UNIT 4

NBFCs
Meaning
Non-banking Financial Companies (NBFCs) play a vital role in the context of Indian Economy.
NBFCs are the intermediaries engaged in the business of accepting deposits and delivering
credit. A non-banking financial company is a company registered under the Companies Act,
1956 and is engaged in the business of loans and advances, acquisition of
shares/stock/bonds/debentures/securities issued by government or local authority or other
securities of like marketable nature, leasing, hire-purchase, insurance business, chit business, but
does not include any institution whose principal business is that of agriculture activity, industrial
activity, sale/purchase/construction of immovable property.

DEFINITION
Non banking Financial Company has been defined under section 45 I(f) of the Reserve Bank
Of India as a financial institution, which is a company; non-banking institution, which is a
company and which has its principal business the receiving of deposits under any scheme or
lending in any manner. Such other non-banking institutions, as the bank may with the previous
approval of the central government and by notification in the official gazette, specify.

Characteristics of NBFCs
1. NBFCs cannot accept demand deposits (Demand deposits are funds deposited in an
institution, that are payable immediately on demand e.g.: Savings account, Current
account etc).
2. A NBFC cannot issue cheques, to their customers and is not a part of the payment and
settlement system.
3. Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation (DICGC) is
not available for NBFC depositors.
4. They are allowed to accept/renew public deposits for a minimum period of 12 months
and maximum period of 60 months.
5. They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time
to time.
6. They cannot offer gifts/incentives or any other additional benefit to the depositors.
7. They should have minimum investment grade credit rating, from the credit rating
agencies.

Classification or Types of NBFCs
NBFCs can be classified into different segments depending on the type of activities they
undertake:
1. Hire-Purchase Company- It is a company which carries on as its principal business, hire
purchase transaction or the financing of such transactions.
2. Investment Company-It means any company which carries on as its principal business
the acquisition of securities.
3. Loan Company- It is a company which carries on as its principal business, the providing
of finance whether by making loans or advances or otherwise for any activity other than
its own.
4. Mutual Benefit Finance Company- It means any company which is notified by the
central government under section 620A of the Companies Act, 1956.
5. Equipment Leasing Company-It is a company which carries on as its principal
business, the business of leasing of equipments or the financing of such activity.
6. Residuary Non-banking Company- It is a company which receives deposits under any
scheme by way of subscriptions/ contributions and does not fall in any of the above
categories. E.g. Sahara Mutual Fund was the first RNBC started in India.
7. Miscellaneous Non- banking Company- It is a company which collects from specified
number of subscribers periodically and in turn distributes the same as prizes amongst
them. Any other form of chit is also included in this category.
8. Housing Finance Company- It is a company which carries on as its principal business,
the financing of the acquisition or construction of houses including the acquisition or
development of plots of land for construction of houses.

Re-classification of NBFCs
From December 6, 2006 NBFCs registered with RBI have been re-classified as
1. Asset finance Companies (AFC) AFC are financial institutions whose principal
business is of financing physical assets such as automobiles, tractors, construction
equipments material handling equipments and other machines. E.g.: Bajaj Auto Finance
corp. , Fullerton India etc
2. Investment Companies (IC) ICs generally are involved in the business of shares,
stocks, bonds, debentures issued by government or local authority that are marketable in
nature. E.g.: Stock Broking Companies, Gilt firms.
3. Loan Companies (LC) LCs are loan giving companies which operate in the business
of providing loans. These can be housing loans, gold loans etc. E.g.: Mannapuram Gold
Finance,

Regulations on NBFCs
1. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid
certificate of registration with authorization to accept public deposits can accept/hold
public
deposits.
2. New NBFCs are not allowed to raise public deposits for period of two years from the date
of registration. After completion of two years, detailed review is taken of the company by
the regulator.
3. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months. They cannot accept deposits repayable on
demand.
4. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time. The present ceiling is 12.5 percent per annum. The interest may be paid or
compounded at rests not shorter than monthly rests.
5. NBFCs cannot accept deposits from NRI
6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without credit
rating) are not entitled to accept public deposits.
7. Evaluation of the quality of management in respect of the promoters/directors is taken
into consideration while giving allowance for taking public deposits.
Contribution of NBFCs in the economy of India
1. Development of sectors like Transport & Infrastructure
2. Substantial employment generation
3. Help & increase wealth creation
4. Broad base economic development
5. Irreplaceable supplement to bank credit in rural segments
6. Major thrust on semi-urban, rural areas & first time buyers / users
7. To finance economically weaker sections
8. Huge contribution to the State exchequer

