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I, Aman Singla student of 1st Semester of SCMS (UG), NOIDA hereby declare that the Project on Understanding the sector entitled Product Portfolio and Functions of NBFCs is submitted by me for the partial fulfilment of course objectives for the BBA Degree.

I assure that this project is the result of my own efforts and all the information and facts furnished in this Project are based on our intensive study.



I, Aman Singla, express my sincere gratitude to our respected sir for giving me the opportunity to work on this project and also helping me throughout the project.

I am grateful to other friends for their valuable suggestions in the execution of project work.


Non-Banking Financial Institution

Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc. T h e y a l s o pr o v i d e pr o du c t s / s er vi c es t h a t i n c l u d e s ma r g i n f u n di n g, l ea s i n g a n d hi r e- purchase, corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans, venture capital etc. As in the diagram, NBFCs are classified into four categories:y Hire Purchase Leasing y L oa n C o mp a n y y Investment Company y Equipment Leasing Company Now, these NBFCs have been reclassified into three categories:  

Asset Finance Company (AFC) Investment Company (IC) and Loan Company (LC). Under this classification, 'AFC' is defined as a financial institution whose principal business is that of financing the physical assets which support various productive/economic activities in the country.

Some of the prominent NBFCs in India are y Infrastructure Development Finance Corporation (IDFC) y Rural Electric Corporation ( REC) y Industrial Finance corporation of India (IFCI ) y Capital Till March 2009 ther e wer e 12,739 NBFCs out of which 336 NBFCs wer e per mitted to accept public deposits

NBFCs: Why are they required?

N BF C s a r e r eq u i r e d a s t he y ha v e a gr ea t er r ea c h t o va r i ous ma r ket s a nd ha v e gr ea t efficiency in mobilizing funds. Generally banks to reduce their operational costs establish NBFC. NBFC enjoys many liberal policies by RBI in comparison with the commercial banks. However this scenario is changing. RBI now has strict measures for NBFCs also.

Regulatory body

The Reserve Bank of India is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and supervisory objective, is to: y y ensure healthy growth of the financial companies ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations; and that the quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by keeping pace with the developments that take place in this sector of the financial system.

It has been felt necessary to explain the rationale underlying the regulatory changes and provide clarification on certain operational matters for the benefit of the NBFCs, members of public, rating agencies, Chartered Accountants etc. To meet this need, the clarifications in the form of questions and answers, is being brought out by the Reserve Bank of India (Department of Non-Banking Supervision) with the hope that it will provide better understanding of the regulatory framework.

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.



Number of NBFCs registered with the RBI:

The following table shows the number of NBFCs registered with the Reserve Bank of India and the trend of registration of companies as NBFC since the last decade. The table as given below also indicates registration of deposit accepting NBFCs of the total NBFCs registered with RBI.

End June

Number of Registered NBFCs

13,261 13,014 12,968 12,809 12,740 12,630

Number of NBFCs-d
507 428 401 364 336 308

Number of NBFCsND-SI
149 173 189 234 260

2005 2006 2007 2008 2009 2010

Nbfcs v/s Conventional Banks

y y y y An NBFC cannot accept demand deposits, and therefore, cannot write a checking facility. It is not a part of payment and settlement system which is precisely the reason why it cannot issue cheques to its customers. Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. SARFAESI Act provisions have not currently been extended to NBFCs. Besides the above, NBFCs pretty much do everything that banks do.

A table comparing the functions/limitations of Banks with NBFCs is as follows:

Definition: banking is acceptance of deposits withdrawable by cheque or demand; NBFCs cannot accept demand deposits Scope of business for banks is limited by sec 6 (1) of the BR Act Licensing requirements are quite stringent. Transfer of shareholding also controlled by RBI. No non-banking activities can be carried Can exercise powers of recovery

NBFCs are companies carrying financial business

Scope of business Licensing requirements Major limitations on business Major privileges

There is no bar on NBFCs carrying activities other than financial activities. It is quite easy to form an NBFC. Acquisition of NBFCs is procedurally regulated but not approval required. Cannot provide checking Facilities Do not have powers under

