I.

INTRODUCTION

We studied about bank , apart from bank the Indian Financial System has a large number of privately owned , decentralized and small sized financial institution

known as Non-banking financial companies . in recent time , the non-banking financial companies (NBFCs) have greatly contributed to the Indian economic growth by providing deposit facilities and specialized credit to certain segment of society such as unorganized sector and small borrowers .In the financial system , the NBFCs play a very important role In converting saving in to investment . They offer wide variety of financial services and provide credit to the unorganized sector and small borrower . NBFCs provide financial services like hire-purchase, leasing, loan, investment chit-fund companies etc. NBFCs classified in to 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 offer attractive rate of return .They are fund based as well as non-fund based companies. Their main competitors are bank and financial institution. According to RBI Act , 1934 . It is compulsory to register the NBFCs with the Reserve Bank of India . y A Non-Banking Financial Company (NBFC) 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. y A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a Non-banking financial company (Residuary Non-banking Company)

SECTION 45-I OF THE RBI ACT, 1934 FOR NBFCs

Reserve Bank of India Act 1934 (the Act) governs the provisions relating to a NonBanking Financial Company. Non Banking Financial Company (NBFC) has been defined in clause (f) of Section 45-I of the Act to meani. ii. A financial institution which is a company; A non- banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner , or lending in any manner; iii. Such other non- banking institution or class of such institutions, as the bank may, with the previous approval of the Central Government and by notifications in the Official Gazette specify.

The term Financial Institution has been defined in clause (c) of Section 45-I to mean any non- banking institution which carries on as its business or part of its business any of the following activities namely: i. ii. The financing, whether by way of making loans or advances or otherwise, of any activity other than its own; The acquisition of shares, bonds, debentures or securities issued by a Government or local authority or other marketable securities of a like nature. iii. Letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause. (c) of Sec. 2 of the Hire-Purchase Act, 1972 iv. v. The carrying on of any class of insurance business Managing, conducting or supervising, as foreman, agent or in any other capacity, of chits or kuries as defined in any law which is for the time being in force in any State, or any business, which is similar thereto; vi. Collecting, for any purpose or under any scheme or arrangement by whatever name called, moneys in lump sum or otherwise, by way of subscription by sale of units, or other instruments or in any other manner and awarding prizes or gifts, whether in cash or in kind or disbursing moneys in any other way, to

person from whom moneys are collected or to any other person, but does not include any institution, which carries on as its principal business,a. agricultural operations; or (aa) industrial activity; or b. purchase or sale of any goods (other than securities) or the providing of any services; or c. the purchase, construction or sale of immovable property, so, however, that no portion of the income of the institution is derived from the financing of purchases, construction or sales of immovable property by other persons

Clause (aa) of Section 45-I of the Act defines a company as a company defined in Section 3 of Companies Act, 1956, & includes a Foreign Company within the meaning of Section 591 of the that Act.

Thus a Non-Banking Financial Company (NBFC) 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, hirepurchase, 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. A non-banking institution which is a company and which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is also a non-banking financial company (Residuary non-banking company). The provisions relating to requirements of Registration and Net Owned Fund is covered under Section 45-IA of the Act.

Section 45-IA provides that no NBFC shall commence or carry on the business of Non- Banking Financial Institution without a. Obtaining a Certificate of Registration issued and

b. Having the net owned fund of fifty lakh rupees or such other amount, not exceeding two hundred lakh rupees, as the bank may, by notification in the Official Gazette, specify.

The NOF prescribed was Rs 25 lakh

Further sub-section (2) of Section 45-IA provides that every NBFC shall make an application for registration to the Bank in such a form as the Bank may specify.

Further Subsection (4) of 45-IA provides that the Bank may for the purpose of considering the application for registration, required to be satisfied by an inspection of the books of the Non- Banking Financial Company or otherwise that the following conditions are fulfilled:a. that the non- banking financial company is or shall be in the position to pay its present or future depositors in full as and when their claims accrue;

b. that the affair of the non- banking financial company are not being or are not likely to be conducted in a manner detrimental to the interest of its present or future depositors;

c. that the general character of the management or the proposed management of the non- banking financial company shall not be prejudicial to the public interest or the interests of the depositors; d. the non-banking financial company has adequate capital structure and earning prospects;

e. that the public interest shall be served by the grant of certificate of registration to the non- banking financial company to commence or to carry on the business in India;

f. that the grant of certificate of registration shall not be prejudicial to the operation and consolidation of the financial sector consistent with monetary
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stability and economic growth considering such other relevant factors which the Bank may, by notification in the Official Gazette, specify; and

g. any other condition, fulfillment of which in the opinion if the Bank, shall be necessary to ensure that the commencement of, or carrying on of the business in India by a non- banking financial company shall not be prejudicial to the public interest or in the interests of the depositors.