Role of NBFCS: A critical review of working of NBFCs
A robust banking and financial sector is critical for activating the economy and facilitating
higher economic growth. Financial intermediaries like NBFCs have a definite and very important
role in the financial sector, particularly in a developing economy like ours. They are a vital link
in the system.
After the proliferation phase of 1980s and early 90s, the NBFCs witnessed consolidation and
now the number of NBFCs eligible to accept deposits is around 600, down from 40000 in early
1990s. The number of asset financing NBFCs would be even lower, around 350, the rest are
investment and loan companies. Almost 90% of the asset financing NBFCs are engaged in
financing transportation equipments and the balance are in financing equipments for
infrastructure projects. Therefore, the role of non-banking sector in both manufacturing and
services sector is significant and they play the role of an intermediary by facilitating the flow of
credit to end consumers particularly in transportation, SMEs and other unorganized sectors.
The role of NBFCs in creation of productive national assets can hardly be undermined. This is
more than evident from the fact that most of the developed economies in the world have relied
heavily on lease finance route in their developmental process, e.g., lease penetration for asset
creation in the US is as high as 30% as against 3-4% in India. A conducive and enabling
environment has been created for the NBFC industry globally, which has helped it grow and
become an essential part of the financial sector for accelerated economic growth of the countries.
This is not the case in our country. It is, therefore, obvious that the development process of the
Indian economy shall have to include NBFCs as one of its major constituents with a very
significant role to play.
NBFCs, as an entity, play a very useful role in channelising funds towards acquisition of
commercial vehicles and consequently, aid in the development of the road transport industry.
Needless to mention, the road transport sector accounts for nearly 70% of goods movement and
80% of passenger movement across the length and breadth of the country and the role of NBFCs
in the growth and development of this sector has been historically acknowledged by several
committees set up by the Government and RBI, over the years.
NBFCs play a crucial and prominent role in the rural and social sectors of the economy by
providing finance for the acquisition of trucks, buses and tractors, which operate mainly in rural
and semi-urban India. In fact, our exposure to the rural / social sectors is direct and pronounced,
since financing for acquisition of vehicles provides a spin-off benefit by creating jobs and
opportunities in the rural parts of our country.
With the economic revival pegged to the development of the rural and suburban economies,
NBFCs role in deposit mobilisation and credit extension can hardly be over-emphasized. Given
Indias large unorganized markets, there is a huge demand for unsecured credit in areas where
banks do not have adequate reach. NBFCs fill this gap. Specialising in funding sectors where
there is a credit gap, the core strengths of NBFCs lie in their strong customer relationships,
excellent understanding of regional dynamics, well-developed collection systems, and
personalised services. These institutions play a crucial role in extending credit to the countryside,
thus preventing the concentration of credit risk in banks. In urban areas too, NBFCs focus on
segments neglected by banks-non-salaried individuals, traders, transporters and stock brokers.
These institutions are also instrumental in generating substantial employment in these regions.
In the past decade, NBFCs have played an important role in the expansion of the consumer
durables, housing and transport sectors. The industry is now witnessing a paradigm shift, as
competition is eating into the retail finance space, which has been traditionally dominated by
NBFCs. As the traditional boundaries between different financial intermediaries blur, market
participants are merging to increase their size and reach, while distributing risk over the large
base in an attempt to survive. According to the latest available numbers, registered NBFCs
declined from more than 13,000 in 2006 to 12,809 in June 2008. The number of deposit-taking
NBFCs also decreased to 364 in 2008 from over 450 in 2007