Foreign investment Regulations SLR/CRR requirements

under SARFAESI and DRT law Upto 74% allowed to private sector banks BR Act and RBI Act lay down stringent controls over banks Banks are covered by SLR/ CRR requirements

SRFAESI or DRT law Upto 100% allowed Controls over NBFCs are relatively much lesser NBFCs have to maintain a certain ratio of deposits in specified securities; no such requirement for non depository companies Priority sector norms are not applicable to banks

Priority sector lending requirements

Certain minimum exposure to priority sector required

Swot analysis of NBFC

Strengths:The core strengths of NBFCs lie in their strong customer relationships, good understanding of regional dynamics, service orientation, and ability to reach out to customers who would otherwise have been ignored by banks. Because of their niche strengths, local knowledge, and presence in remote topographies, these NBFCs are able to appraise and service non-bankable customer profiles and ticket sizes. They are thus able to service segments of the population whose only other source of funding would be moneylenders, often charging usurious rates of interest.

Weakness:With the onset of retail financing, NBFCs are loosing ground to banks. Also the profitability of NBFCs has also come under pressure due to the competitive dynamics in the Indian financial system. Under these circumstances, NBFCs have begun to look at high-yield segments such as personal loans of small ticket sizes, home equity, loans against shares, and public issue (IPO) financing, to boost profitability. To benefit from access to funding at lower costs, among other reasons, some leading NBFCs have also metamorphosed into banks: Ashok Leyland Finance Ltd, for instance, merged into Indus Ind Bank Ltd, and Kotak Mahindra Finance Ltd converted into Kotak Mahindra Bank Ltd.

Opportunity:Virgin business segments are likely to have NBFCs as innovators. The NBFCs willleverage their first mover advantage to make reasonable profits in these segments. NBFCs will play the role of innovators, going forward, with some doubling up as partners to banks. As innovators, they will help identify new businesses, or new ways of doing traditional businesses; they will build business models that will attain a measure of stability over time, before the banks step in. When that happens, it will be difficult for some NBFCs to hold their own against the competition, and some will move out; others will enter into partnerships with banks, resulting

in a win-win relationship for both. Partnerships with banks can take a variety of forms. Some NBFCs will become originating agents working for a fee, like DSAs, but others are likely to have more substantial partnerships with banks. Such a partnership could, for instance, involve the NBFC performing credit appraisals, and sharing credit risk on assets that it has originated and sold to its partner bank. The success of this business model will depend critically on the NBFCs ability to assess the risks involved in the exposures it originates.

Threats:Factors such as ability to sustain good asset quality, provide prompt and customized services, enter into franchises or tie up arrangements with manufacturers and dealers, and build large networks to reach out to customers, are vital for success on the business front; so are strong collection and recovery capabilities. NBFC lack such facilities. On the financial side, competitive cost of funds and the ability to capitalize at regular intervals, in line with growth requirements, are key requirements for maintaining competitive positions. Slowly and steadily NBFC is loosing ground to banks and it only way out is go for partnership with big.

Products and Services

Funding of commercial vehicles Funding of infrastructure assets Retail financing Loan against shares Funding of plant and machinery Small and Medium Enterprises Financing Financing of specialized equipment Operating leases of cars, etc Generally, services have four important characteristics that distinguish them from the physical products. They are intangibility, inseparability, heterogeneity and perish-ability. Financial services can be availed but they are not visible in nature. It can neither be displayed nor can it be stored. Even though financial products are sold in the financial markets, in reality what we really find is the offering of financial service and not any physical products. In a service business, the customers are fully involved in the production of service. For example, an individual who wants to have a hair cut has to depend on the barber to avail the service. Financial services also seek high involvement of the users. The services are customer centric. Consider an example of a housing loan in which each loan account is based on the mortgage of the property. Each loan is unique financial product because of the differences in the customer profile, their needs, the term of the loan and the property available. Therefore, services are tailored to suit the needs of customers and require full involvement of customers.