Sub-section (5) of 45-IA provides that the Bank may, after being satisfied that the conditions specified in sub-section (4) are fulfilled, grant a certificate of registration subject to such conditions which it may consider fit to impose.

Therefore 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.However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank.

II. LITERATURE REVIEW

IMPORTANCE OF NBFCS According to RBI Non Banking Finance Companies (NBFCs) is a constituent of the institutional structure of the organized financial system in India. NBFCs perform a significant and important role in our financial system. They facilitate the process of channelizing of public savings and provide better return to the depositors. We are aware that due to liberalization and globalization, banking industry and financial sector has gone through many reforms. In the present economic environment it is very difficult to cater need of society by Banks alone so role of Non Banking Finance Companies and Micro Finance Companies become indispensable. The activities of non-banking financial companies (NBFCs) in India have undergone qualitative changes over the years through functional specialization. At present, NBFCs in India have become prominent in a wide range of activities like hire-purchase finance, equipment lease finance, loans, investments, etc. By employing innovative marketing strategies and devising tailor-made products, NBFCs have also been able to build up a clientele base among the depositors, mop up public savings and command large resources as reflected in the growth of their deposits from public, shareholders, directors and their companies, and borrowings by issue of nonconvertible debentures, etc.

ROLE OF NBFCS According to EPW Research Foundation (EPWRF )The Indian economy is going through a period of rapid `financial liberalization' the macroeconomic perspective and the structure of the Indian financial system, the role of NBFCs has become increasingly important. The crucial role of Non Banking Finance Institutions (NBFIs) in broadening access to financial services, and enhancing competition and diversification of the financial sector has been well recognized. The main advantages of these companies lie in their ability to lower transactions costs of their operations, their quick decision-making ability, customer orientation and prompt provision of services. While NBFIs are sometimes seen as akin to banks in terms of the products

and services offered, this is strictly not accurate, as more often, NBFIs play a range of
roles that complement banks.

ON GLOBAL CRISIS According to CARE: NBFC sector faced significant stresses on asset quality,

liquidity and funding costs due to the global economic slowdown & its impact on the domestic economy. While all the NBFCs were affected, the impact varied according to the structural features of each NBFC. Asset-liability maturity (ALM) profiles, type of assets financed and origination / collection models followed were the primary differentiators within NBFCs. Profitability is expected to be lower than historical levels due to conservative ALM management, higher provisioning and avoidance of high yielding unsecured loan segments. However profits are at the same time expected to be much more stable & less susceptible.

III. TYPES OF NBFCS

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 Types of NBFCs depending upon the nature of their major activities ,the non-banking financial companies can classified into the following categories :

1. Equipment Leasing Companies 2. Hire-purchase companies 3. Housing financial companies 4. Loan Companies 5. Chit fund companies 6. Investment companies 7. Mutual Benefits companies 8. Residuary companies

1. EQUIPMENT LEASING COMPANIES : Equipment leasing companies means any company which is carrying on the activity of leasing of equipment ,as its main business , or financing of such activity .the leasing takes place between the lessor (lessor means the leasing company) and the lessee(lessee means borrower). Under leasing equipment business a lessee is allowed to use a particular capital equipment as a hire ,against a payments of a monthly rent .Hence the lessee does not purchase the capital equipment , but he buys the right to use it . There are two types of leasing arrangements , they are :

(a) Operating Leasing :

In operating leasing the producer of the capital equipment offer his product directly to the lessee on a monthly rent basis. There in no middleman in operating leasing .It is defined as any leas other than a finance lease following features ; y y The lease term is significantly less than the economic life of equipment . The lessee enjoy the right to terminate the lease period at short notice without any significant penalty. with the

y The lessor usually provide the operating lease know how and related service
and undertake responsibility of insuring and maintaining the equipment .such an operating lease is called as wet lease.

(b) Financial lease .

In finance leasing the producer of the capital equipment sells the equipment to the leasing company lease it to the final user of the equipment. The leasing company act as middleman between the producer of the equipment and the user of equipment .it is a pure form of borrowing with the following features ; y It is an intermediate term to long term cancellation arrangement . During the initial lease period , referred to as the primary lease the lease cannot be cancelled .
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The lease is more or less fully amortized during the primary lease period. In other words during this period the lessor recovers his investment from the lessee rental along with acceptable rate of returns

y y

The lessee is responsible for maintenance , insurance and taxes. The lessee usually enjoy the option for renewing the lease for further period at substantially reduce lease rental.

