCandisaccompaniedby4Annexures. Annexure1:ListofApprovedSecuritiesHeldTowardsLiquidAssetRequirement Annexure2:ListofDepositsHeldwithScheduledCommercialBanks

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Annexure3:NameandAddressoftheDesignatedBank/Depositorythrougha DepositoryParticipant/theBankwheretheConstituentsSubsidiaryGeneralLedger Accountismaintained.

d.MONTHLYRETURNS 1. MonthlyReturnbyNBFCsnotacceptingdepositsandhavingassetsizeofRs.100cr andabove. ItisthemonthlyreturnonimportantparametersofNBFCsnotaccepting/holding publicdepositsandhavingassetsizeofRs.100crandabove. Itgivesinformationon: Co.profile SourcesofFunds ApplicationofFunds Requirementsastoprofitandlossaccount Assetclassification PercentageofNPAs Banks/FisexposureontheCo. Co.sexposuretogroup/associate/relatedparties DetailsofCapitalMarketExposure ForeignSourcesofFunds IthasCertificationbytheManagingDirectorandisalsoCertifiedbytheAiditorsofthe Co. Enclosurestothisreturninclude: 1. SpecimenSignaturecards 2. ListofPrincipalOfficersandnames&addressesofDirectors 3. AcopyoftheAuditedBalanceSheet(withschedules)forthequarterendedMarch.

2.FORMNBS6MonthlyReturnonExposuretoCapitalMarket

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IntroducedvidevideNotificationNo.DNBS.192/DG(VL)2007,dated222 2007. ThisreturnistobefilledbyalldeposittakingNBFCshavingtotalassetsofRs 100croreandaboveasonMarch31ofthepreviousyear (e.g.forthereturnforthemonthofApril2007orOctober2007thebasedatetotalassets wouldbeMarch2007,similarlyforthereturnforthemonthofMarch2008basedatetotal assetswouldbeMarch2007).Intheabsenceofauditedfigures,provisionalfiguresmaybe takenforthepurpose. ThereturnshouldbesubmittedtotheRegionalOfficeoftheDepartmentofNon BankingSupervision,ReserveBankofIndiaunderwhosejurisdictionits RegisteredOfficeissituated. Definitionofcapitalmarketexposure(CME) TheCME,forthepurposeofthisreturn,wouldbetheaggregateofexposuresofthe companyintheformof: (i)investmentinquotedequityshares,quotedcompulsorilyconvertiblepreferenceshares (CCPS),quotedconvertiblebondsanddebenturesandquotedunitsofprimarilyequity orientedmutualfunds; (ii)loansandadvancesagainstsecuritiesat(i)above,includingthoseforfinancingof IPOs,etc. (iii)securedandunsecuredloansandadvancestoandguaranteesissuedonbehalfofstock brokers;and (iv)underwritingcommitmentsinrespectofequityrelatedprimaryissuesincluding throughbookbuildingroute;and (v)anyotherequityrelatedexposuretocapitalmarket. TheCMEdoesnotcoveracceptanceofshares,debentures,unitsofmutualfunds,etc. assignedtotheNBFCsandRNBCsascollateraloradditionalsecurity,iftheyareaccepted aspernormalbusinesspracticeandappraisalprocedure,asalsotheinvestmentsbyRNBCs incompliancewiththeprovisionsofparagraph6oftheResiduaryNonBanking Companies(ReserveBank)Directions,1987. SubsidiariesandCompaniesinthesamegroupmentionedinthisReturnhave thesamemeaningsassignedtotheminSection4andSection372(11)respectively, oftheCompaniesAct,1956. Turnovermeanstotalofsalesandpurchasesinthesamecategoryofinvestments.

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Incasethereisnothingtoreportinanypart/itemoftheReturn,00smaybe indicatedinthecolumn(s)meantforAmount. TheReturnshouldbesignedbyanyofthePrincipalOfficersasgivenintheAnnual returnondeposits(NBS1/NBS1A). ThetermGrossPurchasesindicatesexposureswhichresultinincreaseincapital marketexposureandGrossSalesmeansexposurewhichresultindeclineincapital marketexposureoftheNBFC/RNBC.

TheReturnisdividedinto3parts: Part1=QuotedInvestments Part2=UnquotedInvestments Part3=PositionasperlastauditedBalanceSheet

3.FormNBS4Monthlyreturnonrepaymentofdeposits TheReserveBankhasputinplacecomprehensiveregulatoryandsupervisorymechanism forNonBankingFinancialCompanies(NBFCs)toensurethatthesecompaniesworkon soundandhealthylinesandtheinterestsofthedepositorsareadequatelyprotected.RBI AmendmentAct,1997hasmadeitmandatoryforNBFCstoobtainCertificateof RegistrationfromtheBankasaprerequisiteforcommencingorcontinuingthebusinessof aNBFC.Onapplication,theBankgrantsCoRtothecompaniesunderSection451Aof RBIAct,1934onfulfillmentofcriterialaiddowntherein.Furthercompaniescanhold CoRonlyaslongastheycontinuetofulfiltheserequirements.Incaseacompanydoes notfulfiltheconditionsforgrantofCoRorcontinuanceofCoR,theBankrejectsthe applicationofthecompanyorcancelstheCoRgrantedtoit,asthecasemaybe. TheregulatoryandsupervisoryattentionoftheBankisbeingfocussedoncompanies whichareholdingpublicdeposits. Inordertoprotecttheinterestsofdepositorsandtomonitortherepaymentofpublic depositsofcompaniesholdingpublicdepositsandwhoseapplicationshavebeenrejected orCertificatesofRegistrationhavebeencancelled,theBankhasdevisedanewreturn,

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NBS4,tobesubmittedbysuchcompaniesonamonthlybasistotheRegionalOffice underwhosejurisdictiontheregisteredofficeofthecompanyislocated. ThereturnhasbeenintroducedfromJune30,2000andtherejectedcompanieshavebeen advisedaccordingly.

4.FORMNBS5MonetaryandSupervisoryReturn TobesubmittedbyallNonBankingFinancialCompanies,andResiduaryNon BankingCompaniescoveredbyPara8(3)ofNotificationNo.DFC.118/DG(SPT)98 datedJanuary31,1998andpara2oftheRNBC(ReserveBank)Directions1987 respectively,holdingpublicdepositsofRs20Croreandaboveasperthelastaudited balancesheet

NBFCsnotacceptingpublicdepositsbuthavingassetsizeofRs.100croreandabove

Inordertomonitortheactivitiesofnonbankingfinancialcompaniesnotaccepting/holding publicdeposits(NBFCsND),asystemofquarterlyreportingwasintroducedinrespectof companieshavingassetsizeofRs.500croreandabove.Thereportingsysteminthe prescribedformatforsuchNBFCsNDwasputinplacebeginningSeptember2004.The arrangementwasreviewedanditwasfeltthattheinterveningperiodofonequarterwastoo longtotakeinformedandtimelydecisions.Theperiodicityforthesubmissionofthereturn was,therefore,changedfromquarterlytomonthlyfromSeptember2005. Similarly,withaviewtoincreasingthecoverageofNBFCs,thethresholdlevelwasraised bymakingthereportingsystemapplicabletoNBFCswithassetsizeofRs.100croreand above,beginningSeptember2005,insteadofRs.500croreandaboveearlier.

Documents/CompliancerequiredtobesubmittedtotheReserveBankofIndiabythe NBFCsnotaccepting/holdingpublicdeposits

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a.RBIDNBSCircularNo.DNBS.PD/CC.No.130/03.05.002/200809Dated24.09.2008 MonitoringFrameworkfornondeposittakingNBFCs ReservebankofIndiahasdecidedtocallforthebasicinformationfromnondeposittaking NBFCswithassetsizeofRs50croreandabovebutlessthanRs100croreatquarterly intervalsandreturnsforthequarterendedSeptember2008maybesubmittedbyfirstweek ofDecember2008.Attheendofeachquarter,thesequarterlyreturncouldbefiledonline withtheRegionalOfficeoftheDepartmentofNonBankingSupervisioninwhose jurisdictioncompanyisregistered. b.TheNBFCshavingassetssizeofRs.100croreandabovebutnotacceptingpublic depositsarerequiredtosubmitaMonthlyReturnonimportantfinancialparametersofthe company.Allcompaniesnotacceptingpublicdepositshavetopassaboardresolutionto theeffectthattheyhaveneitheracceptedpublicdepositnorwouldacceptanypublic depositduringtheyear. c.AllNBFCsincludingnondeposittakingshouldsubmitacertificatefromtheirStatutory AuditorseveryyeartotheeffectthattheycontinuetoundertakethebusinessofNBFI requiringholdingofCoRunderSection45IAoftheRBIAct, 1934.

ApplicabilityofNBFCsNDSIregulations(videNotificationRBI/200809/491DNBS (PD)CC.No.141/03.10.001/200809dated4.6.2009 1.IntermsofcircularDNBS(RID)C.C.No.57/02.05.15/200506datedSeptember6, 2005,allNBFCswithassetssizeofRs100croreandabove,andnotaccepting/holding publicdepositswererequiredtosubmitaMonthlyReturnonImportantFinancial ParameterstotheRegionalOfficeunderwhosejurisdictionthecompanyislocated. Further,intermsof"NonBankingFinancial(NonDepositAcceptingorHolding) CompaniesPrudentialNorms(ReserveBank)Directions,2007"asamendedfromtimeto time,systemicallyimportantnondeposittakingnonbankingfinancialcompaniesare requiredtocomplywith,interalia,capitaladequacy,creditconcentrationanddisclosure normsalongwithreportingrequirements.Systemicallyimportantnondeposittakingnon bankingfinancialcompany'(NBFCNDSI)asdefinedinPara2(xix)ofthesaidDirections meansanonbankingfinancialcompanynotaccepting/holdingpublicdepositsandhaving totalassetsofRs100croreandaboveasshowninthelastauditedbalancesheet.

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2.AnondeposittakingNBFCwithanassetsizeoflessthanRs.100croreasonbalance sheetdatemightsubsequentlyaddonassetsbeforethenextbalancesheetdatedueto severalreasonsincludingbusinessexpansionplan.ItisclarifiedthatonceanNBFC reachesanassetsizeofRs.100croreorabove,itshallcomeundertheregulatory requirementforNBFCsNDSIasstatedabove,despitenothavingsuchassetsasonthe dateoflastbalancesheet.

3.Therefore,itisadvisedthatallsuchnondeposittakingNBFCsmaycomplywithRBI regulationsissuedtoNBFCNDSIfromtimetotime,asandwhentheyattainanassetsize ofRs.100crore,irrespectiveofthedateonwhichsuchsizeisattained. 4.Itisfurtherobservedthatinadynamicenvironment,theassetsizeofacompanycan fallbelowRs100croreinagivenmonth,whichmaybeduetotemporaryfluctuationsand notduetoactualdownsizing.Itisclarifiedthatinsuchacasethecompanymaycontinue tosubmittheMonthlyreturnonImportantFinancialParameterstoReserveBankofIndia andtocomplywiththeextantdirectionsasapplicabletoNBFCNDSI,tillthesubmission oftheirnextauditedbalancesheettoReserveBankofIndiaandaspecificdispensationis receivedfromtheBankinthisregard.

TheMasterCircularRBI/200910/18DNBS(PD)CCNo.157/03.10.001/200910 datedJuly1,2009consolidatesallinstructionsissuedexclusivelytoNBFCNDSIi.e. otherthanthosewhichhavebeenconsolidatedinMasterNotificationonPrudential NormsandMasterCircularcompendiumofinstructionsissuedtoNBFCs. 9.0ANTIMONEYLAUNDERINGSTANDARDS ThePreventionofMoneyLaunderingAct,2002(PMLA)isinforcesince1stJuly2005. UnderPMLAcertainexclusiveandconcurrentpowersareconferredontheDirector, FinancialIntelligenceUnit,India(FIUIND). FinancialIntelligenceUnitIndia(FIUIND)wassetbytheGovernmentofIndiavide orderdated18thNovember2004asthecentralnationalagencyresponsibleforreceiving, processing,analyzinganddisseminatinginformationrelatingtosuspectfinancial transactions.FIUINDisanindependentbodyreportingdirectlytotheEconomic IntelligenceCouncil(EIC)headedbytheFinanceMinister. 74

Section13(2)ofthePreventionofMoneyLaunderingAct,2002,empowerstheDirector, FIUINDtoimposefineonanybankingcompany,financialinstitutionorintermediaryfor failuretocomplywiththeobligationsofmaintenanceofrecords,furnishinginformation andverifyingtheidentityofclients.Theamountoffinemayvaryfromtenthousandrupees toonelakhrupeesforeachfailure.

ObligationofNBFCsintermsofThePreventionofMoneyLaunderingAct,2002and Rulesnotifiedthereunder: Section12ofthePreventionofMoneyLaunderingAct,2002laysdownfollowing obligationsonbankingcompanies,financialinstitutionsandintermediaries.

"12.(1)Everybankingcompany,financialinstitutionandintermediaryshall (a)maintainarecordofalltransactions,thenatureandvalueofwhichmaybeprescribed, whethersuchtransactionscompriseofasingletransactionoraseriesoftransactions integrallyconnectedtoeachother,andwheresuchseriesoftransactionstakeplacewithin amonth; (b)furnishinformationoftransactionsreferredtoinclause(a)totheDirectorwithinsuch timeasmaybeprescribed; (c)verifyandmaintaintherecordsoftheidentityofallitsclients,insuchamannerasmay beprescribed. Providedthatwheretheprincipalofficerofabankingcompanyorfinancialinstitutionor intermediary,asthecasemaybe,hasreasontobelievethatasingletransactionorseriesof transactionsintegrallyconnectedtoeachotherhavebeenvaluedbelowtheprescribed valuesoastodefeattheprovisionsofthissection,suchofficershallfurnishinformationin respectofsuchtransactionstotheDirectorwithintheprescribedtime.(2)Therecords referredtoinsubsection(1)shallbemaintainedforaperiodoftenyearsfromthedateof cessationofthetransactionsbetweentheclientsandthebankingcompanyorfinancial institutionorintermediary,asthecasemaybe."

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NotificationsissuedbyRBI 01.07.2009MasterCircular'PreventionofMoneyLaunderingAct,2002 ObligationsofNBFCsintermsofRulesnotifiedthereunder 05.08.2008ObligationsofNBFCsunderPMLAandCounterfeitCurrencyReport 05.04.2006PreventionofMoneyLaunderingAct,2002ObligationofNBFCs 21.03.2006PreventionofMoneyLaunderingAct,2002ObligationofPrimary (Urban)CooperativeBanks 07.03.2006KYCguidelinesAMLStandardsNBFCs,MiscellaneousNBCs, andResiduaryNBCs 21.11.2005CreditCardOperationsofbanksCommercialBanks/NBFCs (ExcludingRRBs) 11.10.2005KYCforpersonsauthorizedbyNBFCstocollectpublicdepositon behalfofNBFCs 21.02.2005KYCguidelinesAMLStandardsNBFCs,MiscellaneousNBCs, andResiduaryNBCs

ObligationsaspertheRBINotifications NBFCswereadvisedtogothroughtheprovisionsofPMLA,2002andtheRules notifiedthereunderandtakeallstepsconsiderednecessarytoensurecompliance withtherequirementsofsection12oftheAct NBFCsshouldalsoreportinformationinrespectofalltransactionsreferredtoin Rule3ofthePreventionofMoneyLaunderingRulestotheDirector,Financial IntelligenceUnitIndia(FIUIND). NBFCsarerequiredtoprepareaprofileforeachcustomerbasedonrisk categorization.Theneedforperiodicalreviewofriskcategorizationhasbeen emphasized. Asapartoftransactionmonitoringmechanism,NBFCsarerequiredtoputinplace anappropriatesoftwareapplicationtothrowalertswhenthetransactionsare inconsistentwithriskcategorizationandupdatedprofileofcustomers. NBFCstoensureelectronicfilingofcashtransactionreport(CTR)andSuspicious TransactionReports(STR)toFIUIND.IncaseofNBFCs,whereallthebranches arenotyetfullycomputerized,thePrincipalOfficeroftheNBFCshouldcullout thetransactiondetailsfrombrancheswhicharenotcomputerizedandsuitably arrangetofeedthedataintoanelectronicfilewiththehelpoftheeditable electronicutilitiesofCTR/STRashavebeenmadeavailablebyFIUINDontheir websitehttp://fiuindia.gov.in. 76

MakeCashTransactionReports(CTR)toFIUIndiaforeverymonthlatestby15th ofthesucceedingmonth.Itisfurtherclarifiedthatcashtransactionreportingby branches/officesofNBFCstotheirPrincipalOfficershouldinvariablybesubmitted onmonthlybasis(notonfortnightlybasis)andthePrincipalOfficer,inturn,should ensuretosubmitCTRforeverymonthtoFIUINDwithintheprescribedtime schedule. InregardtoCTR,itisreiteratedthatthecutofflimitofRupeestenlakhis applicabletointegrallyconnectedcashtransactionsalso. Payspecialattentiontoallcomplex,unusuallargetransactionsandallunusual patternsoftransactions,whichhavenoapparenteconomicorvisiblelawful purpose.Thebackgroundincludingalldocuments/officerecords/memorandums pertainingtosuchtransactionsandpurposethereofshould,asfaraspossible,be examinedandthefindingsatbranchaswellasPrincipalOfficerlevelshouldbe properlyrecorded.Theserecordsarerequiredtobepreservedfortenyearsasis requiredunderPMLA,2002.Suchrecordsandrelateddocumentsshouldbemade availabletohelpauditorsintheirworkrelatingtoscrutinyoftransactionsandalso toReserveBank/otherrelevantauthorities. ThecustomershouldnotbetippedoffontheSTRsmadebythemtoFIUIND.Itis likelythatinsomecasestransactionsareabandoned/abortedbycustomersonbeing askedtogivesomedetailsortoprovidedocuments.NBFCsshouldreportallsuch attemptedtransactionsinSTRs,evenifnotcompletedbycustomers,irrespectiveof theamountofthetransaction. NBFCsshouldmakeSTRsiftheyhavereasonablegroundtobelievethatthe transactioninvolveproceedsofcrimegenerallyirrespectiveoftheamountof transactionand/orthethresholdlimitenvisagedforpredicateoffencesinpartBof ScheduleofPMLA,2002.