Financial services cannot be uniform for all clients. As stated in the previous point, services vary from one customer to the other. Services cannot be standardized. We have different formats for the marketing of financial services. Some are addressed to individuals and some are addressed to institutions or companies. We all know about the diverse nature of the service industry. Services are rendered in diverse industry like hospitality, education, health care etc. Apart from other type of services industry like tourism and professional services, there is another concept called financial services. Now let us see what is this financial service is about. Financial services comprises of all the services that are rendered by banks, financial institutions and insurance companies. These services include managing your money, stock broking, management of portfolio, and other related services. Now financial services also include services like venture capital, equipment leasing, retail financing etc. In a broader sense, it includes credit rating services, factoring services and credit card services etc. There are several new financial products introduced by the banking industry due to the intense competition in financial service industry. Financial service sector has shown consistent growth and also has a potential for growth in every new financial product that it introduces. Now let us see few example of what are the services rendered by this financial service industry. For instance, if you take retail finance, they provide loans for consumer durables. In addition they provide vehicle finance and for professionals they provide equipment finance. Now coming to equipment finance in detail, they render services like leasing equipment, sale of equipment and lease back, vendor leasing, hire purchase services and sales aid lease. If we take working capital finance, some of the financial services that are rendered are discounting of bills, providing short term loans for business and inter corporate deposits. I hope, by now, you have known about financial services by reading my article.

Raising deposits
A NBFC is a business entity whether incorporated under the Companies Act, 1956 or not which devotes its resources in providing to the society the financial services of various descriptions that are distinct from normal banking services. Non Banking Finance companies are allowed to collect Deposits from General Public after complying with various provisions of the Companies Act and after filing all the requirements as per the guidelines issued by the Reserve Bank of India. It is to be noted that to raise deposits from the general public by giving an advertisement, the person soliciting deposits should file all the relevant documents with the Reserve Bank of India, obtain clearances and then only issue an advertisement. Only those NBFCs who are registered with the Reserve Bank of India and who have complied with the requirements of credit rating satisfactory grade and prudential norms are given freedom to offer interest rate (with an upper ceiling of 11.00% prescribed) on deposits exceeding the period of one year and not exceeding the period of 5 years. The above rate is applicable to those deposits accepted or renewed by the NBFCs after 4th March 2003. NBFCs are free to offer lesser rate of interest also at their convenience. NBFCs raise deposits from the general public by issuing advertisements and thereafter invest the same in various businesses for which the companies are formed.

PUBLIC DEPOSIT ACCEPTANCE NORMS y y y An NBFC having Net Owned Funds of Rs. 200.00 lakhs and above only can accept Public Deposits. It has obtained Minimum Stipulated Credit Rating from any one of the approved Credit Rating Agencies at least once in a year Copy of the Credit Rating should be sent to the RBI along with the Return on

Prudential Norms. If the Credit Rating is either downgraded or upgraded, the NBFC is required to report this fact to the RBI within 15 days from the date when it receives such information. It is to be noted that the deposits taken by the NBFCs are repayable on demand and the Minimum period for which Public Deposits can be accepted is not less than 12 months with a maximum period of 84 months. There is a ceiling provided for the quantum of deposits accepted by NBFCs. Hire Purchase & Leasing Companies: 1.5 times of their Net Owned Funds or Rs. 10.00 Crores whichever is less. Such companies can accept or renew deposits up to 4.00 times of their Net Owned Funds provided they obtain minimum investment grade of credit rating. Loan Companies and Investment Companies: 1.5 times of their Net Owned Funds. Receipt to be issued to Depositor NBFCs are required to issue a receipt to each depositor in respect of each deposit accepted. This receipt is required to be signed by the authorized official of the Company. The receipt should consists the following particulars: Date of Receipt Name of the Depositor Amount of Deposit in words and figures Maturity Date Rate of Interest

NBFCs are required to maintain a Register of Deposits consisting of the details of the depositor and the deposits along with all particulars.

Payment of Brokerage NBFCs are not allowed to pay more than 2% of the deposit amount in the form of any brokerage to any broker on the public deposits collected by or through him and reimbursement of expenditure shall be given to a maximum extent of 0.5% of the deposits collected by or through him.

