Project On Non Banking Finance

"Aon Banking Financial Companies"
T.Y.B.B. & I. Page

INTRODUCTION:

We studied about banks, apart Irom banks the Indian Financial System has a large
number oI privately owned, decentralised and small sized Iinancial institutions
known as Non-banking Iinancial companies. In recent times, the non-Iinancial
companies (NBFCs) have contributed to the Indian economic growth by providing
deposit Iacilities and specialized credit to certain segments oI the society such as
unorganized sector and small borrowers. In the Indian Financial System, the
NBFCs play a very important role in converting services and provide credit to the
unorganized sector and small borrowers.

NBFCs provide Iinancial services like hire-purchase, leasing, loans, investments,
chit-Iund companies etc. NBFCs can be classiIied into deposit accepting
companies and non-deposit accepting companies. NBFCs are small in size and are
owned privately. The NBFCs have grown rapidly since 1990. They oIIer attractive
rate oI return. They are Iund based as well as service oriented companies. Their
main companies are banks and Iinancial institutions. According to RBI Act 1934, it
is compulsory to register the NBFCs with the Reserve Bank oI India.

The NBFCs in advanced countries have grown signiIicantly and are now coming
up in a very large way in developing countries like Brazil, India, and Malaysia etc.
The non-banking companies when compared with commercial and co-operative
banks are a heterogeneous (varied) group oI Iinance companies. NBFCs are
heterogeneous group oI Iinance companies means all NBFCs provide diIIerent
types oI Iinancial services.

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Non-Banking Financial Companies constitute an important segment oI the
Iinancial system. NBFCs are the intermediaries engaged in the business oI
accepting deposits and delivering credit. They play very crucial role in
channelizing the scare Iinancial resources to capital Iormation.

NBFCs supplement the role oI the banking sector in meeting the increasing
Iinancial need oI the corporate sector, delivering credit to the unorganized sector
and to small local borrowers. NBFCs have more Ilexible structure than banks. As
compared to banks, they can take quick decisions, assume greater risks and tailor-
make their services and charge according to the needs oI the clients. Their Ilexible
structure helps in broadening the market by providing the saver and investor a
bundle oI services on a competitive basis.

Non Banking Finance Companies (NBFCs) are a constituent oI the institutional
structure oI the organized Iinancial system in India. The Financial System oI any
country consists oI Iinancial Markets, Iinancial intermediation and Iinancial
instruments or Iinancial products. All these Items Iacilitate transIer oI Iunds and
are not always mutually exclusive. Inter-relationships Between these are parts oI
the system e.g. Financial Institutions operate in Iinancial markets and are,
thereIore, a part oI such markets.

NBFCs at present providing Iinancial services partly Iee based and partly Iund
based. Their Iee based services include portIolio management, issue management,
loan syndication, merger and acquisition, credit rating etc. their asset based
activities include venture capital Iinancing, housing Iinance, equipment leasing,
hire purchase Iinancing Iactoring etc. In short they are now providing variety oI
services. NBFCs diIIer widely in their ownership: Some are subsidiaries oI large
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ManuIacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others
are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital
Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in
Kerala Iinancial services. Other Iinancial institutions are IFCIs IFCI Financial
Services Ltd or IFCI Custodial Services Ltd (Devdas, 2005).
Non-banking Financial Institutions carry out Iinancing activities but their resources
are not directly obtained Irom the savers as debt. Instead, these Institutions
mobilize the public savings Ior rendering other Iinancial services including
investment. All such Institutions are Iinancial intermediaries and when they lend,
they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment
Institutions.
The term 'Finance is oIten understood as being equivalent to 'money. However,
Iinal exactly is not money; it is the source oI providing Iunds Ior a particular
activity. The word system, in the term Iinancial system, implies a set oI complex
and closely connected or inter-linked Institutions, agents, practices, markets,
transactions, claims, and liabilities in the Economy. The Iinancial system is
concerned about money, credit and Iinance. The three terms are intimately related
yet are somewhat diIIerent Irom each other:

O Money reIers to the current medium oI exchange or means oI payment.
O Credit or loans is a sum oI money to be returned, normally with interest; it
reIers to a debt
O Finance is monetary resources comprising debt and ownership Iunds oI the
state, company or person.

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ISTORICAL BACKGROUND.

The Reserve Bank oI India Act, 1934 was amended on 1st December, 1964 by the
Reserve Bank Amendment Act, 1963 to include provisions relating to non-banking
institutions receiving deposits and Iinancial institutions. It was observed that the
existing legislative and regulatory Iramework required Iurther reIinement and
improvement because oI the rising number oI deIaulting NBFCs and the need Ior an
eIIicient and quick system Ior Redressal oI grievances oI individual depositors.
Given the need Ior continued existence and growth oI NBFCs, the need to develop
a Iramework oI prudential legislations and a supervisory system was Ielt especially
to encourage the growth oI healthy NBFCs and weed out the ineIIicient ones. With
a view to review the existing Iramework and address these shortcomings, various
committees were Iormed and reports were submitted by them. Some oI the
committees and its recommendations are given hereunder:

1. 1ames Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank oI India in 1974.
AIter studying the various money circulation schemes which were Iloated in the
country during that time and taking into consideration the impact oI such schemes
on the economy, the Committee aIter extensive research and analysis had suggested
Ior a ban on Prize chit and other schemes which were causing a great loss to the
economy. Based on these suggestions, the Prize Chits and Money Circulation
Schemes (Banning) Act, 1978 was enacted

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. Dr.A.C.Shah Committee (199):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah
Committee set out the agenda Ior reIorms in the NBFC sector. This committee
made wide ranging recommendations covering, inter-alia entry point norms,
compulsory registration oI large sized NBFCs, prescription oI prudential norms Ior
NBFCs on the lines oI banks, stipulation oI credit rating Ior acceptance oI public
deposits and more statutory powers to Reserve Bank Ior better regulation oI
NBFCs.

3. Khan Committee (1995)

This Group was set up with the objective oI designing a comprehensive and
eIIective supervisory Iramework Ior the non-banking companies segment oI the
Iinancial system. The important recommendations oI this committee are as Iollows:
i. Introduction oI a supervisory rating system Ior the registered NBFCs. The
ratings assigned to NBFCs would primarily be the tool Ior triggering on-site
inspections at various intervals.
ii. Supervisory attention and Iocus oI the Reserve Bank to be directed in a
comprehensive manner only to those NBFCs having net owned Iunds oI
Rs.100 laths and above.
iii. Supervision over unregistered NBFCs to be exercised through the oII-site
surveillance mechanism and their on-site inspection to be conducted
selectively as deemed necessary depending on circumstances.
iv. Need to devise a suitable system Ior co-coordinating the on-site inspection
oI the NBFCs by the Reserve Bank in tandem with other regulatory
authorities so that they were subjected to one-shot examination by diIIerent
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regulatory authorities.

v. Some oI the non-banking non-Iinancial companies like
industrial/manuIacturing units were also undertaking Iinancial activities
including acceptance oI deposits, investment operations, leasing etc to a great
extent. The committee stressed the need Ior identiIying an appropriate
authority to regulate the activities oI these companies, including plantation
and animal husbandry companies not Ialling under the regulatory control oI
Either Department oI Company AIIairs or the Reserve Bank, as Iar as their
mobilization oI public deposit was concerned.

vi. Introduction oI a system whereby the names oI the NBFCs which had not
complied with the regulatory Iramework / directions oI the Bank or had
Iailed to submit the prescribed returns consecutively Ior two years could be
published in regional newspapers.

4. Narasimhan Committee (1991)

This committee was Iormed to examine all aspects relating to the structure,
organization & Iunctioning oI the Iinancial system.

These were the committee`s which Iounded non- banking Iinancial companies.

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NON-BANKING FINANCIAL COMPANY (NBFC)

-MEANING

Non-Banking Financial Companies (NBFCs) play a vital role in the context oI
Indian Economy. They are indispensible part in the Indian Iinancial system
because they supplement the activities oI banks in terms oI deposit mobilization
and lending. They play a very important role by providing Iinance to activities
which are not served by the organized banking sector. So, most the committees,
appointed to investigate into the activities, have recognized their role and have
recognized the need Ior a well-established and healthy non-banking Iinancial
sector.

Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 1956 and is engaged in the business oI loans and advances,
acquisition oI shares/stock/bonds/debentures/securities issued by Government or
local authority or other securities oI like marketable nature, leasing, hire-purchase,
insurance business, chit business but does not include any institution whose
principal business is that oI agriculture activity, industrial activity,
sale/purchase/construction oI immovable property.
Non-banking institution which is a company and which has its principal business
oI receiving deposits under any scheme oI arrangement or any other manner,
or lending in any manner is also a non- banking Iinancial company.

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DEFINITIONS OF NBFC.

Non-Banking Financial Company has been deIined as:
(i) A non-banking institution, which is a company and which has its principal
business the receiving oI deposits under any scheme or lending in any
manner.
(ii) Such other non-banking institutions, as the bank may with the previous
approval oI the central government and by notiIication in the oIIicial gazette,
speciIy.
NBFCS provide a range oI services such as hire purchase Iinance, equipment lease
Iinance, loans, and investments. NBFCS have raised large amount oI resources
through deposits Irom public, shareholders, directors, and other companies and
borrowing by issue oI non-convertible debentures, and so on.
Non-banking Financial Institutions carry out Iinancing activities but their resources
are not directly obtained Irom the savers as debt. Instead, these Institutions
mobilize the public savings Ior rendering other Iinancial services including
investment. All such Institutions are Iinancial intermediaries and when they lend,
they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment
Institutions:
&NIT TR&ST OF INDIA.
LIFE INS&RANCE CORPORATION (LIC).
GENERAL INS&RANCE CORPORATION (GIC).