KnowYourCustomer(KYC)Guidelines TheRBIvideitsCircularDNBS(PD).CCNo.34/10.01/200304datedJanuary6,2004had issuedguidelineson'KnowYourCustomer'norms.NBFCswereadvisedtofollowcertain customeridentificationprocedureforopeningofaccountsandmonitoringtransactionsofa suspiciousnatureforthepurposeofreportingittoappropriateauthority. TheMasterCircularRBI/200910/9DNBS(PD)CCNo.151/03.10.42/200910

datedJuly1,2009consolidatesallearliercircularsonthissubject. 77

TheseKnowYourCustomerguidelineshadbeenrevisitedinthecontextofthe RecommendationsmadebytheFinancialActionTaskForce(FATF)onAntiMoney Laundering(AML)standardsandonCombatingFinancingofTerrorism(CFT).These standardshavebecometheinternationalbenchmarkforframingAntiMoneyLaundering andcombatingfinancingofterrorismpoliciesbytheregulatoryauthorities. Compliancewiththesestandardsbythebanks/financialinstitutions/NBFCsinthecountry hadbecomenecessaryforinternationalfinancialrelationships.TheDepartmentofBanking OperationsandDevelopmentofReserveBankhadissueddetailedguidelinestothebanks basedontheRecommendationsoftheFinancialActionTaskForceandthepaperissuedon CustomerDueDiligence(CDD)forbanksbytheBaselCommitteeonBanking Supervision. TheseKYCguidelinesareequallyapplicabletoNBFCs.AllNBFCswereadvisedtoadopt thesamewithsuitablemodificationsdependingontheactivityundertakenbythemand ensurethataproperpolicyframeworkonKnowYourCustomerandAntiMoney LaunderingmeasuresisformulatedandputinplacewiththeapprovaloftheBoard.Itmay alsobeensuredthatNBFCsarefullycompliantwiththeprovisionsofthiscircularbefore December31,2005. GuidelinesonKnowYourCustomerNorms,containthefollowing KnowYourCustomerStandards CustomerAcceptancePolicy(CAP) CustomerIdentificationProcedure(CIP) MonitoringofTransactions RiskManagement CustomerEducation 10.FAIRPRACTICESCODE TheFairPracticesCodeoftheNBFCsshouldbeputupontheirwebsite,ifany,forthe informationofvariousstakeholders.

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NBFCswereadvisedonSeptember28,2006(GuidelinesonFairPracticesCode[DNBS (PD)CCNo.80/03.10.042/200506datedSeptember28,2006),toprescribethebroad guidelinesonfairpracticesthataretobeframedandapprovedbytheboardsofdirectorsof allnonbankingfinancialcompanies(includingRNBCs).Thefairpracticescodesoframed andapprovedbytheboardofdirectorsistobepublishedanddisseminatedonthewebsite ofthecompany,ifany,fortheinformationofthepublic

VideMasterCircularRBI/200910/15DNBS(PD)CCNo.153/03.10.042/200910 datedJuly1,2009consolidatedallearliercircularsonthetopic

GuidelinesonFairPracticesCodeforNBFCs (i)Applicationsforloansandtheirprocessing (a)Loanapplicationformsshouldincludenecessaryinformationwhichaffectstheinterest oftheborrower,sothatameaningfulcomparisonwiththetermsandconditionsofferedby otherNBFCscanbemadeandinformeddecisioncanbetakenbytheborrower. (b)TheNBFCsshoulddeviseasystemofgivingacknowledgementforreceiptofallloan applications.Preferably,thetimeframewithinwhichloanapplicationswillbedisposedof shouldalsobeindicatedintheacknowledgement. (ii)Loanappraisalandterms/conditions TheNBFCsshouldconveyinwritingtotheborrower,theamountofloansanctionedalong withthetermsandconditionsincludingannualisedrateofinterestandmethodof applicationthereofandkeeptheacceptanceofthesetermsandconditionsbytheborrower onitsrecord. (iii)Disbursementofloansincludingchangesintermsandconditions TheNBFCsshouldgivenoticetotheborrowerofanychangeinthetermsandconditions includingdisbursementschedule,interestrates,servicecharges,prepaymentchargesetc. NBFCsshouldalsoensurethatchangesininterestratesandchargesareeffectedonly prospectively.Asuitableconditioninthisregardshouldbeincorporatedintheloan agreement.

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(iv)Postdisbursementsupervision (a).PostdisbursementsupervisionbyNBFCsshouldbeconstructiveandthegenuine difficultieswhichtheborrowermayface,maybegivendueconsideration. (b)Beforetakingadecisiontorecall/acceleratepaymentorperformanceunderthe agreementorseekingadditionalsecurities,NBFCsshouldgivenoticetoborrowersin consonancewiththeloanagreement. (c)NBFCsshouldreleaseallsecuritiesonrepaymentofallduesoronrealisationofthe outstandingamountofloansubjecttoanylegitimaterightorlienforanyotherclaim NBFCsmayhaveagainstborrower.Ifsuchrightofsetoffistobeexercised,theborrower shallbegivennoticeaboutthesamewithfullparticularsabouttheremainingclaimsand theconditionsunderwhichNBFCsareentitledtoretainthesecuritiestilltherelevantclaim issettled/paid. (v)General (a)NBFCsshouldrefrainfrominterferenceintheaffairsoftheborrowerexceptforthe purposesprovidedinthetermsandconditionsofsanctionoftheloan(unlessnew information,notearlierdisclosedbytheborrower,hascometothenoticeofthelender). (b)Incaseofreceiptofrequestfortransferofborrowalaccount,eitherfromtheborrower orfromalenderwhichproposestotakeovertheaccount,theconsentorotherwisei.e. objectionoftheNBFC,ifany,shouldbeconveyedwithin21daysfromthedateofreceipt ofrequest.Suchtransfershallbeaspertransparentcontractualtermsinconsonancewith law. (c)Inthematterofrecoveryofloans,theNBFCsshouldnotresorttoharassment.

(vi)GrievanceRedressalMechanism TheBoardofDirectorsofNBFCsshouldalsolaydowntheappropriategrievanceredressal mechanismwithintheorganizationtoresolvedisputesarisinginthisregard.Sucha mechanismshouldensurethatalldisputesarisingoutofthedecisionsoflending institutions'functionariesareheardanddisposedofatleastatthenexthigherlevel.The BoardofDirectorsshouldalsoprovideforperiodicalreviewofthecomplianceoftheFair PracticesCodeandthefunctioningofthegrievancesredressalmechanismatvariouslevels

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ofmanagement.AconsolidatedreportofsuchreviewsmaybesubmittedtotheBoardat regularintervals,asmaybeprescribedbyit. (vii)FairPracticesCodebasedontheguidelinesoutlinedhereinaboveshouldbeputin placebyallNBFCswiththeapprovaloftheirBoardsattheearliestpossible,butnotlater thanJune30,2006.NBFCswillhavethefreedomofdraftingtheFairPracticesCode, enhancingthescopeoftheguidelinesbutinnowaysacrificingthespiritunderlyingthe aboveguidelines.Thesameshouldbeputupontheirwebsite,ifany,fortheinformation ofvariousstakeholders.

SampleFairPracticeCode XYZLtd.FairPracticesCode WithaviewtosettingoutFairLendingPracticesinatransparentmanner,XYZLtd.has decidedtoadoptthefollowingasLendersFairPracticesCode. BACKGROUND TheReserveBankofIndia,byitsnotificationno.RBI/200607/138DNBS(PD)CCNo. 80/03.10.042/200506datedSeptember28,2006hasprescribedthebroadguidelineson fairpracticesthataretobeframedandapprovedbytheBoardofDirectorsofallNon BankingFinancialCompanies(NBFCs),whichshouldbepublishedanddisseminatedon thewebsiteoftheCompany,ifany,fortheinformationofthePublic. XYZLtd.(theCompany)isacompanyincorporatedundertheCompaniesAct,1956. TheCompanyhasbeengrantedtheCertificateofregistration(CertificateNo. Dated)byRBI,permittingtocommenceandcarryonthebusinessofanon bankingfinancialinstitution.Thecompanyisnotengagedinactivityofacceptingpublic deposits. OBJECTIVE Thecodehasbeendevelopedwithanobjectto: Promotefairpracticesandtransparencybysettingminimumstandardsindealingwith customer IncreasecustomerconfidenceintheCompany.

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CONTENTS TheCompanyhasadoptedthecodeforfairpractices,inpursuanceofthedirectionsissued bytheRBI.TheFairPracticeCode(FPC)isintendedtocoverthefollowingareas: Applicationforloansandtheirprocessing Loanappraisalandterms/conditions Disbursementofloans,includingchangesintermsandconditions GeneralProvisionsand Grievanceredressalmechanism

1.Applicationforloansandtheirprocessing: A. Loanapplicationformsofthecompanyshouldincludenecessaryinformation, whicharelikelytoaffecttheinterestsoftheprospectiveborrower,sothata meaningfulcomparisonwiththetermsandconditionsofferedbyotherNon BankingFinancialCompaniescanbemadeandaninformeddecisioncanbetaken bytheprospectiveborrower. B. Theloanapplicationformshallindicatethedocumentsrequiredtobesubmitted alongwiththeapplicationform. C. Thecompanyshallprovidetotheprospectiveborroweranacknowledgementfor receiptofallloanapplications. D. Anindicativetimeframe,withinwhichloanapplicationswillbedisposedoff,will bementionedinsuchacknowledgement. 2.Loanappraisalandterms/conditions A. Loanapplicationsshallbeassessedinaccordancewiththecompanyscredit appraisalprocess. B. Thecompanyshallconveyinwritingtotheprospectiveborrowerthefateofthe loanapplicationbymeansofsanctionletterorotherwise. C. Incaseofsanctionofloan,thesanctionlettershallcontainthetermsandconditions includingannualizedrateofinterestandmethodofapplicationthereof.The acceptanceofthetermsandconditionscommunicatedbytheborrowershallbe preservedbythecompanyinitsrecords. 3.Disbursementofloansincludingchangesintermsandconditions A. Thecompanyshallgivenoticetotheborrowerofanychangeinthetermsand conditionsincludingdisbursementschedule,interestrate,servicecharges, 82

prepaymentchargesetc.Thecompanyshallensurethatchangesininterestrates andotherchargesareaffectedonlyprospectively.Theloanagreementshallcontain aspecificclausetothiseffect. B. Thedecisionofthecompanytorecall/acceleratepaymentorperformanceshallbe inconsonancewiththetermsoftheloanagreement. C. NoObjectionCertificate(NOC)tobeissuedonrecoveryofalldues.Thecompany shallreleaseallsecuritiesuponrepaymentofallduesoronrealizationofthe outstandingamountofloansubjecttoanylegitimaterightorlienforanyother claimitmayhaveagainstborrower.Ifsuchrightofsetoffistobeexercised,the borrowershallbegivennoticeaboutthesamewithfullparticularsaboutthe remainingclaimsandtheconditionsunderwhichthecompanyisentitledtoretain thesecuritiestilltherelevantclaimissettled/paid. 4.GeneralProvisions A. Thecompanywillrefrainfrominterferingintheaffairsoftheborrowerexceptfor thepurposesprovidedinthetermsandconditionsoftheloanagreement,unless newinformation,notearlierdiscloseddeliberatelyorotherwisebytheborrower, hascometothenoticeofthecompany. B. Incaseofreceiptofrequestfromtheborrowerfortransferofaborroweraccountto otherNBFC,bankorfinancialinstitution,theconsentorotherwiseshallbe conveyedwithin21daysfromthedateofreceiptofsuchrequest.Suchtransfer shallbeinaccordancewiththecontractualtermsenteredintowiththeborrower andinconsonancewiththestatutes,rules,regulationsandguidelines,asmaybe applicablefromtimetotime. C. Inthematterofrecoveryofloans,thecompanyshallresortonlytoremedieswhich arelegallyandlegitimatelyavailabletoitandwillavoidtheundueharassmentviz. persistentlybotheringtheborrowersatoddhours,useofmusclepowerfor recoveryofloans,etc. 5.Grievanceredressalmechanism A. Thecompanywillguidecustomerswhowishtolodgeacompliantandalsoprovide aguidancetodoincasethecustomerisnothappywiththecompanyspractices. B. Incaseofanycomplaints/grievances,theapplicant/borrowermaycontactthrough anyofthesechannels: o Mail: XYZLtd. (contactaddress) 83

Telephone: o Fax: o Email: C. Afterexaminingthematter,itwillbeourendeavourtoprovidetheborrower/ applicantwithourfinalorotherresponse,withinaperiodoftwo(2)weeksand withinamaximumperiodofsix(6)weeksfromreceiptofsuchcomplaint/ grievance.

o

TheFPCshallcomeintoeffectfromOctober28,2006.

ClarificationregardingrepossessionofvehiclesfinancedbyNBFCs (VideRBInotificationRBI/200809/454DNBS(PD)CC.No.139/03.10.001/200809 datedApril24,2009) NBFCsmusthaveabuiltinrepossessionclauseinthecontract/loanagreementwiththe borrowerwhichmustbelegallyenforceable.Toensuretransparency,thetermsand conditionsofthecontract/loanagreementshouldalsocontainprovisionsregarding:(a) noticeperiodbeforetakingpossession;(b)circumstancesunderwhichthenoticeperiod canbewaived;(c)theprocedurefortakingpossessionofthesecurity;(d)aprovision regardingfinalchancetobegiventotheborrowerforrepaymentofloanbeforethesale/ auctionoftheproperty;(e)theprocedureforgivingrepossessiontotheborrowerand(f) theprocedureforsale/auctionoftheproperty. Acopyofsuchtermsandconditionsmustbemadeavailabletotheborrowersintermsof DNBS.PD/CC.No.107/03.10.042/200708datedOctober10,2007whereinitwas statedthatNBFCsmayinvariablyfurnishacopyoftheloanagreementalongwithacopy eachofallenclosuresquotedintheloanagreementtoalltheborrowersatthetimeof sanction/disbursementofloans,whichmayformakeycomponentofsuchcontracts/loan agreements

11.MONITORINGOFFRAUDS TheReserveBankhasissuedguidelines(MasterCircularNo. RBI/200910/7

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DNBS.PD.CC.No.149/03.10.042/200910datedJuly1,2009)toNBFCs(including RNBCs)onclassificationoffrauds,approachtowardsmonitoringoffraudsandreporting requirementsfromtimetotimeunderSection45Kand45LoftheRBIAct,1934. WhiletheprimaryresponsibilityforpreventingfraudslieswithNBFCsthemselves,a reportingsystemforfraudsprescribedbytheabovementionedMasterCircularisgivenin thefollowingparagraphs: NBFCsshouldensurethatareportingsystemisinplacesothatfraudsarereported withoutanydelay. NBFCsshouldfixstaffaccountabilityinrespectofdelaysinreportingoffraud casestotheReserveBank. NBFCsmay,strictlyadheretothefixedtimeframefixedforreportingfraudcases totheReserveBankfailingwhichNBFCswouldbeliableforpenalactionas prescribedundertheprovisionsofChapterVoftheRBIAct,1934. NBFCsshouldspecificallynominateanofficialoftherankofGeneralManageror equivalentwhowillberesponsibleforsubmittingallthereturns Inordertohaveuniformityinreporting,fraudshavebeenclassifiedasunderbased mainlyontheprovisionsoftheIndianPenalCode: (a)Misappropriationandcriminalbreachoftrust. (b)Fraudulentencashmentthroughforgedinstruments,manipulationofbooksof accountorthroughfictitiousaccountsandconversionofproperty. (c)Unauthorisedcreditfacilitiesextendedforrewardorforillegalgratification. (d)Negligenceandcashshortages. (e)Cheatingandforgery. (f)Irregularitiesinforeignexchangetransactions. (g)Anyothertypeoffraudnotcomingunderthespecificheadsasabove. Casesofnegligenceandcashshortagesandirregularitiesinforeignexchange transactionsreferredtoinitems(d)and(f)abovearetobereportedasfraudifthe intentiontocheat/defraudissuspected/proved.However,thefollowingcases wherefraudulentintentionisnotsuspected/proved,atthetimeofdetection,will betreatedasfraudandreportedaccordingly: 85

(a)casesofcashshortagesmorethanRs.10,000/and (b)casesofcashshortagesmorethanRs.5000/ifdetectedbymanagement /auditor/inspectingofficerandnotreportedontheoccurrencebythepersons handlingcash. NBFCshavingoverseasbranches/officesshouldreportallfraudsperpetratedat suchbranches/officesalsototheReserveBankasperthegivenformatand procedure FraudsinvolvingRs.1lakhandabove FraudreportsshouldbesubmittedinallcasesoffraudofRs.1lakhandabove perpetratedthroughmisrepresentation,breachoftrust,manipulationofbooksof account,fraudulentencashmentofFDRsunauthorisedhandlingofsecurities chargedtotheNBFC,misfeasance,embezzlement,misappropriationoffunds, conversionofproperty,cheating,shortages,irregularities,etc. Fraudreportsshouldalsobesubmittedincaseswherecentralinvestigating agencieshaveinitiatedcriminalproceedingssuomotoand/orwheretheReserve Bankhasdirectedthattheybereportedasfrauds. Whereverinformationisavailable,NBFCsmayalsoreportfraudsperpetratedin theirsubsidiariesandaffiliates/jointventures.Suchfraudsshould,however,notbe includedinthereportonoutstandingfraudsandthequarterlyprogressreports referredtobelow. ThefraudreportsintheprescribedformatshouldbesenttotheCentralOffice(CO) oftheReserveBankofIndia,DepartmentofBankingSupervision,Frauds MonitoringCellwheretheamountinvolvedinfraudisRs25lakhsandaboveand toRegionalOfficeoftheReserveBankofIndia,DepartmentofNonBanking SupervisionunderwhosejurisdictiontheRegisteredOfficeoftheNBFCfalls wherethefraudamountinvolvedinfraudislessthanRs25lakh,intheformat giveninFMR1,withinthreeweeksfromthedateofdetection. AcopyofFMR1wheretheamountinvolvedintheFraudisRs25lakhsandabove shouldalsobesubmittedtotheRegionalOfficeoftheDepartmentofNonBanking SupervisionofReserveBankofIndiaunderwhosejurisdictiontheRegistered OfficeoftheNBFCfalls. FraudsinvolvingRs.25lakhandabove InrespectoffraudsinvolvingRs.25lakhandabove,inadditiontothe requirementsgivenabove,NBFCsmayreportthefraudbymeansofaD.O.letter addressedtotheChiefGeneralManagerinchargeoftheDepartmentofBanking Supervision,ReserveBankofIndia,FraudsMonitoringCell,CentralOfficeanda copyendorsedtotheChiefGeneralManagerinchargeoftheDepartmentofNon 86