ADVERTISEMENT :NBFCs are required to issue an advertisement for acceptance of public deposits and this should be informed to the Reserve Bank of India. Form and particulars of advertisement y Every company intending to invite or allowing or causing any other person to invite or cause to be invited on its behalf, any deposits from the public, other than its directors, shareholders or employees shall issue an advertisement for the purpose in a leading English newspaper and one vernacular newspaper circulating in the State in which the registered office of the company is situate. No such company shall issue or allow any other person to issue or cause to be issued on its behalf, any advertisement inviting deposits unless such advertisement is issued on the authority and in the name of the board of directors of the company and contains a reference to the conditions subject to which deposits shall be accepted by the company, the date on which the said board of directors has approved the text of the advertisement and the following information, namely: The name of the company; The date of incorporation of the company; The business carried on by the company and its subsidiaries with details of branches or units, if any; Brief particulars of the management of the company; Names, addresses and occupations of the directors; Profits of the company before and after making provisions for tax for the three financial years immediately preceding the date of advertisement; Dividends declared by the company in respect of the said years; A summarised financial position of the company as in the two audited balance sheets immediately preceding the date of advertisement.


Copy of the advertisement to be filed with the Reserve Bank No advertisement shall be issued by or on behalf of company unless on or before the date of its issue, there has been delivered to the Regional Office of the [Department of Financial Companies] of the Reserve Bank of India within whose jurisdiction the registered office of such company is situate, a copy thereof signed by a majority of the directors constituting the board of directors which approved the advertisement or by their

agents authorized in writing.

ACCEPTANCE OF DEPOSITS BY UNINCORPORATED BODIES 1. Individuals, Firms or an unincorporated Association of Individuals shall not accept any deposits if his or their business wholly or partly includes any of the activities mentioned in Section 45 I of the RBI Act. 2. Such people cannot accept deposits if his or its principal business is that of receiving of deposits under any scheme or arrangement or in any other manner or lending in any manner. 3. Existing Registered Unincorporated Bodies and Individuals who carryout eligible business can accept deposits from a maximum of 25 depositors in the case of an Individual and 25 depositors per partner in the case of a Partnership Firm.

FOLLOWING IS THE BRIEF READY CHECKLIST FOR INVESTIGATORS VERIFYING THE AUTHENTICITY OF AN NBFC VERIFY WHETHER The Company is Registered with the Reserve Bank of India The Company has achieved the Net Owned Funds of Rs. 25.00 lakhs The Net Owned Funds have not fallen below Rs. 25.00 lakhs at any time The Company is eligible to accept Public Deposits The Company has accepted the Public Deposits with in the applicable limits which depends on the following factors y y y y y y y y y y y Net Owned Funds Credit Rating Capital Adequacy Credit Rating obtained by the company is valid The Company has filed advertisements before acceptance of Public Deposits The Company has issued fresh advertisement every year before its expiry The Company has treated the Public Deposits as it is or has classified it as Non public Deposits The Company has not accepted any deposits which are not repayable on demand The Company has not accepted any deposits the tenure of which is less than 12 months The interest paid is within the ceiling prescribed (prescribed on time to time basis) by RBI. Brokerage paid is within the ceiling of 2% of the Public Deposits

y y y y y y y y

y y y y

Reimbursement of expenditure to brokers is within the ceiling of 0.5% of the Public Deposits Application forms supplied by the company to the Depositors consist of all the data required by NBFC Act. The changes in credit rating have been informed to the RBI within a period of 15 days of the date on which the company comes to know about the change. The Company which holds excess Public Deposits than the regular ceiling have regularized the deposits The Company has paid interest on Public Deposits regularly The Company renews the Public Deposits to give benefit of higher rate of interest to the depositor In case of failure of delayed payment of deposits, the company has paid interest from the date of maturity of deposit to the date of actual payment The Company maintains a minimum liquidity of 10% or higher percentage as stipulated by RBI from time to time with a Scheduled Bank at any time during the currency of its operations. The Company debits the amount of loans given to a separate account and not to the Deposits Accounts The company has not granted an amount of loan on deposits exceeding 75 percent The Company issues a receipt for the deposits received The receipt issued consists of the information required by the relevant acts and rules