Factors contributing to the Growth of NBFCs:
According to A.C. Shah Committee, a number oI Iactors have contributed to the
growth oI NBFCs. Comprehensive regulation oI the banking system and absence
or relatively lower degree oI regulation over NBFCs has been one oI the main
reasons Ior their growth. During recent years regulation over their activities has
been strengthened, as see a little later.
The merit oI non-banking Iinance companies lies in the higher level oI their
customer orientation. They involve lesser pre or post-sanction requirements, their
services are marked with simplicity and speed and they provide tailor-made
services to their clients. NBFCs cater to the needs oI those borrowers who remain
outside the purview oI the commercial banks as a result oI the monetary and credit
policy oI RBI. In addition, marginally higher rates oI interest on deposits oIIered
by NBFCs also attract a large number oI depositors
Regulation of NBFCs
In 1960s, the Reserve Bank made an attempt to regulate NBFCs by issuing
directions to the maximum amount oI deposits, the period oI deposits and rate oI
interest they could oIIer on the deposits accepted. Norms were laid down regarding
maintenance oI certain percentage oI liquid assets, creation oI reserve Iunds, and
transIer thereto every year a certain percentage oI proIit, and so on. These
directions and norms were revised and amended Irom time to time.
In 1997, the RBI Act was amended and the Reserve Bank was given
comprehensive powers to regulate NBFCs. The amended Act made it mandatory
Ior every NBFC to obtain a certiIicate oI registration and have minimum net
owned Iunds. Ceilings were prescribed Ior acceptance oI deposits, capital
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adequacy, credit rating and net-owned Iunds. T he Reserve Bank also developed a
comprehensive system to supervise NBFCs accepting/ holding public deposits.
Directions were also issued to the statutory auditors to report non-compliance with
the RBI Act and regulations to the RBI, Board oI Directors and shareholders oI the
NBFCs.

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CLASSIFICATION OF NBFCs:

This classiIication is in addition to the present classiIication oI NBFCs into
deposit-taking and Non-deposit-taking NBFCs. Depending on the nature their
major activity, the non-banking Iinancial companies can be classiIied into the
Iollowing categories, they are:

(1) Equipment leasing companies.
(2) Hire-purchase Iinance companies.
(3) Housing Iinance-companies.
(4) Investments companies.
(5) Loan companies.
(6) Mutual Fund BeneIit Companies.
(7) Chit Iund companies.
(8) Residuary companies.

Equipment Leasing Company:

(a) Equipment leasing company means any company which is carrying on the
activity oI leasing oI equipment, as its main business, or the Iinancing oI
such activity.
(b) The leasing business takes place oI a contract between the lessor (lessor
means the leasing company) and the lessee (lessee means a borrower).
(c) &nder leasing oI equipment business a lessee is allowed to use particular
capital equipment, as a hire, against a payments oI a monthly rent.

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(d) Hence, the lessee does not purchase the capital equipment, but he buys the
right to use it.
(e) There are two types oI leasing arrangements, they are:
(i) Operating leasing: In operating leasing the producer oI capital equipment
oIIers his product directly to the lessee on a monthly rent basis. There is no
middleman in operating leasing.
(ii) Finance leasing: In Iinance leasing, the producer oI the capital equipment
sells the equipment to the leasing company, then the leasing company leases
it to the Iinal user oI the equipment. Hence, there are three parties in Iinance
leasing. The leasing company acts as a middleman between the producer oI
equipment and the user oI equipment.

Benefits/Advantages of Leasing:

(1) 100 finance:
They borrower in the equipment can get up to 100 Iinance Ior the use oI
capital through leasing arrangement in the sense, that the leasing company
provides the equipment immediately and the borrower need not pay the Iull
amount at once. Hence, the borrower can use the amount Ior IulIilling other
needs such as expansion development, etc.

(2) Payment is easier:
Leasing Iinance is costlier. However, the borrower Iinds it convenient (easy)
as he has to pay in installments out oI the return Irom the investment in the
equipment. Hence, the borrower does not Ieel the burden oI payment.

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(3) Tax concessions:
The borrower can get tax concessions in case oI leasing equipments. The
total amounts oI rent paid on leased equipment are deducted Irom the gross
income. In case oI immediate purchase, interest on the loan and the
depreciation are deducted Irom the taxable income.

ire-purchase Finance Companies:

(a) Hire purchase Iinance company means any company which is carrying on
the main business oI Iinancing, physical assets through the system oI hire-
purchase.
(b) In hire-purchase, the owner oI the goods hires them to another party Ior a
certain period and Ior a payment oI certain installment until the other party
owns it.
(c) The main Ieature oI hire-purchase is that the ownership oI the goods
remains with the owner until the last installment is paid to him. The
ownership oI goods passes to the user only aIter he pays the last installment
oI goods.
(d) Hire-purchase is needed by Iarmers, proIessionals and transport group
people to buy equipment on the basis oI hire purchase.
(e) It is a less risky business because the goods purchased on hire purchase
basis serve as securities till the installment on the loan is paid.
(I) Generally, automobile industry needs lot hire-purchase Iinance.
(g) The problem oI recovery oI loans does not occur in most cases, as the
borrower is able to pay back the loan out oI Iuture earnings through the
regular generation oI Iunds out oI the asset purchased.
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(h) In India, there are many individuals and partnership Iirms doing this
business. Even commercial banks, hire-purchase companies and state
Iinancial corporations provide hire-purchase credit.
ousing Finance Companies:

(a) A housing Iinance company means any company which is carrying on its
main business oI Iinancing the construction or acquisition oI houses or
development oI land Ior housing purposes.
(b) Housing Iinance companies also accept the deposits and lend money only
Ior housing purposes.
(c) Even though there is a heavy demand Ior housing Iinance, these companies
have not made much progress and as on 31st March, 1990 only 17 such
companies here reported to the RBI.
(d) The ICICI and the Canara Bank took the lead to sponsor housing Iinance
companies, namely, Housing Development Corporation Ltd. and the CanIin
Homes Ltd.
(e) All the inIormation about the Housing Iinance companies is available with
the National Housing Bank. Housing Iinance companies also have to
compulsorily to register themselves with the Reserve Bank oI India.
(I) National Housing bank is the apex institution in the Iield oI housing. It
promotes housing Iinance institutions, both on regional and local levels.

Investment Companies:
(a) Investment company means any company which is carrying on the main
business oI securities.
(b) Investment companies in India can be broadly classiIied into two types:
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(1) olding Companies:
(i) In case oI large industrial groups, there are holding companies which buy
shares mainly Ior the purpose oI taking control over another institution.
(ii) They normally purchase the shares oI the institution with the aim oI
controlling it rather than purchasing shares oI diIIerent companies.
(iii) Such companies are set up as private limited companies.

(2) Other Investment Companies:
(i) Investment companies are also known as Investment trusts.
(ii) Investment companies collect the deposits Irom the public and invest them
in securities.
(iii) The main aim oI investment companies is to protect small investors by
collecting their small savings and investing than in diIIerent securities so
that the risk can be spread.
(iv) An individual investor cannot do all this on his own, due to lack oI
expertise in investing. Hence, investing companies are Iormed Ior
collective investing. Companies are Iormed Ior collective investments oI
money, mainly oI small investors.
(v) Another beneIit oI an investment company is that it oIIers trained,
experienced and specialised management oI Iunds.
(vi) It helps the investors to select a Iinancially sound and liquid security.
Liquid security means a security which can be easily converted into cash.
(vii)In India investment trusts are very popular. They help in putting the
savings oI people into productive investments.
(viii)Some oI the investment trusts also do underwriting, promoting and
holding company business besides Iinancing.
(ix)These investments trusts help in the survival oI business in the economy by
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keeping the capital market alive, active and busy.

Loan company:

(a) A loan company means any company whose main business is to provide
Iinance through loans and advances.
(b) It does not include a hire purchase Iinance company or an equipment leasing
company or a housing Iinance company.
(c) Loan company is also known as a 'Finance Company".
(d) Loan companies have very little capital, so they depend upon public
deposits as their main source oI Iunds. Hence, they attract deposits by
oIIering high rates oI interest.
(e) Normally, the loan companies provide loans to wholesalers, retailers, small-
scale industries, selI-employed people, etc.
(I) Most oI their loans are given without any security. Hence, they are risky.
(g) Due to this reason, the loan company charges high rate oI interest on its
loans. Loans are generally given Ior short period oI time but they can be
renewed.

Mutual Benefit Financial Company:

(a) They are the oldest Iorm oI non-banking Iinancial companies.
(b) A mutual beneIit Iinancial company means any company which is notiIied
under section 620A oI the Companies Act, 1956.
(c) It is popularly known as "Nidhis".
(d) &sually, it is registered with only very small number oI shares. The value oI
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the shares is oIten Rs. 1 only
(e) It accepts deposits Irom its members and lends only to its members against
tangible securities.
Chit-fund Companies:
istory:

The chit Iund schemes have a long history in the southern states oI India. Rural
unorganized chit Iunds may still be spotted in many southern villages. However,
organized chit Iund companies are now prevalent all over India. The word is Hindi
and reIers to a small note or piece oI something. The word passed into the British
colonial 'lexicon and is still used to reIer to a small piece oI paper, a child or
small girl

ow Chit Fund elp?

Chit Funds have the advantage both Ior serving a need and as an investment.
Money can be readily drawn in an emergency or could be continued as an
investment.
Interest rate is determined by the subscribers themselves, based on mutual
decisions and varies Irom auction to auction.
The money that you borrow is against your own Iuture contributions.
The amount is given on personal sureties too; unlike in banks and other Iinancial
institutions which demand a tangible security.
Chit Iunds can be relied upon to satisIy personal needs. &nlike other Iinancial
institutions, you can draw upon your chit Iund Ior any purpose - marriages,
religious Iunctions, medical expenses, just anything...