BankingSupervision,ReserveBankofIndia,CentralOfficewithinaweekofsuch fraudscomingtothenoticeoftheNBFC.Thelettermaycontainbriefparticularsof thefraudsuchasamountinvolved,natureoffraud,modusoperandiinbrief,name ofthebranch/office,namesofpartiesinvolved(iftheyareproprietorship/ partnershipconcernsorprivatelimitedcompanies,thenamesofproprietors, partnersanddirectors),namesofofficialsinvolved,andwhetherthecomplainthas beenlodgedwiththePolice.AcopyoftheD.O.lettershouldalsobeendorsedto theRegionalOfficeofReserveBank,DepartmentofNonBankingSupervision underwhosejurisdictiontheRegisteredOfficeoftheNBFCisfunctioning. NBFCsshouldsubmitacopyoftheQuarterlyReportonFraudsOutstandinginthe formatgiveninFMR2totheRegionalOfficeoftheReserveBankofIndia, DepartmentofNonBankingSupervisionunderwhosejurisdictiontheRegistered OfficeoftheNBFCfallsirrespectiveofamountwithin15daysoftheendofthe quartertowhichitrelates. NBFCsshouldfurnishacertificate,aspartoftheabovereport,totheeffectthatall individualfraudcasesofRs.1lakhandabovereportedtotheReserveBankin FMR1duringthequarterhavealsobeenputuptotheNBFCsBoardandhave beenincorporatedinPartA(columns4and5)andPartsBandCofFMR2. ProgressReportonFraudsNBFCsshouldfurnishcasewisequarterlyprogress reportsonfraudsinvolvingRs.1lakhandaboveintheformatgiveninFMR3to theCentralOffice(CO)oftheReserveBankofIndia,DepartmentofBanking Supervision,FraudsMonitoringCellwheretheamountinvolvedinfraudisRs25 lakhsandaboveandtoRegionalOfficeoftheReserveBankofIndia,Department ofNonBankingSupervisionunderwhosejurisdictiontheRegisteredOfficeofthe NBFCfallswherethefraudamountinvolvedinfraudislessthanRs25lakhwithin 15daysoftheendofthequartertowhichitrelates. NBFCsshouldensurethatallfraudsofRs.1lakhandabovearereportedtotheir Boardspromptlyontheirdetection.Suchreportsshould,amongotherthings,take noteofthefailureonthepartoftheconcernedofficials,andconsiderinitiationof appropriateactionagainsttheofficialsresponsibleforthefraud. QuarterlyReviewofFrauds AnnualReviewofFrauds GuidelinestobefollowedforreportingFraudstothePolice

12.CORPORATEGOVERNANCE

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ListedNBFCswhicharerequiredtoadheretolistingagreementandrulesframedbySEBI onCorporateGovernancearealreadyrequiredtocomplywithSEBIprescriptionson CorporateGovernance. TheGuidelinesonCorporateGovernance(MasterCircularRBI/200910/17 DNBS(PD)CCNo.156/03.10.001/200910datedJuly1,2009)areapplicableto 1.AllDeposittakingNBFCswithdepositsizeofRs20croreandabove 2.AllnondeposittakingNBFCswithassetsizeofRs100croreandabove(NBFCND SI). InordertoenableNBFCstoadoptbestpracticesandgreatertransparencyintheir operationsfollowingguidelinesareproposedforconsiderationoftheBoardofDirectorsof theclassofNBFCstowhomthiscircularisaddressed: ConstitutionofAuditCommittee i)Intermsofextantinstructions,anNBFChavingassetsofRs.50croreandaboveasper itslastauditedbalancesheetisalreadyrequiredtoconstituteanAuditCommittee, consistingofnotlessthanthreemembersofitsBoardofDirectors,theinstructionsshall remainvalid. ii)Inaddition,NBFCDwithdepositsizeofRs20croremayalsoconsiderconstitutingan AuditCommitteeonsimilarlines. ConstitutionofNominationCommittee iii)Theimportanceofappointmentofdirectorswithfitandpropercredentialsiswell recognisedinthefinancialsector.IntermsofSection45IA(4)(c)oftheRBIAct,1934, whileconsideringtheapplicationforgrantofCertificateofRegistrationtoundertakethe businessofnonbankingfinancialinstitutionitisnecessarytoensurethatthegeneral characterofthemanagementortheproposedmanagementofthenonbankingfinancial companyshallnotbeprejudicialtotheinterestofitspresentandfuturedepositors.Inview oftheinterestevincedbyvariousentitiesinthissegment,itwouldbedesirablethatNBFC DwithdepositsizeofRs20croreandaboveandNBFCNDSImayformaNomination Committeetoensurefitandproperstatusofproposed/existingDirectors. ConstitutionofRiskManagementCommittee iv)ThemarketriskforNBFCswithPublicDepositofRs.20croreandaboveorhavingan assetsizeofRs.100croreoraboveasonthedateoflastauditedbalancesheetisaddressed 88

bytheAssetLiabilityManagementCommittee(ALCO)constitutedtomonitortheasset liabilitygapandstrategizeactiontomitigatetheriskassociated.Tomanagetheintegrated risk,ariskmanagementcommitteemaybeformed,inadditiontotheALCOincaseofthe abovecategoryofNBFCs. Disclosureandtransparency v)ThefollowinginformationshouldbeputupbytheNBFCtotheBoardofDirectorsat regularintervalsasmaybeprescribedbytheBoardinthisregard:

progressmadeinputtinginplaceaprogressiveriskmanagementsystem,andrisk managementpolicyandstrategyfollowed conformitywithcorporategovernancestandardsviz.incompositionofvarious committees,theirroleandfunctions,periodicityofthemeetingsandcompliance withcoverageandreviewfunctions,etc.

ConnectedLending vi)Thecompaniesshouldcomplywiththeinstructionsonconnectedlendingrelationships, asdetailedinAnnex.TheinstructionsrelatetocreditfacilitiestotheDirectors,loansand advancestorelativesoftheNBFC'sDirectorsortotheDirectorsofothercompaniesand theirrelativesandotherentities,timeframeforrecoveryofsuchloans,etc. 3.NBFCsshallframetheirinternalguidelinesoncorporategovernance,enhancingthe scopeoftheguidelineswithoutsacrificingthespiritunderlyingtheaboveguidelinesandit shallbepublishedonthecompanyswebsite,ifany,fortheinformationofvarious stakeholders.

Annex InstructionsonConnectedLendingRelationships TheNBFCsshouldevolveappropriateoperatingproceduresandinformationsystemsfor ascertainingtheinterestoftheirownDirectorsasalsotheinterestoftheDirectorsofother companiesforthepurposeofimplementingtheseinstructionsandformonitoringongoing compliancetherewith. 1.CreditfacilitiestotheDirectors

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1.1InordertoobviateconflictofinterestinthelendingoperationsoftheNBFC,itshould notgrantanyloan,advanceornonfundbasedfacilityoranyotherfinancial accommodation/facilityto: a)itsdirectorsortheirrelatives; b)toanyfirminwhichanyofitsDirectorsisinterestedasPartner,Manager,Employeeor Guarantor; c)anyindividualinrespectofwhomanyofitsDirectorsisaGuarantor; d)anycompanyofwhich,orthesubsidiaryortheholdingcompanyofwhich,anyofthe DirectorsoftheNBFCisaDirector,ManagingAgent,Manager,EmployeeorGuarantor oranyfirminwhichheholdssubstantialinterest; e)anyentity,whetherincorporatedornotwhichusesasapartofitsnameorinconnection withitsbusiness,thenameoftheNBFCoranysuchwordaswouldshowitsassociation withtheNBFC. 1.2Anyexistingarrangementsmaybeallowedtocontinueuptothedatewhentheyare due.Theyshould,however,notberenewedorextendedanyfurther. 1.3NBFCsarerequiredtosubmitinformationpertainingtoloansandadvancesgrantedto theirdirectors,relativesandotherentitiesreferredtoinitem1.1aboveforeachquarterend (i.e.ason31stMarch,30thJune,30thSeptemberand31stDecember)intheenclosed Proforma1totheRegionalOfficeconcernedoftheDepartmentofNonBanking Supervisionwithin15daysfromthecloseoftherespectivequarter.Ifthereisnothingto report,anilstatementmaybesubmitted. 2.Timeframeforrecoveryofloans 2.1IncaseswheretheNBFChasalreadyprovidedcreditfacilitiestoitsdirectorsas prohibitedin1.1above,immediatestepsshouldbeinitiatedtorecovertheamountsofthe loanoradvancetogetherwithinterest,ifany,assoonastheloanoradvancefallsduefor repaymentintermsoftheloanagreement. 2.2Incasethereisnorepaymentdatefixedforanyfacility,thesamemayberecovered withinaperiodofoneyearfromthedateofthiscircular. 3.Definitions 90

3.1Theterm'substantialinterest'forthepurposeoftheseguidelines: (i)inrelationtoacompany,meanstheholdingofabeneficialinterestbyanindividualor hisspouseorminorchild,whethersinglyortakentogether,inthesharesthereof,the amountpaiduponwhichexceedsfivelakhsofrupeesortenpercentofthepaidupcapital ofthecompany,whicheverisless; (ii)inrelationtoafirm,meansthebeneficialinterestheldthereinbyanindividualorhis spouseorminorchild,whethersinglyortakentogether,whichrepresentsmorethanten percentofthetotalcapitalsubscribedbyallthepartnersofthesaidfirm; 3.2Thescopeoftheterm'relative'shallbeasdefinedintheCompaniesAct,1956. Proforma1 Informationinrespectofloansandadvances sanctionedtotheDirectorsofNBFCs,theirrelatives andotherentitiesmentionedinparagraph1.3ofAnnex

NameoftheNBFC: Positionason: Sr. Nameofthe Borrowers Dateof (relationship) Sanction/ Renewal 1 2 3 LimitsSanctioned(Rs.inlakhs) Typeof Facility Secured Un secured Nature DueDate/ and Dateof Valueof Maturity Security 7 8 9

Funded 4

Non funded 5 6

AmountOutstanding(Rs.inLakhs) 91

Secured Unsecured

Total(100%of Whetherinexcessof Fundedand exposure 50%ofNonfunded norms/limitsstipulated Limits) byRBI 12 13

Actioninitiatedin caseof Overdue/NPA Accounts 14

10

11

Note:Differenttypesoffacilitiessanctionedtoaborrowershouldbeindicatedseparately againstcolumns4and5.

NOTE: AsperRBINotificationno.RBI/20072008/92DNBS.PD/CC104/03.10.042/200708 DATEDJuly11,2007addressedto 1. AllDeposittakingNBFCswithdepositsizeofRs20croreandabove 2. AllnondeposittakingNBFCswithassetsizeofRs100croreandabove(NBFC NDSI). TheBankhasreceivedsuggestionswithreferencetoparagraph2(vi)(containing instructionsonconnectedlending)oftheaboveNotification(No.DNBS.PD/C.C.94/ 03.10.042/200607datedMay8,2007)onGuidelinesonCorporateGovernance. Thesuggestionsarebeingstudiedandtheinstructionscontainedinparagraph2(vi)ofthe circularwillbecomeoperationalafterfinalevaluationofthesuggestionsand modifications,ifanyconsiderednecessary.Allotherinstructionsissuedvide,Company CirculardatedMay8,2007maybecompliedmeticulously.

13.MICROFINANCE TheIndianstateputstressonprovidingfinancialservicestothepoorandunderprivileged sinceindependence.Thecommercialbankswerenationalizedin1969andweredirectedto lend40%oftheirloanablefunds,ataconcessionalrate,totheprioritysector.Thepriority sectorincludedagricultureandotherruralactivitiesandtheweakerstrataofsocietyin general.Theaimwastoprovideresourcestohelpthepoortoattainselfsufficiency.To 92

supplementtheseefforts,thecreditschemeIntegratedRuralDevelopmentProgramme (IRDP)waslaunchedin1980.InIndiathemicrofinancerevolutionbeganinthe1980s withtheformationofpocketsofinformalSelfHelpGroups(SHG)engaginginmicro activitiesfinancedbyMicrofinance.ButIndiasfirstMicrofinanceInstitutionShriMahila SEWASahkariBankwassetupasanurbancooperativebank,bytheSelfEmployed WomensAssociation(SEWA)soonafterthegroup(founderMs.ElaBhatt)wasformedin 1974.ThefirstofficialeffortmaterializedunderthedirectionofNABARD(NationalBank ForAgricultureAndRuralDevelopment). Whatismicrofinance? Microfinancemeansprovidingverypoorfamilieswithverysmallloans(microcredit)to helpthemengageinproductiveactivities/smallbusinesses.Microfinanceisdefinedasthe provisionofthrift(savings),creditandotherfinancialservicesandproductsofverysmall amountstothepoorforenablingthemtoraisetheirincomelevelsandimproveliving standards. InIndia,microfinanceisprovidedbyapexdevelopmentfinancialinstitutions(suchas NationalBankforAgricultureandRuralDevelopmentNABARD,SmallIndustries DevelopmentBankofIndia,andRashtriyaMahilaKosh),commercialbanks,regionalrural banks,cooperativebanks,nonbankingfinancialcompanies(NBFCs)andvariousnotfor profitentities. TheEleventhFiveYearPlanaimsatinclusivegrowthandfasterreductionofpoverty. MicroFinancecancontributeimmenselytothefinancialinclusionofthepoorwithout whichitwillbedifficultforthemtocomeoutoftheviciouscycleofpoverty. MicrofinanceinIndia Therearetwomainmodelsofmicrocreditinthecountryandtheyarebankingmodel andtheMFI(MicroFinanceInstitution)model. InthecaseofthebankingmodelSelfHelpGroupsareformedandfinancedbybanks.In somecasesSHGsareformedbyformalagencies/NGOsandfinancedbybanks.Inthe MFImodelSHGsareformedandfinancedbytheMFIsthatobtainresourcesupportfrom variouschannels.InIndia,majorityofmircocreditactivityisundertheBanking model(NABARDsBankSHGLinkage)and1015%oftheactivityisthroughMFI model.

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MFIModels: ThespecializedMFIs(MicroFinanceInstitutions)ormicrofinancemovementsincethe 1990sisanewavenueofreachingthepoorfortheirmicrocreditneeds.Someofthe MFIsarebasedontheGrameenModel,whichentailsformationofaCentrecomprising eightsolidaritygroupsoffiveborrowers.Membersofeachsolidaritygroupmutually guaranteeeachotherloan.TenCentresformaClusterandsevenclustersforma(bank) branch[andseveralbranchestogetherpresumablyformtheBank].Thisistypicallybased onthemodelofGrameenBankofBangladesh.Allmemberssaveregularlyandloan proposalsareapprovedbytheCentre;allloansare,moreover,repayablein50weekly instalments. MFIsinIndiaregisterthemselveseitherassocieties(undertheSocietiesRegistrationAct, 1960),astrustsundertheTrustActs,asNonBankingFinancialCompanies(NBFCs),oras LocalAreaBanks(LABs).AllNBFCsrequiringregistrationwiththeReserveBankof IndiashouldhaveaminimumcapitalofRs.2crore.NBFCsintendingtoacceptpublic depositshavetosatisfystipulatedcriteriaandhavetoobtainspecificauthorisationfromthe RBI.TheissueofcoveringofNBFCsdepositsbyDepositInsuranceandCreditGuarantee Corporation(DICGC)wasexaminedseveraltimes,anditwasfoundneitherdesirablenor feasibletoextendsuchcoverage.

FlowofMicroFinance Therearedifferentmechanismsthroughwhichthedeliveryofmicrocreditloanstakes place.Banksmaylenddirectlytocustomers.Second,NABARDsponsorstheSelfHelp GroupBankLendingProgramme(SBLP).UnderSBLP,selfhelpgroups(SHGs)needto saveregularlyforaminimumofsixmonthsandmaintainprescribedrecordsandaccounts inordertobecomeeligibletobelinkedtolocalbanks.Thisprogrammeprovidescreditto 22.38lakhSHGs.Third,commercialbanksorapexinstitutionslendtomicrofinance organizations(MFOs)forfurtherlendingtogroupsorindividuals(seechartbelow).

Chart:Institutionalflowofmicrofinance MFOslendtoSHGsandjointliabilitygroups(JLGs,whicharealsoknownasgrameen groups).ThenumberofMFOsinIndiainvolvedinlendingactivitiesisestimatedtobe 94

around800.TheseMFOsvarysignificantlyinsize,outreachandcreditdelivery methodologies.Presently,thelendingactivitiesofMFOsarenotregulatedexceptforthose registeredasNBFCs. DifferencebetweenSHGsandGrameen/JLGs Size NatureofLoan SHGs Upto20members Grameen/JLGs 515members

SingleloantotheSHGasa Loanrecordedinthenamesof whole,whichdecideshowit Individualborrowers. shouldbeallocated.