Conclusion
NBFCs are gaining momentum in last few decades with wide variety of products and services.
NBFCs collect public funds and provide loan able funds. There has been significant increase in
such companies since 1990s. They are playing a vital role in the development financial system of
our country. The banking sector is financing only 40 per cent to the trading sector and rest is
coming from the NBFC and private money lenders. At the same line 50 per cent of the credit
requirement of the manufacturing is provided by NBFCs. 65 per cent of the private construction
activities was also financed by NBFCs. Now they are also financing second hand vehicles.
NBFCs can play a significant role in channelizing the remittance from abroad to states such as
Gujarat and Kerala.
NBFCs in India have become prominent in a wide range of activities like hire purchase finance,
equipment lease finance, loans, investments, and so on. NBFCs have greater reach and flexibility
in tapping resources. Many of the NBFCs have ventured into the domain of mutual funds and
insurance. NBFCs undertake both life and general insurance business as joint venture
participants in insurance companies. The strong NBFCs have successfully emerged as Financial
Institutions in short span of time and are in the process of converting themselves into Financial
Super Market. The NBFCs are taking initiatives to establish a self-regulatory organization
(SRO). At present, NBFCs are represented by the Association of Leasing and Financial Services
(ALFS), Federation of India Hire Purchase Association (FIHPA) and Equipment Leasing
Association of India (ELA). The Reserve Bank wants these three industry bodies to come
together under one roof. The Reserve Bank has emphasis on formation of SRO Particularly for
the benefit of smaller NBFCs. Thus to conclude in the view of above NBFCs play an important
role in economic development.




HIRE PURCHASE
HP is a method of selling goods, goods are let out on hire by a finance company (creditor) to the hirer.
The buyer is required to pay an agreed amount in periodical installments during a given period. The
ownership of the property remains with creditor and passes on to hirer on the payment of last installment.

FEATURES OF HIRE PURCHASE AGREEMENT
1. The buyer takes possession of goods immediately and agrees to pay the total hire purchase price
in installments.
2. Each installment is treated as hire charges.
3. The ownership of the goods passes from buyer to seller on the payment of the installment.
4. In case the buyer makes any default in the payment of any installment the seller has right to re
posses the goods from the buyer and forfeit the amount already received treating it as hire charge.
5. The hirer has the right to terminate the agreement any time before the property passes, he has the
option to return the goods in which case he need not pay installments falling due thereafter.
6. However, he can not recover the sums already paid as such sums legally represent hire charge on
the goods in question.
7. The hire Purchase Act, 1972 defines HP agreement as an agreement under which goods are let on
hire hirer has an option to purchase them according to the terms of agreement under which:
8. Payment is to be made in installments over a specified period.
9. The possession is delivered to the hirer at the time of entering into a contract.
10. The property passes to the hirer on payment of the last installment.
11. Each installment is treated as hire charge & if default is made in payment of installment, the seller
is entitled to take away the goods.
12. The hirer/purchaser is free to return the goods without being required to pay any further
installments falling due after the return.

Hire Purchase Agreement
Is the agreement in writing and signed by both parties incorporating
1. The description of goods in a manner sufficient to identify them.
2. The hire purchase price of the goods.
3. The date of commencement of the agreement.
4. The number of installments in which hire purchase price is to be paid, the amount, and due
date.
5. Higher purchase transaction is different from credit sale. In case of sale ownership and
possession is transferred to the purchaser simultaneously, in hire purchase, the ownership
remains with the seller until last installment is paid.

Particulars Leasing Hire Purchase
Ownership The ownership remains with the lessor
throughout and the lessee (hirer) has no
option to purchase the goods.
The ownership remains with the buyer &
the title is passed on to hirer once he
pays last installment.
Method of
Financing
Leasing is a method of financing business
assets .
Hire purchase is a method of financing
both business assets and consumer
articles.
Depreciation depreciation and investment allowance can
not be claimed by the lessee.
deprecation and investment allowance
can be claimed by the hirer.
Tax Benefits The entire lease rental is tax deductible
expense
Only the interest component of the hire
purchase installment is tax deductible.
Salvage Value The lessee, not being the owner of the asset,
does not enjoy the salvage value of the
asset.
The hirer, in purchase, being the owner
of the asset, enjoys salvage value of the
asset.
Deposit Lessee is not required to make any deposit 20% deposit is required in hire purchase.
Rent-Purchase With lease, we rent with hire purchase we buy the goods.
Extent of
Finance
It is 100% financing. No immediate down
payment or margin money by the lessee is
required.
Margin of 20-25 % of the cost of the
asset is to be paid by the hirer.
Maintenance In case of finance lease only, the
maintenance of leased asset is the
responsibility of the lessee.
The cost of maintenance of the hired
asset is to be borne by the hirer himself.
Reporting The leased assets are shown by way of foot
note only .
The asset on hire purchase is shown in
the balance sheet of the hirer.