Cost oI intermediation is the lowest.

(a) Chit Iunds companies are one oI the oldest Iorms oI local non-banking
Iinancial institution in India.
(b) They are also known as "kuries".
(c) These institutions have originated Irom south India and are very popular
over there.
(d) A chit Iund organisation is an organisation oI a number oI people who join
together and subscribe (contribute) amounts monthly so that any members
who is in need oI Iunds can draw the amount less expenses Ior conducting
the chit. It is an organisation run on co-operative basis Ior the beneIit oI the
members who contribute money, the Iunds are used by them as and when a
particular member needs it.
(e) It helps the persons who save money regularly to invest their savings with
good chances oI proIit.
(I) Chit Iunds have many deIects as the rate oI return given to each member is
not the same.
(g) It diIIers Irom person to person, this leads in improper distribution oI gains
and losses.
(h) Also, the promoters oI these Iunds do everything Ior their own beneIit to get
maximum income.
(I) Hence, the banking commission has made suggestions to pass uniIorm chit
Iunds laws Ior the whole oI India.


Residuary Non-banking Companies:

(a) The term "residue" means a small part oI something that remains. As the
meaning oI the term shows, a residuary company is one which does not Iall
in any oI the above categories.

(b) It generally accepts deposits by operating diIIerent schemes similar to
recurring deposit schemes oI banks.
(c) Deposits are collected Irom a large number oI people by promising them
that their money would be invested in banks and government securities
(d) The collection oI deposits is done at the doorsteps oI depositors through
bank staII, who is paid commission.
(e) These companies get the Iunds at low cost Ior longer terms, at they invest
them in investments which generates good amount oI return.
(I) Many oI these companies operate with very small amount oI capital.
(g) They have some adverse (bad) Ieatures, such as:
(ii) Some do not submit periodic returns to the regulatory authority.
(iii) Some oI them do not appoint banks, etc.

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ROLE OF NON- BANKING FINANCIAL COMPANIES.
(1) Promoters Utilization of Savings:
Non- Banking Financial Companies play an important role in promoting the
utilization oI savings among public. NBFC`s are able to reach certain deposit
segments such as unorganized sector and small borrowers were commercial bank
cannot reach. These companies encourage savings and promote careIul spending oI
money without much wastage. They oIIer attractive schemes to suit needs oI
various sections oI the society. They also attract idle money by oIIering attractive
rates oI interest. Idle money means the money which public keep aside, but which
is not used. It is surplus money.
() Provides easy, timely and unusual credit:
NBFC`s provide easy and timely credit to those who need it. The Iormalities and
procedures in case oI NBFC`s are also very less. NBFC`s also provides unusual
credit means the credit which is not usually provided by banks such as credit Ior
marriage expenses, religious Iunctions, etc. The NBFC`s are open to all. Every one
whether rich or poor can use them according to their needs.
(3) Financial Supermarket:
NBFC`s play an important role oI a Iinancial supermarket. NBFC`s create a
Iinancial supermarket Ior customers by oIIering a variety oI services. Now,
NBFC`s are providing a variety oI services such as mutual Iunds, counseling,
merchant banking, etc. apart Irom their traditional services. Most oI the NBFC`s
reduce their risks by expanding their range oI products and activities.

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(4) Investing funds in productive purposes:
NBFC`s invest the small savings in productive purposes. Productive purposes
mean they invest the savings oI people in businesses which have the ability to earn
good amount oI returns. For example In case oI leasing companies lease
equipment to industrialists, the industrialists can carry on their production with less
capital and the leasing company can also earn good amount oI proIit.
(5) Provide ousing Finance:
NBFC`s, mainly the Housing Finance companies provide housing Iinance on easy
term and conditions. They play an important role in IulIilling the basic human need
oI housing Iinance. Housing Finance is generally needed by middle class and lower
middle class people. Hence, NBFC`s are blessing Ior them.
(6) Provide Investment Advice:
NBFC`s, mainly investment companies provide advice relating to wise investment
oI Iunds as well as how to spread the risk by investing in diIIerent securities. They
protect the small investors by investing their Iunds in diIIerent securities. They
provide valuable services to investors by choosing the right kind oI securities
which will help them in gaining maximum rate oI returns. Hence, NBFC`s plays an
important role by providing sound and wise investment advice.
(7) Increase the Standard of living:
NBFC`s play an important role in increasing the standard oI living in India. People
with lesser means are not able to take the beneIit oI various goods which were once
considered as luxury but now necessity, such as consumer durables like Television,
ReIrigerators, Air Conditioners, Kitchen equipments, etc. NBFC`s increase the
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Standard oI living by providing consumer goods on easy installment basis.
NBFC`s also Iacilitate the improvement in transport Iacilities through hire-
purchase Iinance, etc. Improved and increased transport Iacilities help in
movement oI goods Irom one place to another and availability oI goods increase
the standard oI living oI the society.
(8) Accept Deposits in Various Forms:
NBFC`s accept deposits Iorms convenient to public. Generally, they receive
deposits Irom public by way oI depositor a loaner in any Iorm. In turn the NBFC`s
issue debentures, units` certiIicates, savings certiIicates, units, etc. to the public.
(9) Promote Economic Growth:
NBFC`s play a very important role in the economic growth oI the country. They
increase the rate oI growth oI the Iinancial market and provide a wide variety oI
investors. They work on the principle oI providing a good rate oI return on saving,
while reducing the risk to the maximum possible extent. Hence, they help in the
survival oI business in the economy by keeping the capital market active and busy.
They also encourage the growth oI well- organized business enterprises by
investing their Iunds in eIIicient and Iinancially sound business enterprises only.
One major beneIit oI NBFC`s speculative business means investing in risky
activities. The investing companies are interested in price stability and hence
NBFC`s, have a good inIluence on the stock- market. NBFC`s play a very positive
and active role in the development oI our country.

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Functions of Non- Banking Financial Companies:
(1) Receiving benefits:
The primary Iunction oI nbIcs is receive deposits Irom the public in various ways
such as issue oI debentures, savings certiIicates, subscription, unit certiIication, etc.
thus, the deposits oI nbIcs are made up oI money received Irom public by way oI
deposit or loan or investment or any other Iorm.
() Lending money:
Another important Iunction oI nbIcs is lending money to public. Non- banking
Iinancial companies provide Iinancial assistance through.
(a) ire purchase finance:
Hire purchase Iinance is given by nbIcs to help small important operators,
proIessionals, and middle income group people to buy the equipment on the
basis on Hire purchase. AIter the last installment oI Hire purchase paid by
the buyer, the ownership oI the equipment passes to the buyer.
(b) Leasing Finance:
In leasing Iinance, the borrower oI the capital equipment is allowed to use
it, as a hire, against the payment oI a monthly rent. The borrower need not
purchase the capital equipment but he buys the right to use it.
(c) ousing Finance:
NBFC`s provide housing Iinance to the public, they Iinance Ior construction
oI houses, development oI plots, land, etc.

T.Y.B.B. & I. Page

(d) Other types of finance provided by NBFCs include:
Consumption Iinance, Iinance Ior religious ceremonies, marriages, social
activities, paying oII old debts, etc. NBFCs provide easy and timely Iinance
and generally those customers which are not able to get Iinance by banks
approach these companies.
(e) Investment of surplus money:
NBFCs invest their surplus money in various proIitable areas.

T.Y.B.B. & I. Page

Commercial Bank versus (v/s) Non-banking Financial Companies
While commercial banks and non-banking Iinancial companies are both Iinancial
intermediaries (middleman) receiving deposits Irom public and lending them.
Commercial bank is called as 'Big brother while the 'NBFC is called as the
'Small brother. But there are some important diIIerences between both oI them,
they are as Iollows:

No. Commercial Banks. Non Bank Financial companies.
1 Issue of cheques:
In case oI commercial banks, a
cheque can be issued against bank
deposits.

In case oI NBFC`s there is no
facility to issue cheques against
bank deposits.
2 Rate of interest:
Commercial bank oIIer lesser rate
of interest on deposits and charge
less rate oI interest on loans as
compared to NBFC`s.

NBFC`s oIIer higher rate of
interest on deposits and charge
higher rate oI interest on loans as
compared to Commercial banks.
3 Facilities provided by them:
Commercial banks can enjoy the
benefit of certain facilities like
deposit insurance cover Iacilities,
reIinancing Iacilities, etc.

NBFC`s are not given such Iacilities.

T.Y.B.B. & I. Page

4

Law which governs them:

Commercial banks are regulated by
Banking Regulation Act 1949 and
RBI.

NBFC`s are regulated by diIIerent
regulation such as SEBI, Companies
Act, National Housing Bank, &nit
Fund Act and RBI.
5 Types of assets:

commercial banks hold a variety of
assets in the Iorm oI loans, cash
credit, bill oI exchange, overdraIt
etc.

NBFC`s specialize in one types of
asset. For e.g.: Hire purchase
companies specialize in consumer
loans while Housing Finance
Companies specialize in housing
Iinance only.