Source:MicrofinanceinIndia:AStateoftheSectorReport,2006,PrabhuGhate,CARE, SwissAgencyforDevelopmentandCooperation,andFordFoundation<

MicroFinancialSector(DevelopmentandRegulation)Bill2007 TheMicroFinancialSector(DevelopmentandRegulation)Bill2007wastabledintheLok SabhaonTuesday,March20,2007. TheBillhadbeenreferredtotheStandingCommitteeonFinance.Currently,theBillis PendinginParliament. TheBillmakestheNationalBankforAgricultureandRuralDevelopment(Nabard)the regulatorforthemicrofinancialsector. TheMicroFinancialSector(DevelopmentandRegulation)Bill,2007seekstopromotethe sectorandregulatemicrofinancialorganisations(MFO). Onitsenactment,theBillmakesregistrationofmicrofinanceorganisationswithNabard mandatoryandnoinstitution(includingexisting)cancarryoutbusinessofofferingthrift serviceswithoutobtainingcertificateofregistration.EveryMFOthatacceptsdeposits needstoberegisteredwithNABARD.Conditionsforregistrationinclude(a)netowned fundsofatleastRs5lakh;and(b)atleastthreeyearsinexistenceasanMFO.AllMFOs, whetherregisteredornot,shallsubmitannualfinancialstatementstoNABARD

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TheBillqualifiesanyamountnotexceedingRs50,000asamicrofinanceservice,with thislimitsetatRs1.50lakhforhousingpurposes.Forsafeguardinginterestsofthepeople depositingtheirmoney,theBillproposesconstitutionofareservefund,whereminimum 15percentofthenetprofitorsurplusrealisedoutofthriftserviceswillbeparked. TheBillalsoempowersNabardtoframeaschemefortheappointmentofoneormore MicroFinanceOmbudsmenforsettlementofdisputesbetweenclientsandmicrofinance institutions. BanksanddeposittakingNonBankingFinancialCompanies(NBFCs)havetocomply withReserveBankofIndias(RBI)prudentialnormsdesignedtosafeguarddepositors funds.WhiletheBillenablesNABARDtoprescribenormsforMFOs,itspecifiessome normswhicharelessstringentthanforbanksandNBFCs.UnlikebanksregulatedbyRBI, theBilldoesnotexemptregisteredMFOsfromtheUsuriousLoansAct,1918orstatelaws whichcapinterestrates. 14.CHITFUNDS ChitfundsaretheIndianequivalentoftheRotatingSavingsandCreditAssociations (ROSCA)thatarefamousthroughouttheworld.ROSCAsareameansto'saveandborrow' atthesametime.Itisconsideredoneofthebestinstrumentstocatertotheneedsofthe poor. Theconceptofchitfundsoriginatedmorethan1000yearsago.Initiallyitwasintheform ofaninformalassociationoftradersandhouseholdswithincommunities,whereinthe memberscontributedsomemoneyinreturnforanaccumulatedsumattheendofthe tenure.Participationinchitfundsweremainlyforthepurposeofpurchasingsomeproperty or,inotherwords,for'consumption'purposes.However,inrecenttimes,therehasbeen tremendousalterationintheconstitutionandfunctioningofchitfunds. WiththeadventoftheChitFundsAct,initiallyintheyear1961(MadrasAct)and amendedsubsequentlyintheyear1982(CentralAct),chitfundshavebeenhighly regulatedandgovernedbystringentrules.ThepurposeofthesaidActanditsproposed benefittothechitfundsindustryis,however,questionable

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ChitFundMonitoringAuthorities: 1.ReserveBankofIndia 2.MinistryofFinanceDepartmentofFinancialServices(Banking) ChitfundsinIndiaaregovernedbyvariousstateorcentrallaws,likeTravancoreChitAct of1945,ChitFundsAct,1982andMadrasChitFundAct,1961.Organisedchitfund schemesarerequiredtoregisterwiththeRegistrarofFirms,SocietiesandChits. MeaningofChit "Chit"meansatransaction(whethercalledchitfund,chit,kuriorbyanyothername),by whichtheforemanentersintoanagreementwithanumberofsubscribersthateveryoneof themshallsubscribeacertainsumforacertainperiodandeachsubscriberinhisturnas determinedbylotorbyauction,shallbeentitledtoaprizedamount. MeaningofChitFund AChitFundisakindofsavingsschemepracticedinIndia.Inachitscheme,aspecific numberofindividualscometogethertopoolaspecificamountofmoneyatperiodic intervals. AtotallyIndianconcept,thechitfundsystemhasnowwonuniversalacclaim.Inthe villagesofKerala,manycenturiesago,asmallgroupoffarmersoperatedauniquescheme. EachfarmergaveafixedquantityofgrainsperiodicallytoaselectedTRUSTEE.The Trustee,afterkeepingasideaportionforhimself,gavetheresttoamemberofthegroupto helphimtomeethissocialcommitmentsandotherneeds.Thefarmerwhoreceivedthelot continuedtogivethefixedquantitytilleverymemberofthegroupreceivedhislot.The additionalbenefitswhenreceivingthelotearlierledtocompetition.Somememberswere evenwillingtoforgoacertainportion(likeadiscount)ofthelot,inordertogetanearlier chance.So,anauctionwasheldandthelowestbiddergotthelot.Thiswasthebasisof whatweknowtodayasthe"ChitFundScheme" TheChitCompanyformsdifferentgroupeachconsistingofacertainnumberof subscribers.Theyagreetocontributeaspecificamountasinstalmentforacertainnumber ofmonths.AssoonasthegroupiscompleteandtheGovernmentCertificateof Commencementissecured,anauctionisheld.Onthedateoftheauction,thesubscribersin theparticulargroupassemble,eitherinpersonorthroughproxy.Theybidfortheamount andthepersonofferingthehighestdiscountreceivesthechitamount.Outofthediscount foregone,theCompany'scommission(5%ofthechitamount)isdeductedandthebalance 97

isdividedequallyamongthesubscribersinthegroup.Thesubscribersthendeductthe dividendandpayonlythebalanceintheirnextinstalments.Beforethesuccessfulbidder drawstheamount,heproposessecuritiesimmovableproperties,LifeInsurancePolicies, Debenturesofgoodcompanies,UnitTrustofIndiaCertificates,BankGuaranteeetc. Personalsuretiesofpersonsemployedingovernmentoffices,governmentundertakings andreputedpubliclimitedcompaniesarealsoaccepted.Theprizeamountisgivenassoon asthesecurities/suretiesareaccepted. HowChitFundHelp? ChitFundshavetheadvantagebothforservinganeedandasaninvestment.Moneycan bereadilydrawninanemergencyorcouldbecontinuedasaninvestment.Interestrateis determinedbythesubscribersthemselves,basedonmutualdecisionsandvariesfrom auctiontoauction.Themoneythatyouborrowisagainstyourownfuturecontributions. Theamountisgivenonpersonalsuretiestoo;unlikeinbanksandotherfinancial institutionswhichdemandatangiblesecurity.Chitfundscanbereliedupontosatisfy personalneeds.Unlikeotherfinancialinstitutions,youcandrawuponyourchitfundfor anypurposemarriages,religiousfunctions,medicalexpenses,justanything...andCostof intermediationisthelowest.

15.MONEYLENDING Landlords,localshopkeepers,traders,suppliersandprofessionalmoneylenders,and relativesaretheinformalsourcesofmicrocreditforthepoor,bothinruralandurban areas.Someoftheperceivedadvantagesofinformalloansare: (a)contractualflexibility, (b)lowerdiscrepanciesbetweenloansanctionedandloanreceivedand (c)lessrelianceoncollateral. Theinterestchargedoninformalloansisstatedtovarybetween24percentto48percent perannum(or4percentpermonth).Incertainregions,itgoesupto120percentper annum(or10percentpermonth). StateMoneyLendingActs TheMoneyLendersActsenactedbyvariousstatesareintendedtochecktheexploitation ofthepoorbythemoneylenders.Theycannotchargeexorbitantratesofinterests;infact, inmostcasesthereisanupperceilingoninterestratesandthetotalrecoveriescannot 98

exceedtwicetheamountoftheprincipal.However,suchprovisionsarerarelyenforced duetovariousreasons. ThevariousMoneyLendingActsenactedbythedifferentstateshavenotbeensuccessful inensuringanydisciplineonthenonformalbankingsector. Illegal(loan)contracts,thoughnotjudiciable,areenforcedbythemoneylendersthrough themusclepowertacticsaswellasthedesireofthepoorthemselvesnottolosecredibility fortakingloansinthenextcycle. AspertheMoneyLendersActswhichareinforceatpresent,registrationandlicensefor moneylendingaremandatory.Asanincentive,theprofessionalmoneylenderswhoareso registeredmaybeallowedaccesstorefinancingfacility,sameastheMFIs,ifthey allowedtheiraccountstobeauditedbytheauthorisedregulatorregularly.

MoneyLendinginIndia Lendingbymoneylendersisanactivitythatantedatescontemporarybankingsystemfrom ancienttimes.Theyhavebeenorganizedintheformoffamilyorindividualbusiness.They varyintheirsizefromsmallpettymoneylenderstosubstantialindigenousbankerswhose businesses,attimes,haveexceededthatofcommercialbanks. InIndia,historically,moneylendershavehadaprominentpositioninthecapitalandcredit markets.Theyareusuallyalignedalongethniclinesandarevariouslycalledasshroffs, seths,sahukars,mahajans,chettisetc.indifferentpartsofthecountry. Moneylenderslendmoney,actasmoneychangersandfinanceloantradebymeansof billsofexchange.Theyusuallyuseworkingcapitaloftheirown,anddonotgenerallyget depositsorsolicitsavingsfromthepublic.Theygrantloansonpersonnelrecommendation andguaranteetopersonswellknowntothem.Theyalsosometimesgrantloansagainst securitiessuchasgold,jewellery,land,promissorynotesetc.Moneylendersusuallydonot havecontactwithothersuppliers/institutionsastheyusuallydependontheirownfunds. Buttheydoborrowfromjointstockbanksandotherfinancialinstitutionsintimesofhigh demand,thuscreatingachannelwhereformalfundsarechanneledtotheinformalsector. MoneyLendersinIndiacomeundercontroloftheMoneyLendersAct,promulgatedby eachofthedifferentstates.TheActessentiallysetsouttheappointmentofaRegistrar GeneralofMoneyLenderswhomaintainsaRegisterofMoneylendersintheir 99

jurisdiction.TheRegistrarprovidesforalicensetomoneylenderstocarryouttheir business,regulatesthetermsandconditionsunderwhichaloanisprovidedtoborrowers, andarbitratesindisputesbetweenmoneylendersandborrowersincasesofdefaultorother aspects.CompliancewiththeActisrarehowever,andmajorityofthemoneylendersdo notobtainsuchalicensetooperate.

PowertoLegislateonMoneyLending UndertheConstitutionofIndia(SeventhSchedule),moneylendingisaStateSubject: MoneyLending: Entry30ofListII:StateList 30.Moneylendingandmoneylenders;reliefofagriculturalindebtedness. Anyotherlawenactedinthiscontextis,thereforeissubservienttothelawpassedbythe statelegislature.TheSeventhScheduledoesnotmentionPrivateMoneyLending.As such,allkindsofmoneylendingwhetherthroughinstitutionalornoninstitutionalsources cangetcovered. TheConstitutionofIndiahasconferredthepowertolegislateonmattersrelatingtomoney lendingandmoneylenderstotheStates.Mostofthemhaveenactedthelaws.Manyof thesearecomprehensivelegislationsprovidingdetailedandstringentprovisionsfor regulationandsupervisionofthemoneylendingbusiness.Theselegislationscontain provisionsaimedatprotectingtheborrowersfrommalpracticesofthemoneylenders. SomeStateshaveenactedseparatelegislationsgoverningthebusinessofpawnbroking, whileothershaveincorporatedseparateprovisionsforpawnbrokerswithinthemoney lendinglegislationitself.

AparticularMoneyLendingAct(ofastate)maythuscomeinconflictwithanotherAct, enactedletussay,onbehalfofRBI.Onewaytoovercomethisdifficulty,maybethe CentrepreparingamodelMoneyLendingActandpassingitdowntothestatesfor enactmentofasimilarlegislation. VariousattemptshavebeenmadebytheReserveBankofIndia(RBI)toregulateand bringintoitspreview,thefunctioningofmoneylendersandindigenousbankers. 100

RecommendationsfromRBIthatdetailedaccountingstyles,rediscountinganddeposit takingfunctions,supportbycommercialbanksetc.werenotacceptedbyassociationsand unionsoflenders,disagreeingwithsomeoftheprovisionsmadebyRBI.

ModelLegislation AspertheReportoftheTechnicalGroupoftheReserveBankofIndiasetuptoreview legislationsonmoneylending,itrecommendsamodellegislationfortheconsiderationand adoptionbytheStateGovernmentsthatdonotpresentlyhaveacomprehensivelegislation inplace. MoneyLenders&AccreditedLoanProviders'Bill,2007(ModelLegislation) TheTechnicalGroupalsorecommendssomemodificationsintheexistinglegislationslike aquick,informalandeasydisputeresolutionmechanismforbetterenforcementand mandatoryprovisionforregistrationtoundertakemoneylendingactivityinStatesthat havenosuchprovisions.

MoneyLending Thenamebywhichmoneylendersarecalledmayvaryfromcountrytocountrybutthey canbefoundperformingsimilaractivitiesallovertheworld.Inmanycountries,the moneylenders(asweunderstandinIndia)areknownasconsumercreditproviders (UnitedKingdom)orcreditproviders(SouthAfrica).

WhoisaMoneyLender? Thedefinitionofthetermmoneylenderinlegislationisgenerallyallinclusive,and meansapersonwhoisinthebusinessoflendingmoney(loans),whetherasprincipal businessorotherwise.However,nearlyalllegislationsexpresslyexcludecertaincategories ofpersonsfromthedefinition.Theexcludedcategoriesareeitherincorporatedbodiesor institutionsinthebusinessofbanking,insurance,dealinginsecuritiesetc.,whichare otherwiseregulatedbyformalregulatorybodies. Therearecertainothernonincorporatedbutregisteredbodies,suchas,registeredco operativesocieties,whicharealsoexcludedfromthedefinitionofmoneylenders.

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Inadditiontoindividualsbeingexpresslyexcluded,someinternationallawsalsoexclude eitheraclassofloansorloansprovidedbyaclassofpersonsfrombeingregardedas loansforthepurposeofthemoneylendinglegislationtherebytakingthemoutofthe purviewofthoselaws. ThevariousMoneylendersActsofdifferentStatesdefineamoneylenderasapersonwhose mainorsubsidiaryoccupationisthebusinessofadvancingandrealisingloans.Banksand CooperativeSocietiesareexcludedfromthepurviewoftheActsofmanyStates. Generally,thelawshavebeenmadeapplicabletoindividuals,firms,associationof individualsandcompanies.However,NagalandandAndhraPradesh(asapplicabletothe AndhraRegionScheduledAreas)haveexcludedcompaniesfromthepurviewoftheir respectiveenactment Generallyallthelegislationsdefineamoneylendertobeapersonadvancingloans. Exemptionsfromtheapplicabilityoftheprovisionsofthemoneylendinglawsareof varioustypes: (i)exemptionprovidedunderthedefinitionofmoneylender(RajasthanMoneylendersAct), (ii)exemptionprovidedunderthedefinitionofloan(generallyinmanylegislations); (iii)provisionsexpresslyexemptingpersons/entitiesfromtheprovisionsofthe legislations(MadhyaPradeshMoneylendersAct,1934); (iv)ProvisionsempoweringGovernmenttoexemptpersons/entitiesfromtheprovisions ofthelegislations; (iv)limitedexemptionisgrantedundercertainlegislations(BombayMoneylendersAct, 1946applicabletoMaharashtraandGujarat)tobanks,companies,unincorporatedbodies etc.

MoneyLendingLaws Theobjectoflegislationpertainingtomoneylendingistoregulateandcontrolthebusiness ofmoneylenders. Thenatureofthemoneylendinglawsisregulatory,withemphasisbeingonprotectingthe interestsoftheborrowersbyprovidingdefiniteupperlimitsonratesofinterestandcurbing coerciverecoverypracticesbypenalizingsuchactsasalsobydenyingthe benefitsoflegalremediestomoneylenderstorecoverloanstotheextenttowhichtheyare taintedwithillegalities.Coerciverecoverypracticesarealsosoughttobecurbedby 102

providingdefiniterecoveryproceduresgenerallythroughCourts.Wherethereare violations,proceduresarealsoprescribedtoprovidearemedytotheinjured.

AnexaminationofthemoneylendinglegislationsofStatesshowsthattheprovisionsare generallysimilar.Thesalientfeaturesare: 1.Requirementofregistration/licenseforcarryingonthebusinessofmoneylendingwithin aState/aportionoftheState; 2.Dutiesofthemoneylenderswithrespecttomaintainingandprovidingstatementof accountstothedebtors; 3.Penaltiesforcarryingonbusinesswithoutlicenceandforintimidatingthedebtorsor interferingwiththeirdaytodayactivities,includingthecognizabilityofsuchoffences; 4.Maximumratesofinterestthatcanbecharged; 5.MattersthattheCourtsarerequired/empoweredtodecideinsuitsfiledby moneylenders; 6.Applicabilitytocompaniesengagedinthemoneylendingbusiness.However,some Statesinexerciseoftheirgeneralexemptionpowers,havegrantedexemptionsto companiesfromtheapplicabilityofthelegislations. 7.Exemptiontoloansfromatradertoanothertrader,loansbybanks,cooperative societies,financialinstitutions,etc.