The company maintains a Register of Public Deposits the reaction comes in to effect and the NBFCs and finance companies are regulated properly, it is everybodys duty to take precautions and go further in matters relating to dealings with NBFCs. y y y y y y y y y y consisting of necessary particulars The company maintains prescribed percentage of liquid assets in approved securities in accordance with the requirements The Company has designated one branch of scheduled commercial bank for the custody of securities and informed RBI about the same The company lodges the securities with the designated branch as said above The Company has transferred at least 20% of the profit after tax to the Reserve Fund The Company has furnished the Balance Sheet, Profit & Loss Account to the RBI with in 15 days from the date of Annual General Meeting The Company has not extended credit exceeding 15% of its owned funds to a single party The Company has not extended credit exceeding 25% of its owned funds to a single group of borrowers The Company has not made investments exceeding 25% of its owned funds in the shares of any single group of companies The Company has not granted any loans against its own shares.

If all the above requirements along with the other requirements of the RBI, SEBI guidelines and regulations are satisfied, then only the Company can be provisionally called to have accepted the deposits in a correct manner. An officer dealing the case of acceptance of deposits and the utilization of monies accepted as deposits, has to first verify the Books & Records (elsewhere mentioned in this material) and see that the provisions and regulations as stipulated by the Reserve Bank of India and

the Securities Exchange Board of India as mentioned in the checklist and other applicable provisions are satisfied. According to the recent guidelines issued by RBI, it has been provided that any complaint filed with the Police has to be registered and informed to the RBI and in turn RBI shall provide information in relation to the Group against which complaint has been filed, which will enable the Department to speed up the process of investigation or inquiry. The role of NBFCs in our economy needs to be emphasized. They have supplemented the role played by the Banks. While functioning as financial intermediaries between the savers and the users, they cater to the different segments of the society. RBI allowed them to have a high gearing of ten times. This led to the promotion of finance companies by people who had nothing to do with finance business. They only want to collect money under the grab of NBFC for diversion. The directions governing the finance companies are not comprehensive enough. So, something was bound to happen and what happened was not pleasing. Some companies promise unrealistic things. Some unscrupulous elements dupe the gullible people of their hard earned money. Hence, the reaction by the regulators becomes inevitable.

Performance of the NBFC Sector during 2009-10

Hire purchase and loans and advances by NBFCs witnessed a growth of 7.6% and 42.7% respectively during 2009-10 as compared to 6.8% and 14.7% respectively in the previous year. Total assets/ liabilities of NBFCs-D (excluding RNBCs) expanded at the rate of 21.5 per cent during 2009-10 as compared to 3.4 per cent during 2008- 09. Borrowings, a major source of funds for NBFCs-D, increased by 23.6 per cent, while public deposits increased by 38.4 per cent. Total investments of NBFCs-D increased by 23.3 per cent during 200910 primarily on account of rise in Non-SLR investments. The asset size of NBFCs-D varies significantly between less than 25 lakh to above 500 crore. NBFCs-D with asset size of above 500 crore were holding 97.5 per cent of total assets of all NBFCs-D, while the remaining 213 held about 2.5 per cent in end-March 2010. The financial performance of NBFCs-D in 2009-10 witnessed moderate deterioration which also reflected in the decline in the operating profits. This was due to increase in expenditure over income. The cost to income ratio declined from 74 per cent in 2008-09 to 81.8 per cent in 2009-10. Non-interest cost at 97.4 per cent continued to constitute the