T.Y.B.B. & I. Page

RBI Guidelines for Asset-Liability Management (ALM)
system in NBFCs.
This note lays down broad guidelines in respect oI interest rate and
liquidity risks management systems in NBFCs which Iorm part oI the Asset
Liability Management (ALM) Iunction. This is applicable to all NBFCs and
Residuary non-banking companies meeting the criteria oI asset base oI
Rs.100 crores, whether accepting deposits or not, or holding public deposits oI
Rs.20 crores or more. Sl.No. Description / Compliance requirement Comments.
As we are aware, the guidelines Ior introduction oI ALM system by banks and all
India Iinancial intuitions have already been issued by Reserve Bank oI India and
the system has become operational. Since the operations oI Iinancial companies
also give rise to Asset Liability mismatches and interest rate risk exposures, it has
been decided to introduce an ALM system Ior the NON- Banking Financial
Companies (NBFCs) as well, as part oI their overall system Ior eIIective risk
management in their various portIolios. A copy oI the guidelines Ior Asset
Liability Management (ALM) system in NBFCs is enclosed.
Is there an Asset Liability Committee (ALCO) consisting oI the company`s
senior management to decide the business strategy oI the NBFC.
1. In the normal course, NBFC'S are exposed to credit and market risks in
view oI the asset-liability transportation. With liberalization in Indian
Iinancial markets over the last Iew years and growing integration oI
domestic with external markets and entry oI MNC's Ior meeting the credit
needs oI not only the corporate but also the retail segments, the risks
associated with NBFC's operations have become complex and large,

requiring strategic management. NBFC`s are now operating in a Iairly
deregulated environment and are required to determine on their own,
interest rates on deposits, subject to the ceiling oI maximum rate oI interest
on deposits they can oIIer on deposits prescribed by the Bank; and advances
on a dynamic basis. The interest rates on investments oI NBFC's in
Government and other securities are also now market related. Intense
pressure on the management oI NBFC's to maintain a good balance among
spreads, proIitability and long-term viability. Imprudent liquidity
management can put NBFC's earnings and reputation at great risk.

2. NBFC's need to address these risks in a structured manner by upgrading
their risk management and adopting more comprehensive Asset-Liability
Management (ALM) practices than has been done hitherto. ALM, among
other Iunction, is also concerned with risk management and provides a
comprehensive and dynamic Iramework Ior measuring, monitoring and
managing liquidity and interest rate equity and commodity price risks oI
major operators in the Iinancial system that needs to be closely integrated
with the NBFC's business strategy. It involves assessment oI various types
oI risks and altering the asset-liability portIolio in a dynamic way in order to
manage risks.

3. This note lays down broad guidelines in respect oI interest rate and liquidity
risks management systems in NBFC's which Iorm part oI the Asset-Liability
Management (ALM) Iunction. The initial Iocus oI the ALM Iunction would
be to enIorce the risk management discipline i.e. managing business aIter
assessing the risks involved. The objective oI good risk management
systems should be that these systems will evolve into a strategic tool Ior

NBFC's management.

4. The ALM process rests on three pillars:

O ALM InIormation Systems
O Management InIormation Systems
O InIormation availability, accuracy, adequacy and expediency
O ALM Organisation
O Structure and responsibilities
O level oI top management involvement
O Risk parameters
O Risk identiIication
O Risk management
O Risk policies and tolerance levels.

ALM INFORMATION SYSTEMS

ALM has to be support by a management philosophy which clearly speciIies the
risk policies and tolerance limits. This Iramework needs to be built on sound
methodology with necessary inIormation system as back up. Thus, inIormation is
the key to the ALM process. It is, however, recognized that varied business
proIiles oI NBFC's in the public and private sector do not make the adoption oI a
uniIorm ALM System Ior all NBFC's Ieasible.

NBFC's have heterogeneous organizational structures, capital base, asset sizes
management proIile, business activities and geographical spread. Some oI them
T.Y.B.B. & I. Page

have large number oI branches and agents/ brokers whereas some have unitary
oIIices.
ALM ORGANISATION

(a) SuccessIul implementation oI the risk management process would require
strong commitment on the part oI the senior management in the NBFC, to
integrate basic operations and strategic decision making with risk
management.
(b) The Asset-Liability Committee (ALCO) consisting oI the NBFC's senior
management including ChieI Executive OIIicer (CEO) should be
responsible Ior ensuring adherence to the limits set by the Board as well as
Ior deciding the business strategy oI the NBFC (on the assets and liabilities
sides) in line with the NBFC's budget and decided risk management
objectives.
(c) The ALM Support Groups consisting oI operating staII should be
responsible Ior analyzing, monitoring and reporting the risk proIiles to the
ALCO. The staII should also prepare Iorecasts (simulations) showing the
eIIects oI various possible changes in market conditions related to the
balance sheet and recommended the action needed to adhere to NBFC's
internal limits.

T.Y.B.B. & I. Page

LIQUIDITY RISK MANAGEMENT

Measuring and managing liquidity needs are vital Ior eIIective operation oI
NBFCs. By ensuring an NBFC's ability to meet its liabilities as they become due,
liquidity management can reduce the probability oI an adverse situation
developing. The importance oI liquidity transcends individual institution, as
liquidity shortIall in one institution can have repercussions on the entire system.
NBFCs management should measure not only the liquidity positions oI NBFCs on
an ongoing basis but also examine how liquidity requirements are likely to involve
under diIIerent assumptions.
Experience shows that assets commonly considered as liquid, like Government
securities and other money market instruments, could also become illiquid when
the market and players are unidirectional.

NBFCs holding public deposits are required to invest up to a prescribed percentage
(15 as on date) oI their public deposits in approved securities in terms oI liquid
asset requirement oI section 45-IB oI the RBI Act,1934. Residuary Non-Banking
Companies (RNBCs) are required to invest up to 80 oI their deposits in a manner
as prescribed in the Directions issued under the said Act. There is no such
requirements Ior NBFCs which are not holding public deposits. Thus various
NBFCs including RNBCs would be holding in their investments portIolio
securities which could be broadly classiIiable as 'mandatory securities' (under
obligation oI law) and other 'non-mandatory securities'.

T.Y.B.B. & I. Page

Financial Companies Regulation Bill, 000.
The Government oI India Iramed the Financial Companies Regulation Bill, 2000 to
Consolidate the law relating to NBFCs and unincorporated bodies with a view to
ensured posit or protection. The salient Ieatures oI this Bill are:
All NBFCS will be known as Financial Companies instead oI NBFCs; NBFCs
holding public deposits would not be allowed to carry on any non-Financial
business with out the prior approval oI RBI; RBI would have the powers to
prescribe minimum net-worth norms; unsecured depositors would have Iirst charge
on liquid assets and assets created out oI deployment oI part oI the reserve Iund.
Financial Companies would require prior approval oI RBI Ior any change in
name, management or registered oIIice; Regulation oI unincorporated bodies
would be in the hands oI the respective State Governments; Penalties have been
rationalized with the objective that they should serve as a deterrent and
investigative powers have been vested with District Magistrates and
Superintendents oI Police; RBI would be empowered to appoint Special OIIicer(s)
on delinquent Iinancial companies; Any sale oI property in violation oI RBI order
would be void; The Company Law Board will continue to be the authority to
adjudicate the claims oI depositors. Financial companies would have no recourse
to the CLB to seek deIerment oI the depositors` dues. The Bill has been introduced
in Parliament in 2000 and has since been reIerred to the Standing Committee on
Finance. 8.0 Anomalies in the NBFC regulations.

T.Y.B.B. & I. Page

1. Clarity in Definition of NBFC:
The clause (a) oI the section 45 I oI the RBI Act deIine the term
Business oI A Non Banking Financial Institution`. Herein, it has been
stated that, business oI a non-banking Iinancial institution`` means carrying
on oI the business oI a Iinancial institution reIerred to in clause (c) and includes
business oI a non-banking Iinancial company reIerred to in clause (I).`
ThereIore, to understand what the business oI Non Banking Financial
Institution is a reIerence has to be made to two other clauses (c) and (I).
Clause (c) deIines the term Financial Institution` and clause (I) deIines NBFC
itselI. However, the clause (I) contains a comprehensive and exclusive deIinition
an NBFC. As per this clause a non-banking Iinancial company`` means
(i) A Iinancial institution which is a company;
(ii) A non-banking institution which is a company and which has as its
principal business the receiving oI deposits, under any scheme or
arrangement or in any other manner, or lending in any manner;
(iii) Such other non-banking institution or class oI such institutions, as the
Bank may, with the previous approval oI the Central Government and
by notiIication in the OIIicial Gazette, speciIy. ThereIore, we can say
an NBFC is always a company and can be a corporation or a co-operative
only iI notiIied by RBI with approval oI Central Government. However, no
co operative or corporation has been notiIied till now. The deIinition
oI NBFC should have been simple to understand and need to cross
reIerences to other clauses could have been avoided.

T.Y.B.B. & I. Page

The deIinition oI NBFC in our view could have been:
Non-Banking Financial Company`` means
A non banking company which carries on as its business or part oI its
business any oI the Iollowing activities, namely:
(i) The Iinancing, whether by way oI making loans or advances or
otherwise, oI any activity other than its own.
(ii) The acquisition oI shares, stock, bonds, debentures or securities issued
by the Government or local authority or other marketable securities oI a like
nature.
(iii) Letting or delivering oI any goods to a hirer under a hire-purchase
agreement as deIined in clause (c) oI section 2 oI the Hire-Purchase Act,
1972.
(iv) The carrying on oI any class oI insurance business.
(v) Managing, conducting or supervising, as Ioreman, agent or in any other
capacity, oI chits or kuries as deIined in any law which is Ior the time
being in Iorce in any State, or any business, which is similar thereto.
(vi) Collecting, Ior any purpose or under any scheme or arrangement by
whatever name called, monies in lump sum or otherwise, by way oI
subscriptions or by sale oI units, or other instruments or in any other
manner and awarding prizes or giIts, whether in cash or kind, or
disbursing monies in any other way, to persons Irom whom monies
are collected or to any other person, but does not include any institution,
which carries on as its principal business:
T.Y.B.B. & I. Page

(a) Agricultural operations; or (industrial activity; or)
(b) The purchase or sale oI any goods (other than securities) or the
providing oI any services; or
(c) The purchase, construction or sale oI immovable property, so
however, that no portion oI the income oI the institution is derived
Irom the Iinancing oI purchases, constructions or sales oI immovable
property by other persons
(d) A non banking company and which has as its principal business
the receiving oI deposits, under any scheme or arrangement or in any
other manner, or lending in any manner;
(e ) Such other non-banking institution or class oI such institutions, as
the Bank may, with the previous approval oI the Central
Government and by notiIication in the OIIicial Gazette, speciIy.