CommonFeaturesoftheMoneyLendingLegislationsoftheStates 1.Registration/Licensing Allthemoneylendinglegislationsprovidethatmoneylendersarerequiredtoregisterand obtainalicence.AlltheStatelegislations,exceptthoseofPunjabandtheNationalCapital TerritoryofDelhi,alsoprovideforpenaltiesifanypersoncarriesonbusinesswithout registration/licence.SomeStatesprovideforenhancedpunishmentsforsecondand subsequentoffences. KeralaandKarnatakaprovideforthepaymentofasecuritydepositbythemoneylenderat thetimeofapplyingforthelicence,whichisliabletobeforfeitedintheeventofhis contraveninganyoftheprovisionsoftherespectiveActs/Rules,falsificationofaccounts, andcommissionofcertainoffences. Almostalllaws,exceptofKerala,NagalandandAndhraPradesh(AndhraRegion ScheduledAreas)MoneylendersRegulation,1960,alsoimposeabaronsuitsfiledby unregisteredmoneylenders. 103

2.Loansinkind,goodsandmaterials MostStateActsincludetheadvanceofbothmoneyandkindwithinthedefinitionofthe term"loan". 3.Keeping,FilingandFurnishingofAccounts AlmostalltheStateshaveprovisionsrequiringmoneylenderstokeepstatementof accountsintheformandmannerprescribedintheRules. Moneylendersarealsorequiredinsomestatestofilestatementofaccountswiththe registering/licensingauthoritiesandgenerallytheyarerequiredtodosoannually.Another requirementistofurnishastatementofaccountstotheborrowersasprescribedunderthe Rules. Delhi,PunjabandHaryanadonotcontainprovisionsforthekeepingofaccounts,filing statementofaccounts/returnswithregisteringauthoritiesandfurnishingofaccountdetails totheborrowers. SomeStatesenabletheStateauthoritiestoinspectthebooksofaccountsandrelated documents.SomeStatesevenhavepowersofsearchandseizureofbooksofaccountsand documentsrelatingtomoneylending.MostoftheStatesalsoprescribepenaltiesforthe falsificationofaccounts/entryofwrongsumsinaccounts. 4.InterestRates InterestrateschargeablebymoneylendersareeitherfixedbyStatuteortheStatutes empowertherespectiveGovernmentstofixtheinterestratebyissueofnotificationfrom timetotime. ThesameformsabenchmarkfortheCourtstodeterminewhethertheinterestrates chargedareexcessiveinthegivenfactsandcircumstancesofacase.TheCourtsarealso empoweredtoexaminewhetherornotinterestrateschargedonaloantransactionare excessiveunderacentrallegislation,namely,theUsuriousLoansAct,1918. 5.Molestation SomeStatemoneylendinglegislationshaveprovisionsdefininganoffenceof molestationandprescribingpenaltyforthecommissionorabetmenttocommitthesame. Thetermmolestationhasbeendefinedtoincludeuseofviolence/intimidationagainstthe debtororfamilymembers/loiteringnearthehouseorworkplace/doingofanyact calculatedtoannoythedebtor,etc. 6.ReopeningoftransactionsbyCourt

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WiththeexceptionofsomeStates,somepermittheCourtstoreopenthetransactions pertainingtotheloan,settleaccountsbetweenthepartiesandreducetheamountchargedto thedebtorinrespectofanyexcessiveinterest. 7.Tradecredit Loansfromonetradertoanother(tradecredit)havebeenexempted,expresslyorimpliedly insomestates.

SpecialfeaturesofMoneyLendingLegislationsofsomestates ApartfromthegeneralprovisionscommontothelegislationsofalltheStates,thereare certainspecialfeaturesuniquetosomeofthem: 1.Loan TheBengalMoneylendersAct,1940hasaprovisiondefiningcommercialloan(Section 2(4))tomeanaloanadvancedtoanypersontobeusedbysuchpersonsolelyforthe purposesofanybusinessrelatingtotrade,commerce,industry,mining,planting, insurance,transport,bankingorentertainment,ortotheoccupationofwharfinger, warehousemanorcontractororanyotherventureofamercantilenature, whetherasproprietororprincipaloragentorguarantor.Interestratepermittedishigher forsuchloans. TheAndhraPradesh(TelanganaArea)MoneylendersAct,1349Fhasaprovision(Section 2(9))definingthemeaningoftraderandreadwiththeprovisionsofSection2(4)(g), providingforexemptiontocertaincategoriesofloans,whichincludeloanbyatraderto anothertrader. TheKeralaAct,whiledefiningloan,hasexcludedanadvancemadebyatraderbonafide carryingonbusiness,otherthanmoneylending,ifsuchloanisadvancedintheregular courseofsuchbusiness.

2.Penaltyfortakingsalami,batta,gadiana TheBiharMoneylendersAct,1974containsprovisionprovidingforpenaltyon moneylenderswhotakesfromadebtoratthetimeofadvancingloansordeductsoutofthe principalofsuchloananysalami,batta,gadianaorotherextractionofasimilarnature. 105

3.CompositionofOffences Certainlegislationsprovideforcompoundingsomeoftheoffencesmadepunishableunder theMoneylenderslegislations. 4.Debtcollectors TheAP(AndhraRegionScheduledAreas)MoneylendersRegulation,1960hasaprovision foremployingdebtcollectorsbymoneylendersafterobtainingauthorisationfromthe authorityintermsofsection11. TheNagalandMoneylendersAct,2005prohibitsemploymentofpersonsbymoneylenders forthepurposeofdemandingorrecoveringanyloanduetohimunlesssuchpersonisin possessionofacertificate(issuedbythedesignatedauthorityoftheState)authorisinghim toactasadebtcollector 5.SecurityDeposits KeralaandKarnatakarequireregisteredmoneylenderstokeepsecuritydepositswiththe Government.Thelawprovidesadetailedtablespecifyingtheamountofmoneyrequiredto bedepositedbyamoneylender,anditislinkedtotheamountofmoneylentinayear. ThesecuritydepositsspecifiedundertheKeralaMoneylendersAct,1958rangefroma minimumoffivethousandrupeestoamaximumoftwolakhrupees.Thesecuritydeposits specifiedundertheKarnatakaMoneylendersAct,1961rangefromaminimumoffive thousandrupeestoamaximumoffiftythousandrupees. 6.AuditbyCharteredAccountants TheKeralaMoneylendersAct,1958,istheonlyAct,whichprovidesthattheaccountsof everymoneylenderbeauditedatleastonceineveryyearbyapersonwhoisachartered accountantandtheauditreportsubmittedtothespecifiedauthority.

ReportoftheTechnicalgroupoftheRBItoreviewlegislationsonmoneylending Thecontextforsettingupthegroupwasprovidedbyunprecedentedfarmerssuicides.As thereportsays,sincehighindebtednesstomoneylenderscanbeanimportantreasonfor distressamongfarmers,thegroupwasaskedtoreviewtheefficacyoftheexisting legislativeframeworkandenforcementmachinerygoverningmoneylendingandtomake recommendationsfortheirimprovement. 106

Themainpurposeofthereportistodeviseanewlegislationforincentivisinggood conductamongmoneylenderssothattheycanbecomepartofthesolutiontothecrisisof creditinruralIndia. Thereportsummarisesthehistoryandimpactoflegislationtocontrolusuriousmoney lendingacross22Statesinthecountry.Thereportsaysthatmoneylendinglegislationhas beenalmostimpossibletoenforce. Thereportalsoreviewsinternationalexperiencefromeightcountriestoexplorethe possibilityoflinkingmoneylenderstobanksandconcludesthatanyattempttoputtoo manyonerousoversightobligationsonbankswillbecounterproductiveasthe moneylenderswillnotbehappy. Thesampleincludesdevelopedaswellasthedevelopingcountries. 1.HongKongMoneylendersOrdinance,1997 2.SingaporeMoneylendersAct,1959 3.JapanMoneyLendingBusinessControlandRegulation Law,19835 4.LesothoMoneylendersOrder,1989 5.UnitedKingdomConsumerCreditAct,19746 6.WestPakistanThePunjabMoneylendersOrdinance,19607 7.USA(S.Dakota)Title54oftheSouthDakotaStateLaws(DebtorandCreditor)8 8.SouthAfricaTheNationalCreditAct,20059

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(Source:ReportoftheTechnicalgroupoftheRBItoreviewlegislationsonmoney lending)

Thereportnotesthatallnationalandinternationallegislationempowersthegovernmentto notifymaximumratesofinterestthatcanbechargedbymoneylenders.Butarguesthatthis isoutofsyncwithmarketrealityandsuggestslinkinginterestratestoamarket determinedbenchmarkasthiswillmakemoneylendersviewthelegislationfavourably. Thereportalsorejectsexistinglawsthatprescribeauditofmoneylendersbooksby CharteredAccountants,becausethisisimpracticalandmaynotnecessarilyaddvalue. ThereportoutlinesamodellegislationcalledtheMoneyLenders&AccreditedLoan ProvidersBill,2007.Thisbillseekstoformalisetherelationshipofbankswith moneylenderstotakeadvantageoftheirdominantpresence,knowledgebase,informality andeasyaccess.MoneylenderswouldnowbetransformedintoAccreditedLoanProviders. Bankswouldfacilitatethemtosetupbusinessbyprovidingrequiredfundsforonlending.

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Theseadvanceswillevenbetreatedaspartofthemandatoryprioritysectorlendingby banks. Threeimportantlawsidentifiedinthereport: 1.TheRuleofDamdupat SomeoftheStatelawcontainaprovisionprovidingforthemaximumamountofinterest recoverableonloansmadebymoneylenders,incorporatingtheruleofdamdupat.Therule ofdamdupatisabranchoftheHindulawofdebt.Accordingtothisrule,theamountof interestrecoverableatanyonetimecannotexceedtheprincipal. 2.UsuriousLoansAct,1918. TheUsuriousLoansAct,1918isalsocurrentlyapplicabletotransactionsrelatingtomoney lending.TheUsuriousLoansAct,1918(ULA)wasenactedwiththeobjectofpreventing theCivilCourtsbeingusedforthepurposeofenforcingharshandunconscionableloans carryinginterestatusuriousrates. TheprovisionsofULAenabletheCourtstoreopentransactionsbywayofmoneyorgrain loansincaseswheretheCourtissatisfied(a)thattheinterestorotherreturnisexcessive and(b)thatthetransactionissubstantiallyunfairandafterinvestigationofthe circumstances,bothattendantandantecedent,torevisethetransactionbetweentheparties and,ifnecessary,toreducetheamountpayabletosuchsumastheCourt,havingregardto theriskandallcircumstancesofthecase,maydecidetobereasonable. TheStateGovernmenthasbeenempoweredtoexempt,bywayofnotificationin OfficialGazette,anyarea,classoftransactionsorclassofpersonsfromtheapplicabilityof ULA. ULAhasbeenmadeapplicabletosuitsfor(a)recoveryofaloan,(b)enforcementofany securitytakenoranyagreement,madeinrespectofanyloanand(c)redemptionofany securitygiveninrespectofanyloan. TheULAisapplicabletoallsuitsasmentionedirrespectiveofthepartiesinvolvedinthe disputes.Therefore,theActisalsoapplicabletosuitsinwhichamoneylenderisaparty. 3.InterestAct,1978 Thoughnotapartoftheoverallbodyoflawsrelatingtomoneylending,thereisonemore Act,viz,theInterestAct,1978whichcanalsobeappliedbyCourtswhilegrantinginterest 109

insuits.TheActisaCentralActanditwasenactedwithaviewtoconsolidateandamend thelawrelatingtoallowingofinterestincertaincases. ListofsomeMoneylendinglegislationsinIndia

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(Source:ReportoftheTechnicalgroupoftheRBItoreviewlegislationsonmoney lending)

16.HOUSINGFINANCECOMPANIES IntermsoftheNationalHousingBankAct,1987,NationalHousingBankisexpected,in thepublicinterest,toregulatethehousingfinancesystemofthecountrytoitsadvantageor topreventtheaffairsofanyhousingfinanceinstitutionbeingconductedinamanner detrimentaltotheinterestofthedepositorsorinamannerprejudicialtotheinterestofthe housingfinanceinstitutions.Forthis,NationalHousingBankhasbeenempoweredto determinethepolicyandgivedirectionstothehousingfinanceinstitutionsandtheir auditors. BesidestheregulatoryprovisionsoftheNationalHousingBankAct,1987,National HousingBankhasissuedtheHousingFinanceCompanies(NHB)Directions,2001asalso GuidelinesforAssetLiabilityManagementSysteminHousingFinanceCompanies.These areperiodicallyupdatedthroughissueofcircularsandnotifications. Aspartofthesupervisoryprocess,anentrylevelregulationissoughttobeachieved throughasystemofregistrationofhousingfinancecompanies. NationalHousingBanksupervisesthesectorthroughasystemofonsiteandoffsite surveillance. NationalHousingBank TheNationalHousingBank(NHB)wasestablishedon9thJuly1988underanActofthe Parliamentviz.theNationalHousingBankAct,1987tofunctionasaprincipalagencyto promoteHousingFinanceInstitutionsandtoprovidefinancialandothersupporttosuch institutions. TheAct,interalia,empowersNHBto: 111

Issuedirectionstohousingfinanceinstitutionstoensuretheirgrowthonsoundlines Makeloansandadvancesandrenderanyotherformoffinancialassistancetoscheduled banksandhousingfinanceinstitutionsortoanyauthorityestablishedbyorunderany Central,StateorProvincialActandengagedinslumimprovementand Formulateschemesforthepurposeofmobilisationofresourcesandextensionofcredit forhousing TheprincipalmandateoftheBankistopromotehousingfinanceinstitutionsto improve/strengthenthecreditdeliverynetworkforhousingfinanceinthecountry.The Bankhasplayedafacilitatorroleinthisregardinsteadofitselfopeningsuchdedicated housingfinanceinstitutions.Forthispurpose,NHBhasissuedtheModelMemorandum andArticlesofAssociation.NHBhasalsoissuedguidelinesforparticipatingintheequity ofhousingfinancecompanies.AllhousingfinancecompaniesregisteredwithNHBu/s 29AoftheNationalHousingBankAct,1987andscheduledcommercial/cooperative banksareeligibleforrefinancesupportsubjecttotermsandconditionsaslaiddownunder therespectiverefinanceschemes. AsapartofitspromotionalroleNHBhasalsoformulatedaschemeforguaranteeingthe bondstobeissuedbythehousingfinancecompanies. ConsideringtheneedfortrainedpersonnelforthesectorNHBhasdesignedandconducted varioustrainingprogrammes

HousingFinanceInstitution Section2(d)oftheNHBActdefinesHFIasfollows:"housingfinanceinstitution"includes everyinstitution,whetherincorporatedornot,whichprimarilytransactsorhasasoneofits principalobjects,thetransactingofthebusinessofprovidingfinanceforhousing,whether directlyorindirectly; Legislations NationalHousingBankAct,1987 NHBGeneralRegulations,1988

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AHFCisacompanywhichmainlycarriesonthebusinessofhousingfinanceorhasoneof itsmainobjectclauseintheMemorandumofAssociationofcarryingonthebusinessof providingfinanceforthehousing. Forcommencingthehousingfinancebusiness,anHFCisrequiredtohavethefollowingin additiontotherequirementsundertheCompaniesAct,1956: (a)CertificateofregistrationfromNHB (b)MinimumnetownedfundofRs.200lakhs(w.e.f.16.02.2002) ApartfromregistrationasCompanybytheRegistrarofCompaniesaHFCalsorequires registrationwithNationalHousingBoardforcommencingorcarryingonthebusinessof housingfinance. AHFCcannotcommencebusinessimmediatelyaftermakinganapplicationfor registrationwithNHB,ithastoobtainthecertificateofregistrationfromNHBandalso havetheminimumNetOwnedFund(NOF). HFCsincorporatedafterJune12,2000cannotconductbusinessofhousingfinancewithout obtainingacertificateofregistrationfromNHB.Conductofbusinesswithoutobtaining certificateofregistrationisanoffencepunishableundertheprovisionsoftheNHBAct. NHBcanalsofileapplicationforwindingupofsuchHFCs. HoweveranexistingHFC(existingasonJune12,2000)withoutminimumNOFand registrationcancontinuethehousingfinancebusinessprovidedithasappliedforcertificate ofregistrationwithNHBbeforeDecember12,2000andtheapplicationhasnotbeen rejectedbyNHB.Suchcompanies,havetoachievetheminimumNOFofRs25.00lakhs withinaperiodofthreeyears,i.e.beforeJune12,2003unlessfurtherextendedbyNHB. Registration ToobtainacertificateofregistrationfromNHB,anHFC,afterincorporation,isrequiredto makeanapplicationtoNHBinaspecifiedform. TheconditionsuponthefulfillmentofwhichacertificateofregistrationisgrantedbyNHB aregiveninsubsection(4)ofSection29AoftheNationalHousingBankAct,1987. Briefly,theconditionsare: (a)TheHFCshallbeinapositiontopayitsdepositorsinfullasandwhentheirclaims accrue; 113

(b)TheaffairsofHFCareconductedinamannernotdetrimentaltotheinterestofits depositors; (c)ThemanagementofHFCisnotprejudicialtothepublicinterestortotheinterestsofits depositors; (d)HFChadadequatecapitalandearningprospects; (e)Thepublicinterestisservedbythegrantofsuchcertificateofregistration; (f)Grantofcertificateisnotprejudicialtothegrowthofhousingfinancesector; (g)SuchotherconditionswhichNHBconsidersnecessaryforgrantingthecertificateof registration. Anappealliesagainsttheorderofrejectionofcertificateofregistration.TheHFCcan appealtotheCentralGovernmentwithinaperiodof30daysfromthedateonwhichsuch orderofrejectioniscommunicatedtoit. ThecertificateofregistrationgrantedtoanHFCbyNHBcanbecancelledinthefollowing circumstances: (a)whereitceasestocarryonthebusinessofhousingfinance; (b)wheresuchHFChasfailedtocomplywithanyconditionsubjecttowhichthe certificateofregistrationhadbeenissuedtoit; (c)whereatanytimeitfailstofulfillanyoftheconditionsenumeratedaboveforthegrant ofcertificateofregistration; (d)whereitfails (i)tocomplywithanydirectionissuedbyNHB; (ii)tomaintainaccountsinaccordancewiththerequirementoflaw; (iii)tosubmitorofferforinspectionitsbooksofaccountsandotherrelevantdocumentsto theofficialsofNHB,whensodemanded; (e)whereithasbeenprohibitedfromacceptingdepositbyanordermadebyNHBand suchorderhasbeeninforceforaperiodofnotlessthanthreemonths. AnappealliesagainsttheorderofcancellationofcertificateofregistrationbyNHB.The HFCcanappealtotheCentralGovernmentwithinaperiodof30daysfromthedateon whichsuchorderofrejectioniscommunicatedtoit.