Benefits/ advantages of leasing y y y y .100% finance Payment easier No risk Tax concession

2. HIRE PURCHASE COMPANY

Hire purchase is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time.. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price or return the goods to the owner.

HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period. Standard Provisions To be valid, HP agreements must be in writing and signed by both parties. They must clearly set out the following information in a print that all can read without effort: 1. A clear description of the goods
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2. The cash price for the goods 3. The HP price, i.e., the total sum that must be paid to hire and then purchase the goods 4. The deposit 5. The monthly installments 6. A reasonably comprehensive statement of the parties' rights 7. The right of the hirer to terminate the contract when he feels like doing so with a valid reason. The Seller And The Owner If the seller has the resources and the legal right to sell the goods on credit (which usually depends on a licensing system in most countries), the seller and the owner will be the same person. But most sellers prefer to receive a cash payment immediately. To achieve this, the seller transfers ownership of the goods to a Finance Company, usually at a discounted price, and it is this company that hires and sells the goods to the buyer. This introduction of a third party complicates the transaction. The Hirer's Rights The hirer usually has the following rights: 1. To buy the goods at any time by giving notice to the owner and paying the balance of the HP price less a rebate 2. To return the goods to the owner this is subject to the payment of a penalty to reflect the owner's loss of profit but subject to a maximum specified in each jurisdiction's law to strike a balance between the need for the buyer to minimize liability and the fact that the owner now has possession of an obsolescent asset of reduced value 3. With the consent of the owner, to assign both the benefit and the burden of the contract to a third person. The owner cannot unreasonably refuse consent where the nominated third party has good credit rating 4. Where the owner wrongfully repossesses the goods, either to recover the goods plus damages for loss of quiet possession or to damages representing the value of the goods lost.
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The Hirer's Obligations The hirer usually has the following obligations: 1. To pay the hire installments 2. To take reasonable care of the goods 3. To inform the owner where the goods will be kept. 4. A hirer can sell the products if, and only if, he has purchased the goods finally or else not to any other third party. The Owner's Rights The owner usually has the right to terminate the agreement where the hirer defaults in paying the installments or breaches any of the other terms in the agreement. This entitles the owner: 1. To forfeit the deposit 2. To retain the installments already paid and recover the balance due 3. To repossess the goods 4. To claim damages for any loss suffered.

3. HOUSING FINANCE COMPANIES

y A housing finance companies means any company which carrying on its main business of financing constructions or acquisition of house or development of land for housing purpose y Housing finance companies also accept the deposits and lend money only for housing purpose y Even though there is a heavy demand for housing finance , these companies not made much progress and as on 31st March,1990 only 17 such companies are reported to the RBI. y The ICICI and IDFC bank took the lead sponsor housing finance ,namely ,HOUSING DEVELOPMENT CORPORATION Ltd. and Confine Homes ltd y National housing bank is the apex institution in the field of housing .

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4. LOAN COMPANIES y . A loan company means any company whose main business is to provide finance through loan and advances. y It does not includes hire purchase finance company or equipment leasing company or housing finance company. y y Loan company is also called as finance company Loan company have very little capital so that they depends upon the public deposits as a main source of finance , so that they offer higher interest rate to attract the more deposits. y Normally loan company provide loan to the wholesaler , retailers ,small-scale industries, self employed people etc. y y Most of loan are given without securities hence they are risky. Due to loan company charge higher interest rate on its loans. loans are given to short period but they can renewed it. y As a working of loan company is not in the interest of the economy ,the banking commission has made the following important suggestion : i. Every loan company has to compulsorily obtain a license from RBI , the RBI without should not allowed to conduct the business ii. A certain liquidity ratio and owned fund deposit ratio must be prescribed , which should be fixed at a lesser rate than the commercial bank. iii. There should be limitation on interest rate offered on deposits It is estimated that around 20% of the deposits of non-banking comes from loan companies.

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5. CHIT FUND COMPANIES

Chit-Funds are a popular mode of saving cum borrowing from time immemorial. The concept of Chit Fund is based upon the principal of mutuality, where by a group of persons participate in a scheme to contribute fixed periodical amounts and distribute the amount so collected, in.The subscribers constitute a Chit Group and the Chit fund company can run many such groups. For each group approval of bye-laws and commencement certificate from the office of the Registrar, Chit Funds, is must. The share of a subscriber in a chit is also known as ticket.