2. Clarification regarding what in Principle Business:
The sub clause (ii) oI clause (I) which deIines NBFC states that a non- banking
company that has as its principal business the receiving oI deposits, under any
scheme or arrangement or in any other manner, or lending in any manner is
regarded as NBFC. Moreover, clause (c) that deIined Iinancial institution` also
reIers to the phrase Principle business when it states that Iinancial institution
does not include institution that carries on as its principle business(a)
agricultural operations; or (a) industrial activity; or (b) the purchase or sale
oI any goods (other than securities) or the providing oI any services; or (c)
the purchase, construction or sale oI immovable property, so however, that
T.Y.B.B. & I. Page

no portion oI the income oI the institution is derived Irom the Iinancing oI
purchases, constructions or sales oI immovable property by other persons.
In the absence oI a deIinition oI the term principal business` in the Act itselI, it is
not clear what should be the guidelines to be Iollowed to determine the principal
business` oI a company? In case oI a company engaged exclusively in Iinancial
business or a company doing exclusively non-Iinancial business, the principal
business` will be evident enough and it may not be necessary to dwell upon
what constitutes principal business` oI such a company. However, in the case
oI companies which are carrying on multiple activities, both Iinancial and
non- Iinancial, in some what equal or near equal proportions, determining
the principal business` assumes considerable signiIicance.
It would be necessary to deIine what constitutes the principal business` oI these
companies, in the context oI the obligations cast by the amended provisions
oI the RBI Act on the NBFCs, viz., requirement oI applying Ior registration in case
oI existing companies and prior registration in case oI new companies,
penalties Ior non-compliance with registration requirements, etc.

3. Applicability of Accounting Standards:
The clause 5 oI the 'Non-Banking Financial (Deposit Accepting or Holding )
Companies Prudential Norms (Reserve Bank) Directions, 2007 states that
Accounting Standards and Guidance notes issued by the Institute oI Chartered
Accountants oI India shall be Iollowed in so Iar as they are not inconsistent
with any oI the Directions. This clause should be rectiIied as ICAI has
T.Y.B.B. & I. Page

issued Companies (Accounting Standards) Rules 2006, which are applicable
to accounting periods commencing on or aIter 7-12-2006.
The Government oI India Iramed a new legislation to amend and consolidate the
provisions contained in Chapter IIIB, III-C and V oI the RBI Act, 1934 relating to
the regulation and supervision oI Iinancial companies, hither to known as non-
banking Iinancial companies (NBFCs). This included prohibition oI acceptance oI
deposits by unincorporated bodies and incorporating the recommendations oI the
Task Force on NBFCs, which had made certain recommendations to this eIIect.
The salient Ieatures oI the proposed legislation, which are materially diIIerent Irom
the corresponding provisions oI RBI Act or are new provisions, are as Iollows:
I. Basic Stipulations:
(i) The draIt bill has been named as 'Financial Companies Regulations Bill,
2000. All the NBFCs will be known as Financial Companies instead oI
NBFCs.
(ii) The term 'public deposit' has been deIined in the Bill Ior the Iirst time and
the deIinition would mean the same as at present in the NBFC Directions.
(iii) There would be a nine member Advisory Council Ior Financial Companies
under the Chairmanship oI Depute Companies and other experts in related
areas to advise the Reserve Bank.
(iv) NBFCs holding /accepting public deposits would be prohibited Irom
carrying on any non- Iinancial business without the prior approval oI the
Reserve Bank and the non-Iinancial business presently carried on by them
would have to be wound up or transIerred to a subsidiary within three years.
Any other business or Iee-based activity like insurance agency business,

portIolio management, etc., would require prior approval oI the Reserve
Bank.
II .Entry Point Norms:
(i) The requirement oI obtaining the COR Irom the Reserve Bank would be
compulsory Ior all Iinancial Companies, irrespective oI whether the
companies accept public deposits or not. However, the nonpublic Deposit
taking Iinancial companies would require minimum owned Iund oI Rs.25
Lakh, whereas the public deposit taking Iinancial companies would require
minimum net owned Iund (NOF) oI Rs.2 Crores and a speciIic authorization
Irom the Reserve Bank to accept public deposits.

(ii) There would be powers with the Reserve Bank to:
(a) Prescribe diIIerent capital Ior diIIerent classes oI Iinancial companies,
(b) Raise the requirement oI minimum owned Iund (entry norm) Irom Rs.25
Lakh to oI Rs.25 Lakh to Rs.2 crores Ior the existing Iinancial
companies accepting public deposits. However, suIIicient time would be
allowed to such Iinancial companies to attain the enhanced capital
requirement.

(iii) The requirement oI creation oI reserve Iund would be applicable only to the
Iinancial companies accepting public deposits, as against the earlier
requirement applicable to all NBFCs.
(iv) &nsecured depositors would have Iirst charge on liquid assets and assets
created out oI the deployment oI the part oI the reserve Iund.

(v) The Iinancial companies would require prior approval oI the Reserve Bank
Ior any change in the name, change in the management or change in the
location oI the registered oIIice.
III Regulatory and Supervisory Issues:
(i) The Reserve Bank would be empowered to appoint Special OIIicer(s) on a
delinquent Iinancial company and a duty has been cast on such company to
cooperate with such Special OIIicer(s).
(ii) The Company Law Board (CLB) would continue to be authority to
adjudicate the claims oI depositors against the delinquent companies with
powers to order initial payment oI a part oI deposit, attach assets oI the
Iraudulent Iinancial company and appoint Recovery OIIicer(s) Ior
management oI such asset. Financial company would have no recourse to
the CLB to seek deIerment oI the depositors' dues.
(iii) The prohibitory provisions Ior unincorporated bodies would continue in the
Financial Companies Regulations Bill, but the role oI exercising the powers
Ior enIorcement oI these provisions have been exclusively entrusted to State
Governments, in addition to the powers under the respective State Laws Ior
protecting the interests oI investors in Iinancial establishments.
(iv) There would be powers vested in the District Magistrates to call Ior
inIormation and to proceed against delinquent unincorporated bodies.
(v) There would be a ban on the issue oI advertisement Ior soliciting deposits
by all unincorporated bodies, irrespective oI whether they are conducting
Iinancial business or not.
T.Y.B.B. & I. Page

(vi) &nauthorized deposit-taking by companies (a) whose applications Ior
CertiIicate oI Registration have been rejected, (b) whose registration has
been cancelled, (c) who have been prohibited Irom accepting public
deposits would be a cognizable oIIence. The same would be the case Ior
unregistered Iinancial companies as well as unincorporated bodies.
(vii) Powers would be vested with a police oIIicer oI the rank not below that oI
the Superintendent oI Police OI any State to order investigations into the
alleged violations oI requirement oI registration by Iinancial companies and
prohibition Irom acceptance oI deposits by unincorporated bodies.
(viii) Penalties have been rationalized in accordance with the severity oI deIaults,
with the objective that the penalty should serve as a deterrent to others. The
Bill has been introduced in the Parliament in 2000 and has since been
reIerred to the Standing Committee on Iinance.
The Government oI India Iramed the Financial Companies Regulation Bill, 2000,
to consolidate the law relating to NBFCs and unincorporated bodies with a view to
ensure depositor protection.

T.Y.B.B. & I. Page

AN APPRAISAL OF FINANCIAL COMPANIES
REGULATION BILL, 000:
THE &NION Government's move to enact a separate law to regulate and control
the non-banking Iinance companies (NBFC) sector is indeed laudable, aIter a large
number NBFCs had Iailed to repay public deposits, ruining thousands oI gullible
investors, drawn mainly Irom the middle class strata oI the society. However, a
careIul perusal oI the new bill, introduced in the Lok Sabha on December 13,
shows that this legislation seeks largely to consolidate into a single stand-alone
enactment the regulatory provisions concerning the NBFC sector already existing
in Chapters 111-B and C oI the Reserve Bank oI India Act, 1934, (RBI Act), as
amended in 1997. Thus the new law, when enacted, will just be old wine in new
bottle.
It was in the wake oI the CRB scam that leIt several thousands oI depositors high
and dry that the RBI Act was amended in 1997 to empower, inter alia, the
Company Law Board (CLB) to hear and decide complaints Irom depositors on
deIaults committed by Iinancial companies. However, an objective study will
reveal that the RBI (Amendment) Act, 1997, which added Chapter IR-B to the
parent Act, has hardly beneIited the depositor Iraternity. The winding-up petition
Iiled against CRB by the RBI under the new provisions in 1997 is still pending
with the Delhi High Court. The perpetrators oI the CRB Iraud have been bailed out
and are scot-Iree. Many depositors have been devastated. Justice delayed is indeed
justice denied.