NetOwnedFund(NOF) NetOwnedFundis: 114

(a)theaggregateofthepaidupequitycapitalandfreereservesasdisclosedinthelatest balancesheetofthehousingfinanceinstitutionafterdeductingtherefrom (i)accumulatedbalanceofloss; (ii)deferredrevenueexpenditure,and (iii)otherintangibleassets;and (b)furtherreducedbytheamountsrepresenting (1)investmentsofsuchinstitutioninsharesof (i)itssubsidiaries; (ii)compainesinthesamegroup; (iii)allotherhousingfinanceinstitutionswhicharecompanies;and (2)thebookvalueofdebentures,bonds,outstandingloansandadvances(includinghire purchaseandleasefinance)madeto,anddepositswith, (i)subsidiariesofsuchcompany;and (ii)companiesinthesamegroup, totheextentsuchamountexceedstenpercent.of(a)above; Note:subsidiariesandcompaniesinthesamegroupshallhavethesamemeanings assignedtothemintheCompaniesAct,1956.

AcceptanceofDeposits Theexpressionpublicdeposithasbeendefinedindetailinclause(w)ofsubparagraph(1) ofparagraph2ofTheHousingFinanceCompanies(NHB)Directions,2001.However,the definitionofpublicdepositspecificallyexcludescertaindepositslikeamountreceived fromCentralorStateGovernments,banks,publicfinancialinstitutionsandother institutions,fromothercompanies,mutualfundsetc. WhichHFCscanacceptpublicDeposits: ForacceptanceofpublicdepositsHFCscanbedividedintotwocategories,i.e.HFCs carryingonthebusinessofhousingfinancebeforeJune12,2000andHFCscommencing housingfinancebusinessafterthatdate. (a)CompaniescarryingonbusinessofhousingfinancebeforeJune12,2000canaccept depositsprovidedtheyhaveNOFofoverrupeestwentyfivelacsandhaveappliedfor certificateofregistrationwithNHBbeforeDecember12,2000andeitherhavebeen

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grantedthecertificateofregistrationvalidforacceptanceofdepositsbyNHBortheir applicationisstillpendingforissueofcertificateofregistrationwithNHB. (b)CompaniescommencingthebusinessofhousingfinanceafterJune12,2000canaccept publicdepositsonlyafter: (i)obtainingcertificateofregistrationfromNHBvalidforacceptanceofdeposits;and (ii)havingminimumnetownedfunds(NOF)of[rupeestwocroresormore]*. *thisamountwasrupeestwentyfivelacsormoreforHFCswhichcommencedbusiness beforeFebruary16,2002. IntermsoftheHousingFinanceCompanies(NHB)Directions,2001,HFCscanaccept publicdepositsforperiodsofoneyearandaboveanduptosevenyearsonly. PublicdepositsofHFCsarenotguaranteedbyNHB.Thedepositorhastosatisfyhimself aboutthefinancialpositionandallrelevantaspectsbeforeplacinghisdepositwiththe HFC. ApersonmakingpublicdepositswithHFCsshouldsatisfyhimselfthatitholdsavalid certificateofregistrationforacceptingpublicdepositsfromNHB.NHBwhileissuing certificateofregistrationtoanHFCspecificallymentionswhetherornotitcanaccept publicdeposits. CeilingonthemaximumamountofpublicdepositwhichcanbeacceptedbyanHFC: HFCshavingcreditratingfromapprovedcreditratingagenciesnotbelowAand complyingwithallprudentialnormsrequirementscanacceptdepositnotexceedingfive timesofitsnetownedfund.TheHFCshavingnocreditratingcanacceptdepositonlyupto twotimesofitsnetownedfundorrupeestencroreswhicheverislowerprovidedsuch HFCcomplieswithallprudentialnormsandalsohascapitaladequacyratioofnotlessthan fifteenpercentasperthelastauditedbalancesheet. AlthoughcreditratingisnotcompulsoryforacceptanceofpublicdepositsbyanHFC, howevertheHFChavingcreditratingcanacceptmoredepositsaspertheconditionslaid downforacceptanceofdepositsinsuchacaseascomparedtoanHFCwithoutsuchrating. ApprovedCreditratingagenciesforthepurposeofHFCs:

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Thefollowingcreditratingagencieshavebeenapprovedforthepurpose (i)TheCreditRatingInformationServicesofIndiaLtd.(CRISIL) (ii)ICRALtd. (iii)CreditAnalysisandResearchLimited(CARE) (iv)FITCHRatingsIndiaPvt.Ltd. CeilingontherateofinterestwhichcanbeofferedbyanHFConpublicdeposits TheHousingFinanceCompanies(NHB)Directions,2001provideforceilingonthe maximumrateofinterestwhichcanbeofferedbyanHFConpublicdeposits.Thepresent ceilingistwelveandhalfpercentperannumcompoundedatintervalsnotshorterthan monthlyrests.However,thereisnostipulationwithregardtotheminimumrateofinterest requiredtobeofferedonpublicdepositsbyanHFC. PrematurewithdrawalofDepositbyaDepositor SubjecttoanythingonthecontraryanHFC,onarequestbeingmadebyadepositor,may considermakingprematurepaymentofthedepositsubjecttothefollowing: (i)Nodepositcanberepaidwithinthreemonthsfromthedateofitsacceptance. (ii)Nointerestshallbepaidifthedepositisrepaidwithinsixmonthsfromthedateof deposit. (iii)Wheredeposithasrunfromsixmonthstooneyeartheinterestnotexceedingtenper centcanbepaid. (iv)Wherethedeposithasrunforaperiodoftwelvemonths,therateofinterestapplicable shallbeonepercentagepointlessthanthatHFCsrateapplicablefortheperiodforwhich thedeposithasactuallyrun. (v)Incaseofdeathofthedepositorthedepositmayberepaidwithinterestatthe contractedrateuptothedateofrepaymentofsuchdeposit.

ImportantNote: AHFConitsowncannotrepaythedepositprematurely.Acceptanceofpublicdepositisa contractbetweentheHFCandthedepositorforadefiniteperiodoftime.However,any novationofthecontracthastobemutuallyagreedbetweenthepartiesandshouldbein conformitywiththeprovisionsofHousingFinanceCompanies(NHB)Directions,2001. RemediesavailabletoadepositorwhentheHFCdoesnotrepaythedepositsonmaturity: 117

Thedepositorcanfileacivilsuitforrecoveryoftheamountofdeposit.Hecanalsomakea complainttotheConsumerForumssetupundertheConsumerProtectionAct,1986.The depositorshouldalsobringsuchcasestothenoticeofNHBfortakingactionagainstthe defaultingcompaniesundertheprovisionsoftheNHBAct.Onbeingsatisfiedthatthe companyhasdefaultedinrepaymentofdepositsNHBmayissuedirectionsprohibitingit fromacceptanceoffurtherdepositsandalienationofitsassets.NHBmayalsoimpose financialpenaltiesandtakeactionforimpositionofotherpenalties.NHBmayalsofile windinguppetitionagainstsuchcompanies. DetailsanHFCisrequiredtofurnishintheapplicationformsolicitingpublicdeposits Whilesolicitingpublicdeposits,anHFChastoindicate,interalia,thefollowing: Particularsofthespecifiedcategoryofthedepositors, Creditratingassignedforitsdeposits, Informationrelatingtoaggregateexposuretogroupcompaniesandotherentitiesin whichDirectorsoftheHFC/HFChavesubstantialinterest, OtherstatementspertainingtoRedressalforaavailableincaseofanydeficiency, effectofnonpaymentofdeposits,financialpositionofthecompany,regulatory frameworketc.asdetailedinParagraph6totheHousingFinanceCompanies (NHB)Directions,2001, ParticularsspecifiedintheNonBankingFinancialCompaniesandMiscellaneous NonBankingCompanies(Advertisement)Rules,1977,madeundersection58Aof theCompaniesAct,1956(1of1956).

Regulation TheprovisionsforregulationoftheHFCsasprovidedundertheNHBAct,1987are: RequirementofRegistrationandNetOwnedFund Maintenanceofpercentageofassetsinspecifiedsecurities CreationofReserveFundbytheHFCs Regulationorprohibitionofissueofprospectusoradvertisementsolicitingdeposits DeterminationofPrudentialNormsforHFCs Collectionofinformationastodepositsandtogivedirections IssueofdirectionstotheauditorsoftheHFCsrelatingtofinancialstatementsand disclosurerequirements Prohibitionofacceptanceofdepositsandalienationofassets PenaltyforviolationoftheprovisionsoftheActorthedirectionsissued thereunder.FilingofwindinguppetitionagainsterringHFCs. 118

HousingFinanceCompanies(NHB)Directions,2001 NHBhasissuedgeneraldirectionstoHFCsundertheNHBAct,1987fromtimetotime. TheDirectionscurrentlyinforceareknownasHousingFinanceCompanies(NHB) Directions,2001.TheseDirectionsrelateto: AcceptanceofdepositsbyHFCs, PrudentialNormsrelatingtoIncomeRecognition, CapitalAdequacy, Classificationofassets, CreditConcentrationetc.

TheyalsocontaindirectionstoauditorsoftheHFCsregardingdisclosurerequirements. Periodicalreturns,statements,etc.requiredtobesubmittedbytheHFCstoNHB Thereturns/statementsrequiredtobesubmittedbytheHFCstoNHBareenumerated below: AnnualReturn HalfyearlyReturnonPrudentialNorms QuarterlyReturnonmaintenanceofLiquidAssets AuditorsCertificateonannualbasiscertifyingthecapabilityoftheHFCtorepay deposits Copyoffinancialstatements/AnnualReport ReturnsonchangespertainingtoaddressoftheregisteredofficeoftheHFC,its Directorsetc. FilingacopyoftheadvertisementsolicitingPublicDepositsorstatementinlieu thereof

ActionwhichcanbetakenbyNHBagainsttheHFCsnotcomplyingwiththeprovisionsof theActortheHousingFinanceCompanies(NHB)Directions,2001 AspertheNHBAct,1987,NHBisempoweredtotakethefollowingactions: (a)Issuingspecificdirectionsprohibitingacceptanceofdepositsandalienationofassets (b)Cancellationofcertificateofregistration. 119

(c)Filingofapplicationsforwindinguppetition (d)ImpositionoffinancialpenaltiesontheHFCanditsprincipalofficers (e)FilingofcomplaintsbeforetheMagistrateforimpositionofpenalties ProvisionsundertheNHBAct,1987andHousingFinanceCompanies(NHB)Directions, 2001forsafeguardingtheinterestofthedepositors SomeofthesafeguardsundertheNHBAct,1987andHousingFinanceCompanies(NHB) Directions,2001areenumeratedbelow: (i)ImpositionofceilingontheamountthatcanbeacceptedbyanHFC (ii)Impositionofceilingontherateofinterestondeposits (iii)Provisionfornominationfacility (iv)Requirementofdisclosurestothedepositors (v)ImpositionofceilingonbrokeragetobepaidbyHFCforraisingdeposits (vi)Prohibitiononalienationofassetsincaseofdefaultinrepaymentofdeposits (vii)RequirementofmaintenanceofLiquidAssetsbyHFC (viii)CreationofReserveFund (ix)CollectionofdataperiodicallytoverifycompliancewiththeprovisionsoftheNHB ActanddirectionsbyanHFCtoensureitssoundness

17.MORTGAGEGUARANTEECOMPANIES WhileannouncingproposalsfortheUnionbudget200708,theFinanceMinisterofIndia hadannounced: 'Ourpeoplewanthousingloans.Banksandhousingfinancecompaniesthatlendagainst mortgageswouldhavegreatercomfortifthemortgagecanbeguaranteedthroughathree waycontractamongborrower,lenderandguarantor.Regulationswillbeputinplaceto allowthecreationofmortgageguaranteecompanies'. Accordingly,theReserveBankofIndiahaddrawnupadraftschemeforconsidering proposalsfromMortgageGuaranteeCompanyforgrantofCertificateofRegistration.The draftschemewasdiscussedwiththestakeholdersandafterexaminationof comments/suggestionsreceivedinthisregardandwiththepreviousapprovaloftheCentral Government,itwasdecidedtospecifyMortgageGuaranteeCompanyasnonbanking financialcompany.

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MortgageGuaranteeCompanyasNBFC IntermsofpowersunderSection45I(f)(iii)oftheRBIAct,1934,theRBIvide Notification(NotificationNo.DNBS(MGC)1/CGM(PK)2008datedJanuary15,2008)a MortgageGuaranteeCompany,thatis,acompanyregisteredwiththeBankunderthe schemeforregistrationofMortgageGuaranteeCompaniesnotifiedbytheBankinthis regard,willbetreatedasNonBankingFinancialCompanyundertheprovisionsoftheAct. Further,MortgageGuaranteeCompanywillbeexemptedvideNotificationNo.DNBS (MGC)2/CGM(PK)2008datedJanuary15,2008fromthefollowingprovisionsofRBI Act1934asaseparateregulatoryframeworkisbeingprescribedforsuchcompanies: Section45IA(requirementofregistration), Section45IB(maintenanceofliquidassets)and Section45IC(creationandtransfertoReserveFundacertainpercentageofthenet profit)

Registration TheCompanydesirousofregistrationasMortgageGuaranteeCompanymayapplyto ReserveBankofIndiainapplicationforminduplicate,dulyfilledin,asperformat enclosed/placedontheBank'swebsitewww.rbi.org.in.

GuidelinesonRegistrationandOperationsofMortgageGuaranteeCompany UnderSection45L(1)(b)oftheReserveBankofIndiaAct,1934,theRBIhaslaiddown GuidelinesonRegistrationandOperationsofMortgageGuaranteeCompanyvide Notification(NotificationDNBS(PD)MGCNo.3/CGM(PK)2008datedFebruary15, 2008) Theseguidelineshavetobecompliedbyeverynonbankingfinancialcompany undertakingthebusinessofMortgageGuaranteeasdefinedherein. 121

TheTextoftheNotificationDNBS(PD)MGCNo.3/CGM(PK)2008datedFebruary15, 2008GuidelinesonRegistrationandOperationsofMortgageGuaranteeCompanyunder Section45L(1)(b)oftheReserveBankofIndiaAct,1934,isreproducedbelow.

1.Shorttitle,commencementandapplicabilityofthedirections: (i)Theseguidelinesshallbeknownasthe'MortgageGuaranteeCompany(ReserveBank) Guidelines,2008'. (ii)Theseguidelinesshallcomeintoforcewithimmediateeffect. Scope (iii)Theseguidelinesprovideaframeworkfortheregistrationandoperationofmortgage guaranteecompaniesinIndia. Definitions 2.(1)Intheseguidelinesunlessthecontextotherwiserequires, (a)'bank'means (i)abankingcompany;or (ii)acorrespondingnewbank;or (iii)theStateBankofIndia;or (iv)asubsidiarybank;or (v)suchotherbankwhichtheReserveBankmay,bynotification,specifyforthepurposes oftheseguidelines;and (vi)acooperativebankasdefinedundertheBankingRegulationAct,1949(10of1949); (b)'bankingcompany'meansabankingcompanyasdefinedinSection5(c)oftheBanking RegulationAct,1949(10of1949); (c)'borrower'meansanypersonoranyentitywhohasbeengrantedahousingloanbyany creditorinstitutionoranyotherentitywhichmaybespecifiedbyReserveBankofIndia fromtimetotime;

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(d)"creditorinstitution"meansabankorhousingfinancecompany; (e)'company'meansacompanyregisteredunderSection3oftheCompaniesAct,1956; (f)'correspondingnewbank'meansasdefinedinclause(da)ofSection5oftheBanking RegulationAct,1949; (g)'default'meansnonpaymentontheduedateofanyprincipaldebtorinterestthereon payablebyaborrowertoanycreditorinstitution; (h)'guarantee'meansacontractofguaranteeasdefinedintheIndianContractAct,1872(9 of1872); (i)'housingfinancecompany'meansacompanywhichprimarilytransactsorhasasoneof itsprincipalobjects,thetransactingofthebusinessofprovidingfinanceforhousing,as definedintheNationalHousingBankAct,1987; (j)'housingloan'meansanyloanoradvancegrantedtoanindividualoranyotherentity whichmaybespecifiedbyReserveBankofIndiafromtimetotimeforthepurposeof construction/repairs/upgradationofahouseorresidentialpropertyoracquisitionofa houseorresidentialpropertyorbothi.e.houseandresidentialproperty; Explanation:'Otherentities'wouldincludehousingsocietiesandhousingcooperativesin theabovedefinitionof'housingloan'. (k)'mortgageguarantee'meansaguaranteeprovidedbyamortgageguaranteecompanyfor therepaymentofanoutstandinghousingloanandinterestaccruedthereonuptothe guaranteedamounttoacreditorinstitution,ontheoccurrenceofatriggerevent; (l)'mortgageguaranteecompany'meansacompanywhichprimarilytransactsthebusiness ofprovidingmortgageguarantee; (m)"mortgageguaranteecontract"meansatripartitecontractamongtheborrower,the creditorinstitutionandthemortgageguaranteecompany,whichprovidesthemortgage guarantee; (n)'NationalHousingBank'meanstheNationalHousingBankestablishedunderthe NationalHousingBankAct,1987(53of1987); 123

(o)"netownedfund"isasnotifiedinthePrudentialNormsforMortgageGuarantee Companies; (p)'nonperformingasset'meansaccountofaborrower,whichhasbeenclassifiedbya creditorinstitutionassubstandard,doubtfulorlossasset,inaccordancewiththedirections orguidelinesrelatingtoassetclassificationissuedbytheReserveBankortheNational HousingBankasthecasemaybe; (q)'ReserveBank'meanstheReserveBankofIndiaconstitutedundertheReserveBankof IndiaAct,1934(2of1934); (r)'substantialinterest'meansholdingofabeneficialinterestbyanindividualorhisspouse orminorchild,whethersinglyortakentogetherinthesharesofacompany,theamount paiduponwhichexceedstenpercentofthepaidupcapitalofthecompany;orthecapital subscribedbyallpartnersofapartnershipfirm; (s)"triggerevent"meansclassificationoftheaccountofaborrowerasnonperforming assetinthebooksofthecreditorinstitution; (t)turnoverorbusinessturnovermeansthetotalmortgageguaranteecontractsentered duringtheyeartogetherwiththevolumeofbusinessarisingoutofotheractivities (speciallypermittedbyRBI),undertakenduringtheyear; 2.(2)WordsorexpressionsusedbutnotdefinedhereinanddefinedintheCompaniesAct, 1956(1of1956)orAccountingStandardsissuedbytheCharteredAccountantsofIndia, shallhavethesamemeaningasassignedtotheminthatAct/Accountingstandards. RegistrationwiththeReserveBankofIndia 3.Amortgageguaranteecompanyshallcommencethebusinessofprovidingmortgage guaranteeafter (a)obtainingacertificateofregistrationfromtheReserveBankofIndia;and (b)havinganetownedfundofonehundredcrorerupeesorsuchotherhigheramount,as theReserveBankofIndiamay,bynotification,specify.