NIDHI
Nidhi in the Indian context / language means treasure. However, in the Indian financial sector
it refers to any mutual benefit society notified by the Central / Union Government as a Nidhi
Company. They are created mainly for cultivating the habit of thrift and savings amongst its
members.
The companies doing Nidhi business, viz. borrowing from members and lending to members
only, are known under different names such as Nidhi, Permanent Fund, Benefit Funds, Mutual
Benefit Funds and Mutual Benefit Company.
Nidhis are more popular in South India and are highly localized single office institutions.They
are mutual benefit societies, because their dealings are restricted only to the members; and
membership is limited to individuals. The principal source of funds is the contribution from the
members. The loans are given to the members at relatively reasonable rates for purposes such as
house construction or repairs and are generally secured. The deposits mobilized by Nidhis are
not much when compared to the organized banking sector.

Regulatory framework
Nidhis are companies registered under section 620A of the Companies Act, 1956(Section 406 of
the new Companies Bill 2012, as passed by Lok Sabha) and is regulated by Ministry of
Corporate Affairs (MCA).Even though Nidhis are regulated by the provisions of the Companies
Act, 1956, they are exempted from certain provisions of the Act, as applicable to other
companies, due to limiting their operations within members.
Nidhis are also included in the definition of Non- Banking Financial companies or (NBFCs)
which operate mainly in the unorganized money market. However, since 1997, NBFCs have
been brought increasingly under the regulatory ambit of the Indian Central Bank, RBI. Non-
banking financial entities partially or wholly regulated by the RBI include:
1. NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC),
investment (1C) (including primary dealers (PDs)) and residuary non-banking (RNBC)
companies;
2. mutual benefit financial company (MBFC), i.e. nidhi company;
3. mutual benefit company (MBC), i.e. potential nidhi company; i.e., A company which is
working on the lines of a Nidhi company but has not yet been so declared by the Central
Government; has minimum net owned fund(NOF) of Rs.10 lakh, has applied to the RBI
for certificate of registration and also to Department of Company Affairs (DCA) for
being notified as Nidhi company and has not contravened directions/ regulations of
RBI/DCA.
4. miscellaneous non-banking company (MNBC), i.e. chit fund company.

Since Nidhis come under one class of NBFCs, RBI is empowered to issue directions to them in
matters relating to their deposit acceptance activities. However, in recognition of the fact that
these Nidhis deal with their shareholder-members only,RBI has exempted the notified Nidhis
from the core provisions of the RBI Act and other directions applicable to NBFCs. As on date
(February 2013) RBI does not have any specified regulatory framework for Nidhis.
The Central Government vide Notification No.5/7/2000-CL.V dated 23rd March 2000
constituted a Committee to examine the various aspects of the functioning of Nidhi
Companies.There was no Government Notification defining the word Nidhi. Taking into
consideration the manner of functioning of Nidhis and the recommendations of the Shri
P.Sabanayagam Committee in its report and also to prevent unscrupulous persons using the word
Nidhi in their name without being incorporated by Department of Company Affairs (DCA) and
yet doing Nidhi business, the Committee suggested the following definition for Nidhis:
Nidhi is a company formed with the exclusive object of cultivating the habit of thrift, savings
and functioning for the mutual benefit of members by receiving deposits only from individuals
enrolled as members and by lending only to individuals, also enrolled as members, and which
functions as per Notification and Guidelines prescribed by the DCA. The word Nidhi shall not
form part of the name of any company, firm or individual engaged in borrowing and lending
money without incorporation by DCA and such contravention will attract penal action.