T.Y.B.B. & I. Page

Ineffective CLB orders
Close on the heels oI this `mother' scam came a host oI other NBFC Iailures - to
name a Iew, Prudential Capital Markets, Lloyds Finance, Enarai Finance and
Kirloskar Investments. The CLB's orders on all these cases, directing the
companies concerned, to pay the depositors in accordance with speciIied phased
repayment schedules are just dead letters. Repayments are yet to start at Prudential
though the CLB order was passed in 1998; Lloyds continues to deIault on
repayments and is way behind schedule. Repeated representations Irom the
aggrieved depositors oI these companies to the CLB and the RBI have Iailed to
improve matters. The RBI simply passes the buck on to the CLB. The latter just
does not have either the determination or the will to punish the errant boards and
managements though it has all the requisite powers under the Companies Act to do
so. The result - the depositors continue to suIIer. ICICI got the CLB order on
Enarai Finance stayed and Iiled a liquidation petition against the company, which
is still pending. The RBI was inspired to Iollow ICICI's example in the case oI
Kirloskar Investments and is keenly awaiting the Karnataka High Court's order on
its liquidation petition Iiled last February.
Against such a dismal scenario, is it not disappointing that the new bill provides Ior
payment deIaults by the NBFCs to be adjudicated by the CLB? The CLB has no
power to review its own orders. It reIuses to entertain petitions Irom depositors to
amend/clariIy its orders and curtly asks the petitioners to approach the High Court.
Their order is routinely challenged at the High Courts and stays obtained. The
courts being overburdened with cases are least bothered to hear and dispose oI the
stay petitions expeditiously.
T.Y.B.B. & I. Page

The lay depositor is an unsecured creditor; he is entitled to immediate relieI iI the
company deIaults. This can be provided by compulsory insurance oI his deposit.
Bank deposits are automatically insured up to Rs. 1 Lakh per account.
Moreover, as an added protection to depositors, the Finance Minister has declared
in Parliament that no public sector bank will be liquidated. Why cannot the RBI
make it mandatory Ior NBFCs too to insure the deposits taken by them and issue
certiIicates oI insurance along with the deposit receipts? II this were done, in the
event oI deIault, all that the depositor has to do is to approach the insurance
company and claim his deposit and expeditious remedy and merits incorporation in
the bill. With the opening oI the insurance business to the private sector, insurance
oI NBFC deposits should not pose any problem. The insurance premium could be
allowed as tax deductible expenditure in the company's assessments.
For the Iirst time, the bill provides Ior a Iirst charge on the company's assets to the
depositor. However, in practice, this will be no solace to the depositor. For, the
`Iirst charge' is available only upon deIault. Further, the charge is not on the entire
assets. It is on a maximum oI 25 per cent oI the total value oI deposits taken which
the company is supposed to hold in unencumbered term deposits/approved
securities. Realization oI the charged assets, upon an order oI the CLB, is another
exercise altogether. All in all, the charge provision in the bill, though innovative,
does not inspire conIidence. The Finance Ministry would do well to review this bill
in the light oI these comments and make it more investor Iriendly as the avowed
objective oI the new legislation is to protect the interests oI depositors. The
Supreme Court has time and again ruled that death sentences should be
pronounced only in the rarest oI rare cases. Perhaps, the RBI should extend this
dictum to corporate as well and reIrain Irom Iiling liquidation petitions against
Iailed NBFCs.
T.Y.B.B. & I. Page

NORMS for NBFCS.
In public interest and to regulate the credit system in the best interest oI India, the
RBI has laid down the Iollowing important norms or rules to be Iollowed by
NBFCs accepting public deposits:
(1) What constitutes public deposits?
Public deposit includes Iixed or recurring deposits which are received Irom Iriends,
relative, shareholders oI a public limited company and money raised in issued oI
unsecured debentures or bond. It does not include money raised Irom issue oI
secured debentures and bond or Irom borrowings oI banks or Iinancial institutions,
deposits Irom directors or inter- corporate deposits received Irom Ioreign national
citizens and Irom shareholders oI private limited companies.
() Who is allowed to accept deposits from public?
The NBFCs which have net owned capital oI less than Rs. 25 Lakh will not be
permitted to accept deposit Irom public. In order to raise Iunds the NBFC can
borrow Irom some other sources also.
(3) NBFCs have to submit financial statements:
All NBFCs will have tosubmit their annual Iinancial statements and returns iI they
accept public deposits.
(4) Certain deposits are not regulated by RBI:
The RBI has given directions to NBFCs accepting public deposits to regulate the
amount oI deposit, rate oI interest, time period oI deposits, brokerage and
borrowings received by them. The directions do not include amount received or
T.Y.B.B. & I. Page

generated by central bank or state government. Amount received Irom IDBI, ICICI
Nabard, Electricity Board and IFCI are also not included in directions oI RBI.
Amount received Irom mutual Iunds, directors oI Iirm and shareholders also do not
come under the category oI amount received Ior regulation Irom RBI.
(5) Ceiling (limits on interest):
There is a maximum limit on the rate oI interest oI deposits. The limit charges with
the RBI directions.
(6) Period of deposits:
The deposits can be accepted Ior a minimum period oI 12 months and a maximum
period oI 2 year.
(7) Register of depositors:
The NBFCs have to maintain a register oI depositors with details like name,
address, amount, date oI each deposit, maturity period and other details according
to the required by RBI.
(8) Credit rating:
To protect the public NBFCs are required to get themselves approved by the RBI
through credit rating agencies. The NBFCs which have not owned Iunds oI Rs 25
Lakhs can obtain public deposits iI they are credit rated and they receive a
minimum investment grade Ior their Iixed deposits Irom an approved rating
agency.

T.Y.B.B. & I. Page

The NBFCs have to submit this diIIerent agency is as Iollow:
O The credit analysis and Research Limited (CARE) gives the minimum
rating oI BBB in triple B rating.
O The investment inIormation and credit Rating Agency oI India LTD.
(ICRA) gives the minimum rating oI (MA-)
O The Credit Rating InIormation Services oI India Ltd. (CRISIL) and gives a
minimum rating oI (FA-).
O FITCH Rating India Pvt. Ltd. Provides (BBB-) as its acceptable rating.
II the credit rating is below the minimum investment grate the NBFCs has
to send report to the RBI within 15 days oI received the grating. During that
time the NBFC has to stop accepted the deposits and within 3 years makes
the repayment to the depositors.

RBI deposit norms for small NBFCs.

The RBI has tightened the rules governing access to such public deposits.
It said that NBFCs with a net owned Iund (NoF) oI between Rs 25 Lakh and Rs 2
crore, must limit their public deposits to the level oI their net owned Iunds as
against the current ceiling oI 1.5 times the net owned Iunds. Further, Ior those
companies (with NoF oI between Rs 25 Lakh and Rs 2 crore) that had a capital
adequacy ratio oI 12 and who enjoyed credit rating, the current ceiling oI 4
times the NoF was being revised to 1.5 times the NoF. As per RBI statistics, there
were 243 companies in 2007 that would probably be aIIected by this regulation.
Their net owned Iunds were oI the order oI Rs 171 crore while the public deposits
that they held were about Rs 96 crore. This category oI companies constitutes a
big chunk in the total category oI NBFCs taking deposits that number about 359.
T.Y.B.B. & I. Page

In terms oI amount oI deposits involved, this category oI NBFCs is a very small
category. Total public deposits oI all NBFCs with access to such deposits were oI
the order oI Rs 2042 crore in 2007.

These regulations are part oI the RBI`s move to ensure that NBFCs who accept
deposits are adequately capitalized and have some minimum net owned Iunds.

Mr. T.T.Srinivasaraghavan, Managing Director, Sundaram Finance, said that this
regulation had adopted a Iair approach to the issue oI dealing with risks involved
in smaller companies accepting deposits. He said the regulation met the
aspirations oI those small companies as it would now take the pressure oII them
when they were scrambling Ior capital to reach the minimum NoF limits. It would
also Iorce them to live within their means, by limiting their access to public
deposits.


The current status of Non- Banking Financial Companies.
O PRUDENTIAL NORMS:
The Reserve Bank put in place in January 1998 a new regulatory Iramework
involving prescription oI prudential norms Ior NBFCs which deposits are taking to
ensure that these NBFCs Iunction on sound and healthy lines. Regulatory and
supervisory attention was Iocused on the deposit taking NBFCs` (NBFCs D) so
as to enable the Reserve Bank to discharge its responsibilities to protect the
interests oI the depositors. NBFCs - D are subjected to certain bank like
prudential regulations on various aspects such as income recognition, asset
classiIication and provisioning; capital adequacy; prudential exposure limits and
accounting / disclosure requirements. However, the non-deposit taking NBFCs`
(NBFCs ND) are subject to minimal regulation.
The application oI the prudential guidelines / limits is thus not uniIorm across the
banking and NBFC sectors and within the NBFC sector. There are distinct
diIIerences in the application oI the prudential guidelines / norms as discussed
below:
i) Banks are subject to income recognition, asset classiIication and
provisioning norms; capital adequacy norms; single and group borrower
limits; prudential limits on capital market exposures; classiIication and
valuation norms Ior the investment portIolio; CRR / SLR requirements;
accounting and disclosure norms and supervisory reporting requirements.
ii) NBFCs D are subject to similar norms as banks except CRR requirements
and prudential limits on capital market exposures. However, even where
applicable, the norms apply at a rigour lesser than those applicable to banks.

Certain restrictions apply to the investments by NBFCs D in land and
buildings and unquoted shares.
iii) Capital adequacy norms; CRR / SLR requirements; single and group
borrower limits; prudential limits on capital market exposures; and the
restrictions on investments in land and building and unquoted shares are not
applicable to NBFCs ND.
iv) &nsecured borrowing by companies is regulated by the Rules made under
the Companies Act. Though NBFCs come under the purview oI the
Companies Act, they are exempted Irom the above Rules since they come
under RBI regulation under the Reserve Bank oI India Act. While in the
case oI NBFCs D, their borrowing capacity is limited to a certain extent
by the CRAR norm, there are no restrictions on the extent to which NBFCs
ND may leverage, even though they are in the Iinancial services sector.