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4.Everymortgageguaranteecompanyshallmakeanapplicationforregistrationtothe ReserveBankofIndiainsuchformasmaybespecifiedbytheReserveBankofIndiafor thepurpose. 5.TheReserveBankofIndia,forthepurposeofconsideringtheapplicationfor registration,shallrequiretobesatisfiedthatthefollowingconditionsarefulfilled: (a)thatthemortgageguaranteecompanyshallprimarilytransactthebusinessofproviding mortgageguarantee.Amortgageguaranteecompanyshallbedeemedtocomplywiththe abovewhenatleast90%ofthebusinessturnoverismortgageguaranteebusinessoratleast 90%ofthegrossincomeisfrommortgageguaranteebusiness(whichincludestheincome derivedfromreinvestingtheincomegeneratedfrommortgageguaranteebusiness); (b)thatthemortgageguaranteecompanyisorshallbeinapositiontopayitsliabilities arisingfromthecontractsofguaranteeitmayenterinto; (c)thatthemortgageguaranteecompanyhasadequatecapitalstructureasstipulatedin paragraphs11to13belowandadequateearningprospectsfrommortgageguarantee business; (d)thatthegeneralcharacterofthemanagementortheproposedmanagementofthe mortgageguaranteecompanyshallnotbeprejudicialtothepublicinterest; (e)thattheBoardofDirectorsofsuchmortgageguaranteecompanydoesnotconsistof morethanhalfofitstotalnumberofdirectorswhoareeithernomineesofanyshareholder withsubstantialinterestorassociatedinanymannerwiththeshareholderwithsubstantial interestoranyofthesubsidiariesoftheshareholderwithsubstantialinterestifsucha shareholderisacompany; (f)(i)Mortgageguaranteecompanyshallhaveawelldiversifiedshareholding;

(ii)Mortgageguaranteecompanyshallnotbeasubsidiaryofanyothercompanyincluding acompanyregisteredorincorporatedunderanylawinforceoutsideIndia; (iii)Noindividual,associationorbodyofindividualswhetherincorporatedornot, partnershipfirm,companyorcompanyregisteredorincorporatedunderanylawinforce outsideIndiashall,directlyorindirectly,haveanycontrollinginterestinmortgage guaranteecompany;" 125

(g)theForeignDirectInvestmenttobeeligibleforinvestmentintheequityofamortgage guaranteecompanyshouldhavepriorapprovalofFIPB.Iftheforeignentitywhichhas receivedFIPB/FEDapprovalishavingsubstantialinterestintheapplicantmortgage guaranteecompany,itshouldberegulatedbyahomecountryfinancialregulatorand shoulditselfpreferablybeamortgageguaranteecompanyandhaveagoodtrackrecordof operatingasamortgageguaranteecompany.However,theaboveclauseswouldnotbe applicableiftheinvestorintheequityofamortgageguaranteecompanyisinternational financialinstitution; (h)thatthepublicinterestshallbeservedbythegrantofcertificateofregistrationtothe mortgageguaranteecompanytocommenceortocarryonthebusinessinIndia; (i)thatthegrantofcertificateofregistrationshallnotbeprejudicialtotheoperationand growthofthehousingfinancesectorofthecountry; (j)thatthemortgageguaranteecompanyiscompliantwiththeapplicablenormsforforeign investmentinsuchcompanies;and (k)anyothercondition,fulfillmentofwhichintheopinionoftheReserveBankofIndia, shallbenecessarytoensurethatthecommencementoforcarryingonthebusinessinIndia byamortgageguaranteecompanyshallnotbeprejudicialtothepublicinterestandthe housingfinancesectorinIndia. 6.TheReserveBankofIndiamay,afterbeingsatisfiedthattheconditionsspecifiedinsub paragraphsofparagraph5arefulfilled,grantacertificateofregistrationsubjecttosuch conditionswhichitmayconsider,fittoimpose. 7.Themortgageguaranteecompanyshallbeundertheregulatoryandsupervisory jurisdictionoftheReserveBankofIndia. 8.TheReserveBankofIndiamaycancelacertificateofregistrationgrantedtoamortgage guaranteecompany,ifsuchcompany (a)ceasestocarryonthebusinessofprovidingmortgageguaranteeinIndia;or (b)hasfailedtocomplywithanyconditionsubjecttowhichthecertificateofregistration hasbeenissuedtoit;or (c)hasfailedtohonour,inatimelymanner,theclaimsarisingfromthecontractof guaranteeithasenteredintoormayenterinto;or 126

(d)atanytimefailstofulfillanyoftheconditionsreferredtoinparagraphs5and6;or (e)failsto i)complywithanydirectionissuedbytheReserveBankofIndia;or ii)maintainaccounts,publishanddiscloseitsfinancialpositioninaccordancewiththe requirementsofanylaworanydirectionororderissuedbytheReserveBankofIndia;or iii)submitorofferforinspectionitsbooksofaccountorotherrelevantdocumentswhenso demandedbytheReserveBankofIndia. Essentialfeaturesofamortgageguarantee 9.Theessentialfeaturesofamortgageguaranteecontractshallbeasfollows: (a)itshallbeacontractofguaranteeunderSection126oftheIndianContractAct,1872; (b)themortgageguaranteecontractshallbeunconditionalandirrevocableandthe guaranteeobtainedshallbefreefromcoercion,undueinfluence,fraud,misrepresentation, and/ormistakeunderIndianContractAct,1872; (c)itshallguaranteetherepaymentoftheprincipalandinterestoutstandinginthehousing loanaccountoftheborrower,uptotheamountofguarantee; (d)theguarantorshallpaytheguaranteedamountoninvocationwithoutanyadjustment againsttherealisablevalueofthemortgageproperty; (e)itshallbeatripartitecontractamongtheborrower,thecreditorinstitutionandthe mortgageguaranteecompany,whichprovidesthemortgageguarantee. 10.Themortgageguaranteecompanyshallnotcarryoninsurancebusiness. MinimumCapitalrequirement 11.AmortgageguaranteecompanyshallhaveaminimumnetownedfundofRs.100crore atthetimeofcommencementofbusiness,whichshallbereviewedforenhancementafter3 years. CapitalAdequacy

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12.Amortgageguaranteecompanyshallmaintainacapitaladequacyratiooftenpercent (10%)ofitsaggregateriskweightedassetsofonbalancesheetandofriskadjustedvalue ofoffbalancesheetitemsoranyotherpercentagethatmaybeprescribedbytheReserve BankofIndiaforthepurpose,fromtimetotime. 13.Amortgageguaranteecompanyshallmaintainatleastsixpercent(6%)ofitsaggregate riskweightedassetsofonbalancesheetandofriskadjustedvalueofoffbalancesheet itemsasTierIcapital. Prudentialandaccountingnorms 14.Themortgageguaranteecompanyshallberequiredtocomplywithvariousprudential guidelinesincludingthoserelatingtoincomerecognition,assetclassification,provisioning, classificationandvaluationofinvestmentsandprudentialexposuresthatareissuedbythe ReserveBankofIndiafromtimetotime. 15.ThemortgageguaranteecompanyshallalsocomplywithalltherelevantAccounting StandardsandGuidanceNotesissuedbytheInstituteofCharteredAccountantsofIndia fromtimetotime. 16.Nosingleguaranteeshallexceed10%ofthecompany'sTierIandTierIIcapital. Fundingoptions 17.(1)AcceptanceofpublicdepositsMortgageguaranteecompaniesshallnotaccept publicdeposits. 17.(2)ExternalCommercialBorrowingsMortgageguaranteecompaniesshallnotavail ExternalCommercialBorrowings. CreationandmaintenanceofReserves ContingencyReserves: 18.Amortgageguaranteecompanyshallcreateandmaintaina"ContingencyReserve"on anongoingbasis.Themortgageguaranteecompany:

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(a)Shallappropriateeachyearatleastfortypercent(40%)ofthepremiumorfeeearned duringthataccountingyearortwentyfivepercent(25%)oftheprofit(afterprovisionsand tax),whicheverishigher,totheContingencyReserve; (b)Incaseofinadequateprofits,suchappropriationshalleitherresultinorincreasethe amountofcarryforwardloss; (c)Mayappropriatealowerpercentageofthepremiumorfeeearnedduringany accountingyearwhentheprovisionsmadeeachyeartowardslossesonaccountof settlementofmortgageguaranteeclaimsexceedsthirtyfivepercent(35%)ofthepremium orfeeearnedduringthataccountingyear; (d)ShallensurethattheContingencyReserveisbuiltuptoatleastfivepercent(5%)ofthe totaloutstandingmortgageguaranteecommitments; (e)ShallretaintheamountsappropriatedeachyeartotheContingencyReservefora minimumperiodofseven(7)subsequentyearswhichshallbeeligibleforreversalonlyin theeighthyearsubjecttotheconditionin18(d)above; (f)ShallutilizetheContingencyReserveonlywiththepriorapprovaloftheReserveBank ofIndia; (g)ShallshowtheamountofContingencyReserveasaseparatelineitemontheliability sideofthebalancesheet;however,ContingencyReservemaybetreatedas'freereserve' forthepurposeofnetownedfund. AccountingofUnearnedPremium 19.Amortgageguaranteecompanyshallaccountthepremiumorfeeonthemortgage guaranteecontractsasanincomeintheprofitandlossaccountinaccordancewiththe AccountingStandardsissuedbytheInstituteofCharteredAccountantsofIndia.The amountofunearnedpremiumshallbeshownasaseparatelineontheliabilitysideofthe balancesheet. Provisionforlossesoninvokedguarantees 20.Amortgageguaranteecompanyisexposedtoapotentiallosswhenitsguaranteeis invoked.Mortgageguaranteecompaniesshallholdprovisionsforlossesinrespectofsuch 129

invokedguaranteespendingrecoveryofassets.Theamountofprovisionsrequiredtobe heldshallbeequaltothecontractwiseaggregateofamountofinvocationafteradjusting therealisablevalueoftheassetsheldbythecompanyinrespectofeachhousingloan wheretheguaranteehasbeeninvoked.Incasetherealisablevalueoftheassetsheldin respectofanyinvokedguaranteeismorethantheamountofinvocation,theexcessshall notbeadjustedagainsttheshortfallinotherinvokedguarantees.Incasetheamountof provisionsalreadyheldisinexcessoftheamountascomputedabove,theexcessshallnot bereversed.Theamountofprovisionsmadeeachyearshallbeshownasaseparateline itemintheProfitandLossAccount.Theamountofprovisionheldforlossesonsettlement ofinvokedguaranteesshallbeshownasaseparatelineitemontheliabilitysideofthe balancesheet. ProvisionforIncurredButNotReported(IBNR)losses 21.Amortgageguaranteecompanyisexposedtoapotentiallosswhenthereisadefaultin ahousingloanguaranteedbyit.Mortgageguaranteecompaniesshallholdprovisionsin respectofsuchdefaultedhousingloanswherethetriggereventisyettooccurorthe guaranteeisyettobeinvoked.Thepotentiallosstowhichtheguaranteecompanyis exposedtoisreferredtoasIncurredButNotReported(IBNR)losses.Theamountof provisionsrequiredtobeheldshallbearrivedatonanactuarialbasisdependinguponthe estimatesoflossfrequencyandlossseverityforincurredbutnotreportedlosseswhichare derivedfromhistoricdata,trends,economicfactorsandotherstatisticaldatainrelationto paidclaims,theprovisionsheldforclaimssettled,riskstatistics,etc.Incasetheamountof provisionsalreadyheldisinexcessoftheamountascomputedabove,theexcessshallnot bereversed.Theamountofprovisionsmadeeachyearshallbeshownasaseparateline itemintheProfitandLossAccount.TheamountofprovisionheldforIncurredButNot Reported(IBNR)lossesshallbeshownasaseparatelineitemontheliabilitysideofthe balancesheet. RequirementofmaintainingRegisterofguarantees 22.Everymortgageguaranteecompanyshallkeeponeormoreregistersinwhichshallbe enteredtheparticularsofguaranteeprovidedbythecompany,namely, (a)nameandaddressoftheborrower/coborrower, (b)dateandamountofloansanctionedtotheborrower, (c)briefdescriptionofthepropertyincludingthesite/locationoftheproperty, (d)thenatureofsecurityavailablefortheloan, 130

(e)tenureoftheloan, (f)amountofeachinstallmentandduedateforthepaymentofeachinstallment, (g)nameandaddressofthebankorhousingfinancecompanytowhomtheguaranteehas beenprovided, (h)dateandamountoftheguarantee,and (i)durationoftheguarantee. Mortgageguaranteecompany'sobligations 23.Theliabilityofthemortgageguaranteecompanyinrespectofasecuredhousingloan grantedbyacreditorinstitutionwherethemortgageguaranteecompanyhasprovideda guaranteeshallbeasstipulatedinthecontractofguaranteeenteredintobyandbetweenthe mortgageguaranteecompany,thecreditorinstitutionandtheborrower. 24.Onanydayafteratriggerevent,thecreditorinstitution,whichhasobtainedamortgage guaranteefromamortgageguaranteecompany,shallbeentitledtoinvoketheguarantee againstthemortgageguaranteecompany. 25.Themortgageguaranteecompanyshallmakegoodtheguaranteeliabilitywithout demurasandwhenanoticeofdemandforthepaymentoftheguaranteeliabilityinrespect ofthemortgageguaranteeprovidedbyitinfavourofabankorahousingfinancecompany isreceivedbyit. 26.Ifahousingloanturnsintoanonperformingassetandthecreditorinstitutionprefers firsttorealizetheloanbyresortingtospeedyrecoveryproceduresprescribedinthe SecuritisationandReconstructionofFinancialAssetsandEnforcementofSecurityInterest Act,2002andthecreditorinstitution,realizessomeamountoftheloanfromtheborrower, theliabilityofthemortgageguaranteecompanyinrespectoftheloan,willstandreduced tothatextent. 27.Nomortgageguaranteecompanyshallprovidemortgageguaranteeforahousingloan with90%andaboveLTVratio. Duediligencetobeexercisedbyamortgageguaranteecompany 28.Beforeofferingtoprovideaguaranteefortherepaymentofahousingloan,the mortgageguaranteecompanyshallberequiredtobesatisfied,amongstothers,withthe following; 131

(a)thattheloansaresecuredbyavalidmortgage; (b)thatthecreditorinstitutionhasverifiedtitletotheproperty,marketabilityofthe propertyandcreditworthinessoftheborrower; (c)thatthecreditorinstitutionhasverifiedtheuseofthelandonwhichahouseor residentialpropertyisconstructedorproposedtobeconstructedoutoftheloanobtained fromit; (d)thatthecreditorinstitutionhasverifiedandobtainedacopyofthepermissionobtained bytheborrowerfromtheproperauthoritiesforthepurposeofconstructionofthehouseor residentialproperty;and (e)thattheloangrantedbyacreditorinstitutiontoaborrowerisnotmorethan90%ofthe valueoftheproperty. Prohibitions 29.(1)Ahousingloanwhichisnotsecuredbyavalidmortgageofthehouse/residential propertythatisorisproposedtobeacquiredbysuchloanshallnotbeeligiblefora mortgageguaranteefromamortgageguaranteecompany. Nocommissions,rebatesorinducements 29.(2)Amortgageguaranteecompanyshallnotpaycommissions,rebates,orother inducementsforreferralofmortgageguaranteebusinesstoanyperson. ProhibitiononguaranteeingmortgageoriginationsofRelatedParty 29.(3)Amortgageguaranteecompanyshallnotprovideguaranteesonmortgage originationsofpromoters,its/theirsubsidiaries,associatesandrelatedpartiesor subsidiaries,associatesandrelatedpartiesofmortgageguaranteecompanyincluding companieswherethemortgageguaranteecompanyhasamaterialinvestmentorinterestof fivepercent(5%)ormoreoftheshareholding. Investments