dominant share in total cost of the NBFCs-D during 2009-10 while interest cost accounted for a smaller share. There was a decline in the gross NPAs to gross advances ratio of NBFCs-D in 2009-10 as well. Gross NPA and net NPA ratios of AFCs and loan companies declined during 200910 as compared to the previous year. Capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs-D in 1998, whereby every NBFC-D is required to maintain a minimum capital, consisting of Tier I and Tier II capital, not less than 12 per cent (15 per cent in the case of unrated deposit-taking NBFCs) of its aggregate risk-weighted assets. As at the end of March 2010, 212 out of 216 reporting NBFCs-D had CRAR of more than 12 per cent as against 221 out of 225 in end-March 2009. It may be pointed out that the NBFC sector has been witnessing a consolidation process in the last few years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger sector. The total assets of deposit-taking NBFCs-D sector registered a significant growth during 2009-10 mainly on account of increase in the assets of asset finance companies. As at end-March 2010, around three-fourths of the total assets of the NBFCs-D sector were held by assets finance companies. On the other hand, in case of NBFCs ND-SI secured loans continued to constitute the largest share (44.3 per cent of total assets), followed by unsecured loans (17.8 per cent), hire purchase assets (7.4 per cent), investments (17.4 per cent), cash and bank balances (4.5 per cent), and other assets (8.4 per cent) during the year ended March 2010. The balance sheet of NBFCs-ND-SI stood at Rs. 5,63,476 crore in end-March 2010 as compared to Rs. 4,82,907 crore in end-March 2009 thereby registering a growth of 16.7 per cent during 2009- 10. This significant increase in balance sheet size of NBFCs-ND-SI is mainly attributed to sharp increase in owned funds, debentures, bank borrowings, commercial paper, and other liabilities. Owned funds (which accounted for 25.8 per cent of total liabilities) increased by 11.3 per cent during 2009-10. Total borrowings (secured and unsecured) by NBFCs-ND-SI increased by 19.6 per cent to Rs. 3,81,850 crore and formed 67.7 per cent of total liabilities. During the period ended June 2010, total

borrowings further increased by 8.3 per cent to Rs. 4,13,476 crore. The pattern of deployment of funds by NBFCs-ND-SI in the year ended March 2010 remained broadly in line with that witnessed during the previous year. Secured loans continued to constitute the largest share (44.3 per cent of total assets), followed by unsecured loans (17.8 per cent), hire purchase assets (7.4 per cent), investments (17.4 per cent), cash and bank balances (4.5 per cent), and other assets (8.4 per cent) during the year ended March 2010. The financial performance of the NBFCs-ND-SI sector improved marginally as reflected in the increase in net profit of Rs. 10,897 crore during 2009- 10 over the previous year. However, their net profit to total assets declined during the same period. Gross and net NPA ratios of the NBFCs-ND-SI sector deteriorated marginally during the year ended March 2010. However, these ratios showed some improvement in the quarter ended June 2010. Similarly, there was further diminution in value of investments between March 2009 and March 2010.

In case of NBFCs the benefit is that in most of the funding transaction there is exposure on the asset and not on the corporate, unlike in case of banks. Also NBFCs have been able to provide funding to un-banked regions or where banks are not aggressive on providing financial assistance. Thus, NBFCs have an edge over banks. NBFCs are more diversified in their exposures unlike banks, the charts below provide a comparison between the loan book and funding & liquidity sources of a bank vis--vis NBFCs:

Future prospects of NBFC sector:

NBFCs have been playing a very important role both from the macro economic perspective and the structure of the Indian financial system. NBFCs are the perfect or even better alternatives to the conventional Banks for meeting various financial requirements of a business enterprise. They offer quick and efficient services without making one to go through the complex rigmarole of conventional banking formalities. However to survive and to constantly grow, NBFCs have to focus on their core strengths while improving on weaknesses. They will have to be very dynamic and constantly endeavour to search for new products and services in order to survive in this ever competitive financial market. Since NBFCs have been kept outside the purview of SARFAESI Act, a reform in this area is quite urgently needed. A suitable legislative amendment extending the operation of the said Act to NBFCs too would go a long way in fortifying the faith of the investors and which in turn would greatly contribute to the growth of this Sector. The coming years will be very crucial for NBFCs and only those who will be able to face the challenge and prove themselves by standing the test of time will survive in the long run.