T.Y.B.B. & I. Page

Current Status:
Financial Linkages between Banks and NBFC:
Banks and NBFCs compete Ior some similar kinds oI business on the asset side.
NBFCs oIIer products/services which include leasing and hire-purchase, corporate
loans, investment in non-convertible debentures, IPO Iunding, margin Iunding,
small ticket loans, venture capital, etc. However NBFCs do not provide operating
account Iacilities like savings and current deposits, cash credits, overdraIts etc.
NBFCs avail oI bank Iinance Ior their operations as advances or by way oI banks`
subscription to debentures and commercial paper issued by them.
Since both the banks and NBFCs are seen to be competing Ior increasingly similar
types oI some business, especially on the assets side, and since their regulatory and
cost-incentive structures are not identical it is necessary to establish certain checks
and balances to ensure that the banks` depositors are not indirectly exposed to the
risks oI a diIIerent cost-incentive structure. Hence, Iollowing restrictions have been
placed on the activities oI NBFCs which banks may Iinance:
i) Bills discounted / rediscounted by NBFCs, except Ior rediscounting oI bills
discounted by NBFCs arising Irom the sale oI
a) Commercial vehicles (including light commercial vehicles); and
b) Two-wheeler and three-wheeler vehicles, subject to certain conditions;
c) Investments oI NBFCs both oI current and long term nature, in any
company/entity by way oI shares, debentures, etc. with certain exemptions;
ii) &nsecured loans/inter-corporate deposits by NBFCs to/in any company.
T.Y.B.B. & I. Page

iii) All types oI loans/advances by NBFCs to their subsidiaries, group
companies/entities.
iv) Finance to NBFCs Ior Iurther lending to individuals Ior subscribing to Initial
Public OIIerings (IPOs).
v) Bridge loans oI any nature, or interim Iinance against capital/debenture issues
and/or in the Iorm oI loans oI a bridging nature pending raising oI long-term
Iunds Irom the market by way oI capital, deposits, etc. to all categories oI
Non-Banking Financial Companies, i.e. equipment leasing and hire-purchase
Iinance companies, loan and investment companies, Residuary Non-Banking
Companies (RNBCs).
vi) Should not enter into lease agreements departmentally with equipment
leasing companies as well as other Non-Banking Financial Companies
engaged in equipment leasing.

T.Y.B.B. & I. Page

Current Status:
Structural Linkages between Banks and NBFCs:
Banks and NBFCs operating in the country are owned and established by entities
in the private sector (both domestic and Ioreign), and the public sector.
Some oI the NBFCs are subsidiaries/ associates/ joint ventures oI banks
including Ioreign banks, which may or may not have a physical operational
presence in the country. There has been increasing interest in the recent past in
setting up NBFCs in general and by banks, in particular.
Investment by a bank in a Iinancial services company should not exceed 10 per
cent oI the bank`s paid-up share capital and reserves and the investments in all
such companies, Iinancial institutions, stock and other exchanges put together
should not exceed 20 per cent oI the bank`s paid-up share capital and reserves.
Banks in India are required to obtain the prior approval oI the concerned regulatory
department oI the Reserve Bank beIore being granted CertiIicate oI Registration
Ior establishing an NBFC and Ior making a strategic investment in an NBFC in
India. However, Ioreign entities, including the head oIIices oI Ioreign banks having
branches in India may, under the automatic route Ior FDI, commence the business
oI NBFI aIter obtaining a CertiIicate oI Registration Irom the Reserve Bank.
NBFCs can undertake activities that are not permitted to be undertaken by banks or
which the banks are permitted to undertake in a restricted manner, Ior example,
Iinancing oI acquisitions and mergers, capital market activities, etc. The
diIIerences in the level oI regulation oI the banks and NBFCs, which are
undertaking some similar activities, gives rise to considerable scope Ior regulatory
T.Y.B.B. & I. Page

arbitrage. Hence, routing oI transactions through NBFCs would tantamount to
undermining banking regulation.
This is partially addressed in the case oI NBFCs that are a part oI banking group on
account oI prudential norms applicable Ior banking groups.

T.Y.B.B. & I. Page

CURRENT NEWS.
1) MAT changes will hit NBFCs.
Tuesday, September 1, 009
The Direct Taxes Code (DTC) is slowly being put to deeper scrutiny. As is always
the case, some oI the changes may be ushered in with good intention, but inept
draIting leaves the door open Ior needless litigation.
The newly craIted Minimum Alternate Tax (MAT) is a case in point. Ever since
Rajiv Gandhi unleashed the book proIits tax on India Inc. in 1987, it has generated
controversies galore and kept all the courts busy interpreting the intention and
scope oI the provision.
At present, MAT is applicable to corporate at 15 per cent on published proIits. The
nominal tax rate Ior the corporate sector is 33.99 per cent and the eIIective rate
aIter all deductions/concessions stands at around 22.22 per cent.
MAT computation
MAT, despite the controversy surrounding its existence, has lived by the year Ior
now 22 years and promises to open a new chapter Irom April 1, 2011.
The mechanics, as per the DTC, is simple. MAT will now be 2 per cent oI the
value oI gross assets as against 15 per cent on proIits. For this purpose the value oI
gross assets would be computed as shown in the Table.
It may be noted that even business assets such as sundry debtors, loans and
advances will now Iorm part oI the computation oI gross assets Ior the purpose oI
the levy.
T.Y.B.B. & I. Page

Further, while in the vertical Iorm oI the balance sheet the current assets are
disclosed net oI current liabilities, the proposed MAT computation mechanism
does not envisage a reduction oI current liabilities Irom current assets.
This also leads to an anomalous situation where a company has to pay MAT on the
amount oI deIerred tax asset, iI it appears in the balance sheet oI a company. The
rate oI MAT is proposed to be 0.25 per cent in the case oI banking companies and
2 per cent in the case oI all other companies, including Ioreign companies.
This is clearly a hardship Ior Non-Banking Financial Companies (NBFCs) where
70-75 per cent oI the assets in the balance-sheet constitute loans and advances,
stock on hire and business receivables. There does not appear to be any
justiIication in levying 2 per cent MAT on business assets, which in any case yield
income on monthly basis liable to corporate tax at 33.99 per cent (proposed to be
reduced to 25 per cent by the DTC). In the case oI several large NBFCs, 2 per cent
MAT on gross assets would be Iar greater than 25 per cent on taxable income.
To make matters worse, MAT will now represent a Iinal tax and will not be
allowed to be carried Iorward Ior claiming tax credit in subsequent years. Not only
this, certain companies, will receive an additional blow Ior example, those in
gestation period; having negative net worth because oI huge accumulated losses;
having book losses in the current year; having low asset-turnover ratio low net
proIit ratio; and those earning mainly exempt income.
Change in concept:
The justiIication Ior re-jigging MAT is that several countries have adopted a tax
based on a percentage oI assets. The concept oI MAT when it Iirst originated in
1987 was completely diIIerent Irom what is proposed in the DTC.
T.Y.B.B. & I. Page

The economic rationale oI 'assets-based tax is that it serves as an incentive Ior
eIIiciency. II that be so then the normal tax itselI should serve the purpose.
Any sort oI tax that departs Irom the mainstream route oI linkage with
income/proIits is bound to be litigious.
Added to that is the discrimination between banking companies and other
companies on the rate oI tax. Some serious rethinking is required on the proposed
MAT in the DTC.

) NBFCs
Posted on 19 September 008 by Sara 1ain close Author: Sara 1ain:-
A non-banking Iinancial company (NBFC) is a company registered under the
Companies Act, 1956 and is engaged in the business oI loans and advances,
acquisition oI shares/stock/bonds/debentures/securities issued by government or
local authority or other securities oI like marketable nature, leasing, hire-purchase,
insurance business, chit business, but does not include any institution whose
principal business is that oI agriculture activity, industrial activity,
sale/purchase/construction oI immovable property.
Major difference between Banks & NBFCs
NBFCs are doing Iunctions akin to that oI banks; however there are a Iew
diIIerences:
A NBFC cannot accept demand deposits (demand deposits are Iunds deposited at a
depository institution that are payable on demand immediately or within a very
short period like your current or savings accounts).
T.Y.B.B. & I. Page

It is not a part oI the payment and settlement system and as such cannot issue
cheque to its customers.
Deposit insurance Iacility oI DICGC is not available Ior NBFC depositors unlike
in case oI banks.
The important regulations relating to acceptance of deposits by
NBFCs are as follows:
The NBFCs are allowed to accept/renew public deposits Ior a minimum period oI
12 months and maximum period oI 60 months. They cannot accept deposits
repayable on demand.
NBFCs cannot oIIer interest rates higher than the ceiling rate prescribed by RBI
Irom time to time. The present ceiling is 11 per cent per annum. The interest may
be paid or compounded at rests not shorter than monthly rests.
NBFCs cannot oIIer giIts/incentives or any other additional beneIit to the
depositors.
NBFCs (except certain AFCs) should have minimum investment grade credit
rating.
The deposits with NBFCs are not insured.
The repayment oI deposits by NBFCs is not guaranteed by RBI.
There are certain mandatory disclosures about the company in the Application
Form issued by the company soliciting deposits.
Non-banking Iinancial companies (NBFCs) have seen considerable business model
shiIt over last decade because oI regulatory environment and market dynamics.

In the early 2000s, the NBFC sector in our country was Iacing Iollowing problems:
High cost oI Iunds.

Slow industrial growth.

StiII competition with NBFCs as well as with banking sector.

Small balance sheet size resulting in high cost oI Iund and low asset proIile.

3) On AM ET advertisement:
(Start September 3, 009 4:488.)
Reserve Bank oI India's (RBI) latest guideline allowing non-banking Iinance
companies (NBFC) to issue semi-closed system pre-paid payment instruments will
boost the growth oI m-commerce in India. Industry sources estimate that, in the
next 3 years, India could have 25 mn m-commerce users up Irom the current 5 mn.
The industry currently stands at a market size oI $10bn.
"The new guideline will increase the reach oI the services to the people at the
bottom oI pyramid. Now, people not having any bank account could pay their
utility bill by electronic transIer. We expect a Iive Iold increase in number oI
people using m-commerce services," said Anil Gajwani, Senior Vice President -
Technology, Comviva Technologies.
AIter the new guideline, entry oI a Iew NBFC MNCs into the segment could not be
denied. However, the most viable business plan would be Ior telecom operators, as
the guidelines will allow them to operate as a pre-paid payment instrument as well.