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29.(4)Amortgageguaranteecompanyshallnotinvestinnotesorotherevidencesof indebtednesssecuredbyamortgageorotherlienuponrealproperty.Thissectionshallnot applytoobligationssecuredbyrealproperty,orcontractsforthesaleofrealproperty, whichobligationsorcontractsofsaleareacquiredinthecourseofthegoodfaith settlementofclaimsunderpoliciesissuedbythemortgageguaranteecompany,oringood faithdispositionofrealpropertysoacquired. ConstitutionofAuditCommittee 30.AmortgageguaranteecompanyshallconstituteanAuditCommitteeconsistingofnot lessthanthreenonexecutiveDirectorsoftheBoardofthecompany,atleastoneofwhom willbeaCharteredAccountant. Policyforgrantofguarantee 31.TheBoardofDirectorsofamortgageguaranteecompanyshallframeapolicyforthe companyforprovidingmortgageguaranteetocreditorinstitutions.Suchpolicyshall,inter alia,stipulatethefollowing: (a)thefeeorpremiumchargeableforprovidingamortgageguaranteebasedonspecific identifiedcriteriaincludingthequantumofloan;LTVratio;creditqualityoftheborrower; andcreditappraisal/creditriskmanagementskillsofthebankorhousingfinance company, (b)delegationofpowerforprovidingamortgageguaranteeandtoenterintoacontractof guarantee, (c)delegationofpowerfortakingadecisiontomakegoodtheclaimsreceivedfrombanks andhousingfinancecompanies,and (d)delegationofpowerforinitiatingproceedingsfortherecoveryofitsduesfromthe borrowers. SchemeofMortgageGuarantee 32.Forthepurposeofprovidingmortgageguarantee,themortgageguaranteecompany shallprepareadetailedschemedulyapprovedbyitsBoardofDirectors.Theschemeshall contain,amongstothers,thefollowingmatters: 133

(a)thequalityofahousingloan, (b)themaximumportionofahousingloangrantedbyabankorahousingfinance companytoaborrower,thatmaybecoveredunderthecontractofguarantee, (c)theminimumandthemaximumLTVratioofahousingloanproposedtobecovered underthecontractofguarantee, (d)thefeeorpremiumorchargeindicatingthemannerforthepaymentthereof,payable byaborrowertothemortgageguaranteecompanyinconsiderationforthecontractof guarantee, (e)theliabilityofthemortgageguaranteecompanyastowhethertheliabilitywillbeco extensivewiththatoftheborrowerorotherwise,and (f)theconditionsgoverningtheissueastowhichpartyofthemortgageguaranteecompany orabank/housingfinancecompanywillberequiredtoeffectrecoveriesfromtheborrower afterthemortgageguaranteeisinvokedandtheguaranteeliabilityismadegoodbythe mortgageguaranteecompanytothebankorhousingfinancecompany. Counterguarantee 33.Wheneveramortgageguaranteecompanyobtainscounterguaranteecoverinrespect ofthehousingloansguaranteedbyitfromanothermortgageguaranteecompany,the mortgageguaranteecompanyandthecounterguaranteecompanyshallestablishand maintainthereservesrequiredforamortgageguaranteecompanyinIndiainappropriate proportionsinrelationtotheriskretainedbytheoriginalmortgageguaranteecompanyand cededtotheassumingcounterguaranteecompanysothatthetotalreservesestablished shallnotbelessthanthereservesrequiredunderIndianlawforamortgageguarantee company.Incasethecounterguaranteecompanyisnotregulatedbytheregulator(s)in India,themortgageguaranteecompanyguaranteeingtheclaimshallholdrelevantreserves andprovisionsinrespectofalloutstandingmortgageguaranteecontractsissuedbyit. Exemptions 34.TheReserveBankofIndiamay,ifitconsidersnecessaryforavoidinganyhardshipor foranyotherjustandsufficientreason,grantextensionoftimetocomplywithorexempt 134

anymortgageguaranteecompanyorclassofmortgageguaranteecompaniesorall mortgageguaranteecompanies,fromalloranyoftheprovisionsoftheseguidelineseither generallyorforanyspecifiedperiod,subjecttosuchconditionsastheReserveBankof Indiamayimpose. 35.TheReserveBankofIndiacangiveanyclarificationinrespectoftheaboveguidelines andsuchclarificationshallbetreatedaspartoftheseguidelines.Theguidelinescanbe amendedbytheBankfromtimetotime.

PrudentialNormsandInvestmentNormsapplicabletoMortgageGuarantee Company ThePrudentialNormsandInvestmentNormsasapplicabletoMortgageGuarantee CompanyhavealsobeenframedasperNotificationDNBS(PD)MGCNo.4/CGM(PK) 2008andNotificationDNBS(PD)MGCNo.5/CGM(PK)2008bothdatedFebruary15, 2008formeticulouscompliancebytheMortgageGuaranteeCompanies. TheTextoftheNotificationisreproducedbelow.

NotificationDNBS(PD)MGCNo.5/CGM(PK)2008datedFebruary15,2008 TheReserveBankofIndia,havingconsidereditnecessaryinthepublicinterest,andbeing satisfiedthat,forthepurposeofenablingtheBanktoregulatethecreditsystemtothe advantageofthecountry,itisnecessarytoissuethedirectionsrelatingtotheprudential normsassetoutbelow,inexerciseofthepowersconferredbySection45JAoftheReserve BankofIndiaAct,1934(2of1934)andofallthepowersenablingitinthisbehalf,givesto everyMortgageGuaranteeCompanythedirectionshereinafterspecified. Shorttitle,commencementandapplicabilityofthedirections: 1.(i)Thesedirectionsshallbeknownasthe'MortgageGuaranteeCompaniesInvestment (ReserveBank)Directions,2008'. (ii)Thesedirectionsshallcomeintoforcewithimmediateeffect.

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(iii)TheprovisionsofthesedirectionsshallapplytoeveryMortgageGuaranteeCompany whichhasbeengrantedCertificateofRegistrationbytheReserveBankofIndia. Definitions 2.(1)Forthepurposeofthesedirections,unlessthecontextotherwiserequires: (i)"breakupvalue"meanstheequitycapitalandreservesasreducedbyintangibleassets andrevaluationreserves,dividedbythenumberofequitysharesoftheinvesteecompany; (ii)"carryingcost"meansbookvalueoftheassetsandinterestaccruedthereonbutnot received; (iii)"earningvalue"meansthevalueofanequitysharecomputedbytakingtheaverageof profitsaftertaxasreducedbythepreferencedividendandadjustedforextraordinaryand nonrecurringitems,fortheimmediatelyprecedingthreeyearsandfurtherdividedbythe numberofequitysharesoftheinvesteecompanyandcapitalisedatthefollowingrate: (a)incaseofpredominantlymanufacturingcompany,eightpercent; (b)incaseofpredominantlytradingcompany,tenpercent;and (c)incaseofanyothercompany,includinganonbankingfinancialcompany,twelveper cent; NOTE:If,aninvesteecompanyisalossmakingcompany,theearningvaluewillbetaken atzero; (iv)"fairvalue"meansthemeanoftheearningvalueandthebreakupvalue; (v)"MortgageGuaranteeCompany"meansacompanyregisteredwiththeBankas mortgageguaranteecompanyasdefinedin"MortgageGuaranteeCompaniesPrudential Norms(ReserveBank)Directions,2008; (vi)"netassetvalue"meansthelatestdeclarednetassetvaluebythemutualfund concernedinrespectofthatparticularscheme; (vii)nonperformingasset(NPA)forthepurposeofincomerecognitiononinvestments bymortgageguaranteecompaniesmeansanasset,inrespectofwhich,interestorprincipal oramortizationobligationshaveremainedoverdueforaperiodof90daysormore.

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(2)OtherwordsorexpressionsusedbutnotdefinedhereinanddefinedintheReserve BankofIndiaAct,1934(2of1934)orMortgageGuaranteeCompanyPrudentialNorms (ReserveBank)Guidelines,2008containedinPrudentialNorms(MGC)No.DNBS.(PD) MGC4/CGM(PK)2008datedFebruary15,2008,shallhavethesamemeaningas assignedtothemunderthatActorthatDirections.Anyotherwordsorexpressionsnot definedinthatActorthatDirections,shallhavethesamemeaningassignedtotheminthe CompaniesAct,1956(1of1956). InvestmentPolicyforMortgageGuaranteeCompanies 3.(i)Amortgageguaranteecompanyshallinvestonlyinthefollowinginstruments: a)GovernmentSecurities; b)Securitiesofcorporatebodies/publicsectorundertakingsguaranteedbyGovernment; c)FixedDeposit/CertificateofDeposits/bondsofScheduledCommercialbanks/PFIs; d)listedandrateddebentures/bondsofcorporates; e)fullydebtorientedMutualFundUnits; f)unquotedGovernmentsecuritiesandGovernmentguaranteedbonds. (ii)Nootherinvestmentincludinginvestmentinsubsidiariesandjointventureswouldbe permitted.However,amortgageguaranteecompanymayholdinvestmentsinequityshares ofanycompanywhichmaybequotedorunquotedorotherunquotedinvestmentsacquired insatisfactionofitsdebtswhichshallbedisposedofbythemortgageguaranteecompany withinaperiodofthreeyearsorwithinsuchperiodasextendedbytheBank,fromthedate ofsuchacquisition. PatternofInvestment 4.(i)Amortgageguaranteecompanyshallholdnotlessthan25%ofitstotalinvestment portfolioinCentralandStateGovernmentsecurities. (ii)TheremaininginvestmentsmaybeinvestedastheBoardconsidersprudent,butwitha ceilingof25%inanyonecategoryi.e.listedandratedcorporatebondsanddebenturesor debtorientedmutualfundunits,etc. (iii)TheBoardmayfixanappropriatesublimitforindividualinvestmentswithineach categoryofinstrumentsasspecifiedinparagraph3(i)aboveofthesedirections.

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(iv)TheMinimumInvestmentGradeRating(MIGR)assignedbytheSEBIregistered RatingAgencieswouldbetherequirementforinvestmentbyMGCinbonds/debentures anddebtorientedMutualFunds. Incomerecognition 5.(i)MortgageGuaranteeCompaniesmaybookincomeonaccrualbasisonsecuritiesof corporatebodies/publicsectorundertakingsinrespectofwhichthepaymentofinertestand repaymentofprincipalhavebeenguaranteedbytheCentralGovernmentoraState Government,providedinterestisservicedregularlyandassuchisnotinarrears. (ii)MortgageGuaranteeCompaniesmaybookincomefromdividendonsharesof corporatebodiesonaccrualbasisprovideddividendontheshareshasbeendeclaredbythe corporatebodyinitsAnnualGeneralMeetingandtheownersrighttoreceivepaymentsis established. (iii)MortgageGuaranteeCompaniesmaybookincomefromGovernmentsecuritiesand bondsanddebenturesofcorporatebodiesonaccrualbasis,whereinterestratesonthese instrumentsarepredeterminedandprovidedinterestisservicedregularlyandassuchis notinarrears. (iv)MortgageGuaranteeCompaniesshouldbookincomefromunitsofmutualfundson cashbasis. Accountingofinvestments 6.(1)Allinvestmentsshallbemarkedtomarket; Quotedinvestmentsshall,forthepurposesofvaluation,begroupedintothefollowing categories,viz., (a)Governmentsecuritiesincludingtreasurybills, (b)Governmentguaranteedbonds/securities; (c)bondsofbanks/PFIs; (d)debentures/bondsofcorporates;and (e)Unitsofmutualfund. Quotedinvestmentsforeachcategoryshallbevaluedatcostormarketvaluewhicheveris lower.Forthispurpose,theinvestmentsineachcategoryshallbeconsideredscripwise andthecostandmarketvalueaggregatedforallinvestmentsineachcategory.Ifthe 138

aggregatemarketvalueforthecategoryislessthantheaggregatecostforthatcategory,the netdepreciationshallbeprovidedfororchargedtotheprofitandlossaccount.Ifthe aggregatemarketvalueforthecategoryexceedstheaggregatecostforthecategory,thenet appreciationshallbeignored.Depreciationinonecategoryofinvestmentsshallnotbeset offagainstappreciationinanothercategory. (2)InvestmentsinunquotedGovernmentsecuritiesorGovernmentguaranteedbondsshall bevaluedatcarryingcost. (3)Unquotedinvestmentsacquiredinsatisfactionofitsdebtsshallbevaluedasunder: (a)Unquotedinvestmentsintheunitsofmutualfundsshallbevaluedatthenetassetvalue declaredbythemutualfundinrespectofeachparticularscheme; (b)Unquotedequitysharesshallbevaluedatcostorbreakupvalue,whicheverislower. However,mortgageguaranteecompaniesmaysubstitutefairvalueforthebreakupvalue oftheshares,ifconsiderednecessary.Wherethebalancesheetoftheinvesteecompanyis notavailablefortwoyears,suchsharesshallbevaluedatRupeeonepercompany; (c)Unquotedpreferencesharesshallbevaluedatcostorfacevalue,whicheverislower. Note:Unquoteddebenturesshallbetreatedastermloansorothertypeofcreditfacilities dependinguponthetenureofsuchdebenturesforthepurposeofincomerecognitionand assetclassification. 7.TheMGCwiththeapprovaloftheBoardshallframeaninvestmentpolicyintunewith thesedirections.

18.FOREIGNEXCHANGEINVESTMENTINNBFCs TherelevantregulationsarelaiddowninForeignExchangeManagement(Deposit) Regulations,2000[FEMA5].Accordingly,EffectivefromApril24,2004,NBFCscannot acceptdepositsfromNRIexceptdepositsbydebittoNROaccountofNRIprovidedsuch amountdonotrepresentinwardremittanceortransferfromNRE/FCNR(B)account. Schedule6ofthesaidregulationcontainstheprocedureregardingAcceptanceofdeposits byaCompanyincorporatedinIndia(includingaNBFCregisteredwithRBI)on repatriationbasisfromaNRIorapersonofIndianoriginresidentoutsideIndia 139

Schedule7ofthesaidregulationcontainstheprocedureregardingAcceptanceofdeposits byIndianProprietorshipconcern/firmorcompany(includingaNBFCregisteredwith RBI)onnonrepatriationbasisfromaNRIorapersonofIndianoriginresidentoutside India InboundInvestmentSectoralcaponInvestmentsbyPersonsResidentoutsideIndia AnnexureBscheduleIofFEMA20[ForeignExchangeManagement(Transferorissueof SecuritybyaPersonResidentoutsideIndia)Regulations,2000] Item2 FDI/NRI/investmentsallowedinthefollowing19NBFCactivitiesshallbeasperthe levelsindicatedbelow: a)Activitiescovered: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. MerchantBanking Underwriting PortfolioManagementServices InvestmentAdvisoryServices. FinancialConsultancy Stockbroking AssetManagement VentureCapital CustodialServices Factoring CreditReferenceAgencies CreditRatingAgencies Leasing&Finance 140

14. 15. 16. 17. 18. 19.

HousingFinance Forexbroking CreditCardBusiness MoneychangingBusiness Microcredit Ruralcredit

Note:TheUnionCabineton30thJanuary2008reviewedandapprovedtheFDIpolicyfor furtherliberalizationanddeletedCreditReferenceAgenciesfromthelist b)MinimumCapitalisationnormsforfundbasedNBFCs i. ii. forFDIupto51%,US$0.5milliontobebroughtinupfront IftheFDIisabove51%andupto75%,US$5milliontobebroughtupfront

iii. IftheFDIisabove75%andupto100%,US$50millionoutofwhich$7.5 milliontobebroughtinupfrontandthebalancein24months

c)MinimumCapitalisationnormsfornonfundbasedactivities. MinimumCapitalisationnormofUS$0.5millionisapplicableinrespectofnonfundbased NBFCswithforeigninvestment. d)Foreigninvestorscansetup100%operatingsubsidiarieswithouttheconditionto disinvestaminimumof25%ofitsequitytoIndianentities,subjecttobringinginUS$50 millionasatb)(iii)above(withoutanyrestrictiononnumberofoperatingsubsidiaries withoutbringinginadditionalcapital) e)JointVentureoperatingNBFCsthathave75%orlessthan75%foreigninvestmentwill alsobeallowedtosetupsubsidiariesforundertakingotherNBFCactivities,subjecttothe subsidiariesalsocomplyingwiththeapplicableminimumcapitalinflowi.e,(b)(i)and(b) (ii)above.

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f)FDIintheNBFCsectorisputonautomaticroutesubjecttocompliancewithguidelines oftheReserveBankofIndia.RBIwouldissueappropriateguidelinesinthisregard

19.0THEFINANCIALCOMPANIESREGULATIONBILL2000 TheGovernmentofIndiaframedtheFinancialCompaniesRegulationBill,2000to consolidatethelawrelatingtoNBFCsandunincorporatedbodieswithaviewtoensure depositorprotection. ThesalientfeaturesofthisBillare: AllNBFCSwillbeknownasFinancialCompaniesinsteadofNBFCs;

NBFCsholdingpublicdepositswouldnotbeallowedtocarryonanynonfinancial businesswithoutthepriorapprovalofRBI; RBIwouldhavethepowerstoprescribeminimumnetworthnorms;

Unsecureddepositorswouldhavefirstchargeonliquidassetsandassetscreated outofdeploymentofpartofthereservefund; FinancialCompanieswouldrequirepriorapprovalofRBIforanychangeinname, managementorregisteredoffice; RegulationofunincorporatedbodieswouldbeinthehandsoftherespectiveState Governments; Penaltieshavebeenrationalizedwiththeobjectivethattheyshouldserveasa deterrentandinvestigativepowershavebeenvestedwithDistrictMagistratesand SuperintendentsofPolice; RBIwouldbeempoweredtoappointSpecialOfficer(s)ondelinquentfinancial companies; AnysaleofpropertyinviolationofRBIorderwouldbevoid;

TheCompanyLawBoardwillcontinuetobetheauthoritytoadjudicatetheclaims ofdepositors. 142

FinancialcompanieswouldhavenorecoursetotheCLBtoseekdefermentofthe depositorsdues. TheBillhasbeenintroducedinParliamentin2000andhassincebeenreferredtothe StandingCommitteeonFinance.

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