Considering the reach oI the telcos, in urban, rural and semi-urban areas, their
entry will increase the penetration oI the services among the masses.
Further, these telecom operators already have a large network oI agents, who are
selling pre-paid recharge coupon to the end customer. As per industry estimate
every service provider has around 50,000 such agents. Telcos could use these
existing agents Ior m-commerce as well.
"This will certainly bring more people into the eco-system. Even people not having
any bank account would be able to do some basic Iinancial transaction," said
Probir Roy, Co-Iounder and MD oI Pay mate. Pay mate has currently halI a million
users in the country. The company expects to grow maniIold, in terms oI the users,
by the end oI current FY.
However, the new guidelines still have some bottlenecks, which the industry
people wanted to be removed. RBI restricts the maximum value oI such payment
instruments that can be issued by the institutions/companies to Rs 5,000. Further,
these pre-paid payment instruments up to Rs 5,000 can be issued by accepting any
'oIIicially valid documents' deIined under Rule 2(d) oI Prevention oI Money
Laundering Act, as prooI oI identity.
Such instruments shall not permit cash withdrawal. The utility bills/essential
services shall include only electricity bills, water bills, telephone/mobile phone
bills, and insurance premium, cooking gas payments, ISP Ior Internet/broadband
connections, cable/DTH subscriptions and citizen services by government or
government bodies.

T.Y.B.B. & I. Page

4) Invest in only top 15 NBFCs to play safe.
(On September 3, 009 4:488)
NIVEDITA MOOKER1I
Investors once again Iaced disappointment with Kuber Finance deIaulting on
payments. Although there have been several deIaults in the past couple oI years,
the Kuber Iiasco brought back memories oI the CRB scam in 1997. AIter the CRB
letdown, one thought investors were going to stay away Irom non-banking Iinance
companies (NBFCs) Ior a long time to come. But the temptation to earn high
returns was hard to resist, and investors burnt their Iingers again.
But why don't investors learn Irom others' experiences? What is it that draws them
to NBFCs? Sheer Singh, banking and consumer analyst, Consult Opportune
(India's Iirst consumer banking advisory service), explains why investors are still
opting Ior NBFCs.
Says Singh, ``the lure oI earning returns, which are signiIicantly higher than what
banks oIIer, is one oI the reasons.'' Seen against the backdrop oI dismal stock
market perIormance over the past Iew years, it becomes quite clear why people
still invest in NBFCs, he says. Lack oI suIIicient investment alternatives is also
why investors are drawn to NBFCs, says Singh. Giving a consumer point oI view,
Singh says that through NBFC investments, people seek returns to hedge against
inIlation. Plus, it is seen as a way to earn income to Iinance the growing
consumerist urge. And more than anything else, high returns promised by some
NBFCs seem to IulIill investors' desire to make a Iast buck.
In such a scenario, sound guidelines may help investors in opting Ior the reliable
NBFCs. Sheer Singh oIIers guidelines which have been Iormulated by Consult
T.Y.B.B. & I. Page

Opportune. The things to look Ior while investing in NBFCs, according to Consult
Opportune, are:
a) Deposits oI NBFCs must have an adequate rating by one oI the credit rating
agencies in India.
b) PreIerably invest in deposits oI only the top 10-15 NBFCs in India.
c) Review halI-yearly Iactors such as credentials, market standing, and
proIessionalism oI management and promoters track record oI such NBFCs.
d) Take a close and critical look at the Iinancing activities oI such NBFCs to
decipher their long run viability.
e) Beware oI glossy and misleading advertisements.
I) Avoid any NBFC oIIering unusually high interest rates which seem
`signiIicantly higher' than prevalent rates oIIered by banks on similar
maturity periods.
g) Must preIer an NBFC with a nationwide network and more oriented towards
retail/ consumer Iinance activities due to signiIicantly lower deIault rates
Apart Irom these dos and don'ts, the Reserve Bank oI India also oIIers a
good data bank oI the NBFCs which may be trusted. Particularly its website
at www.rbi.org. in has a list oI over 500 NBFCs all over India which are
authorized by the RBI to accept public deposits. Similarly, the site also
gives out the names oI hundreds oI NBFCs which have been denied
registration. Also, there's substantial inIormation on RBI rules and
notiIications in the subject Overall and valuable source oI inIormation and
assessment regarding investment in NBFCs. Such an inIormation base could
sometimes prompt investors to even look Ior alternatives.
T.Y.B.B. & I. Page

Talking about alternatives, Sheer Singh says that private sector banks rapidly
expanding their branch network in urban centers oI India may emerge as preIerred
alternatives to those NBFCs which are not among the top 20 in India.
He adds that high quality service being oIIered by new private sector banks;
beeIing up oI service and product levels by public sector banks; and expansion oI
networks and product lines oI the top NBFCs should oIIer investors other
alternatives.
On the Iuture oI NBFCs, Singh says: ``we Ioresee a bright Iuture Ior the top 20
NBFCs in India.'' But it's not going to be a cakewalk. Says Singh: ``Considering
that in the Iuture consumer-led growth rather than institutional-led growth would
be the trend, top NBFCs which Iocus on retail lending predominantly can
substantially leverage their networks to oIIer similar lending products oIIered by
banks.'' The Iocus has to be on marketing and service initiatives, he adds. And the
mantra Ior success: Offer cut-throat competition to banks.

T.Y.B.B. & I. Page

List of Non-Banking Financial Companies:

A. R. T. LEASING PRIVATE LIMITED.
144, M.C.ROAD, CHENGANN&R.
ALAP&HA DISTRICT
KERALA
ADOR FINANCE LTD.
ADOR HO&SE, 6 K D&BASH MARG
M&MBAI - 400 023

AL BARR FINANCE HO&SE LTD
(FORMERLY KNOWN AS
ALBARAKA FINANCE HO&SE
LIMITED),
INDIA HO&SE NO. 2,
KEMPS CORNER,
M&MBAI 400 036.
AD-MAN&M FINANCE LTD
5, YESHWANT COLONY,
INDORE 452 003 (MP)
ADAYAR FINANCE & LEASING LTD.,
208, BHARATHI SALAI,
ROYAPETTAH,
CHENNAI 600 014
ALPIC FINANCE LTD.,
NEW EXCELSIOR BLDG.,
6TH FLOOR,
WALLACE STREET, FORT,
M&MBAI - 400 001

ALTA LEASING & FINANCE LTD.
ALTA BHAVAN,
532, SENAPATI BAPAT MARG
DADAR,
M&MBAI - 400 028
ANMOL FINANCIAL SERVICES LTD
A -66, IST FLOOR,
G&R& NANAK P&RA , VIKAS MARG,
DELHI - 110092
T.Y.B.B. & I. Page

ANNA FINANCE LIMITED
16 B/9, DEV NAGAR,
D.B. G&PTA ROAD,
KAROL BAGH,

ABIRAMI FINANCIAL SERVICES
(INDIA) LTD
157, HABIB&LLAH ROAD, T. NAGAR,
CHENNAI - 600 017
AMARPREET FINANCE PVT. LTD.,
182, NEW JAWAHAR NAGAR,
JALANDHR.
ANNA FINANCE LIMITED
16 B/9, DEV NAGAR,
D.B. G&PTA ROAD,
KAROL BAGH,
NEW DELHI -110005

T.Y.B.B. & I. Page

Conclusion:
NBFCs are gaining momentum in last Iew decades with wide variety oI products
and services. NBFCs collect public Iunds and provide loan able Iunds. There has
been signiIicant increase in such companies since 1990s. They are playing a vital
role in the development Iinancial system oI our country. The banking sector is
Iinancing only 40 per cent to the trading sector and rest is coming Irom the NBFC
and private money lenders. At the same line 50 per cent oI the credit requirement
oI the manuIacturing is provided by NBFCs. 65 per cent oI the private construction
activities was also Iinanced by NBFCs. Now they are also Iinancing second hand
vehicles. NBFCs can play a signiIicant role in channelizing the remittance Irom
abroad to states such as Gujarat and Kerala.
NBFCs in India have become prominent in a wide range oI activities like hire
purchase Iinance, equipment lease Iinance, loans, investments, and so on. NBFCs
have greater reach and Ilexibility in tapping resources. In desperate times, NBFCs
could survive owing to their aggressive character and customized services. NBFCs
are doing more Iee-based business than Iund based. They are Iocusing now on
retailing sector-housing Iinance, personal loans, and marketing oI insurance. Many
oI the NBFCs have ventured into the domain oI mutual Iunds and insurance.
NBFCs undertake both liIe and general insurance business as joint venture
participants in insurance companies. The strong NBFCs have successIully emerged
as Financial Institutions` in short span oI time and are in the process oI converting
themselves into Financial Super Market`. The NBFCs are taking initiatives to
establish a selI-regulatory organization (SRO). At present, NBFCs are represented
by the Association oI Leasing and Financial Services (ALFS), Federation oI India
Hire Purchase Association (FIHPA) and Equipment Leasing Association oI India
(ELA). The Reserve Bank wants these three industry bodies to come together
T.Y.B.B. & I. Page

under one rooI. The Reserve Bank has emphasis on Iormation oI SRO Particularly
Ior the beneIit oI smaller NBFCs.

T.Y.B.B. & I. Page

Bibliography
BOOKS:-
1) Statutory guidance`s Ior non- banking Iinancial companies.
Taxman.
WEBSITES:-

www.NBFC.com
www.RBI.com
www. ow Stuff Works.com
www. Wikipedia.com

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