How it Works?
Different chit funds operate in different ways; and there are also many fraudulent tactics practiced by many private firms. The basic necessity of conducting a 'Chitty' is a group of needy people called subscribers. The foreman - the company or person conducting the chitty - brings these people together and conducts the chitty. Foreman is also the person responsible for collecting the money from subscribers, presiding the auctions and keeping records of subscribers. He is compensated a fixed amount (generally 5% of gross chitty amount) monthly for his efforts; other than that the foreman does not has any specific privilege he is just a subscriber of chitty. The general pattern of the chitty can be readily noticed by a simple formula:

Premium*Duration=GrossAmount

Eg: 1000 * 50 = 50,000/-. Where 1000 is the maximum monthly contribution needed from a subscriber, 50 is the duration of the chitty in months and 50,000 is the maximum sum assured. The duration also equals the number of subscribers, as there must be (not more or less) one subscriber to receive the price money every month. The chitty starts on an announced date, every subscriber come together for the auction/lot. As per Kerala chit act, the minimum prize money of an auction is limited to 70% of the gross sum assured that is 35,000 in the above example. When there are more than one person willing to take this minimum sum, lot are conducted and the 'Lucky subscriber' get the price money for the month. If there is no person is willing
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to take the minimum sum, then a reverse auction is conducted where subscribers open-bid for lower amounts; that is from 50,000 >> 49,000 >> 48,000, and so on. The person bidding lowest sum get bid amount . In both the cases the auction discount, that is the difference between the gross sum and auction amount, is equally distributed among subscribers or is deducted from their monthly premium. For example if the auction is settled on a sum of 40,000, then the auction discount of 10,000 (50,000 - 40,000) is divided by 50 (the total number of subscribers) and everyone gets a discount of 200. The same practice is repeated every month and every subscriber get at least a chance of receiving money. Chit Fund Acts Chit funds in India are governed by various state or central laws. Organized chit fund schemes are required to register with the Registrar or Firms, Societies and Chits. y Central Government - Chit Funds Act 1982 (Except the State of Jammu and Kashmir) y Kerala - Kerala Chitties Act 1975 y Tamil Nadu - Tamil Nadu Chit Funds Act, 1961 y Karnataka: The Chit Funds (Karnataka) Rules, 1983 y Andhra Pradesh - The Andhra Pradesh Chit Funds Act, 1971 y New Delhi- The Chit Funds Act,1982 and Delhi Chit Funds Rules, 2007 y Maharashtra - Maharashtra Chit Fund Act 1975 How To Deal With Defaulting Subscriber

If a non-prized subscriber defaults in paying his subscriptions, foreman should follow the following steps:
y y

Give a written notice of such removal to him within 15 days of such removal. File a true copy of such entry with the Registrar, Chit Funds, within 14 days from the date of such removal.

Dont substitute any defaulting subscriber until the expiry of the period for approval i.e. within 7 days from the date of receipt of notice of removal by the
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defaulting subscriber or where an appeal is pending before the R.C.F. till the same has been disposed of.
y

Enter every substitution in the relevant book maintained. A copy of every such entry shall be filed with the RCF within 14 days from the date of substitution.

It is permissible to deduct 25% of the total subscription paid by the defaulting subscriber or 5% of the total chit value, whichever is less.

Foreman is liable to pay the amount of subscription to the defaulting subscriber after the termination of chit or when the chit is prized to the substituted subscriber, whichever is earlier.

If the defaulting subscriber fails to furnish the acknowledgement, foreman should deposit the amount in the S/D Account to be opened in an approved bank. The amount so deposited shall not be withdrawn for any purpose other than for making payment to the defaulting subscribers.

6. INVESTMENT COMPANIES
Generally, an "investment company" is a company (corporation, business trust, partnership, or limited liability company) that issues securities and is primarily engaged in the business of investing in securities. An investment company invests the money it receives from investors on a collective basis, and each investor shares in the profits and losses in proportion to the investors interest in the investment company. The performance of the investment company will be based on (but it wont be identical to) the performance of the securities and other assets that the investment company owns. The federal securities laws categorize investment companies into three basic types:
y y y

Mutual funds (legally known as open-end companies); Closed-end funds (legally known as closed-end companies); UITs (legally known as unit investment trusts).

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Each type has its own unique features. For example, mutual fund and UIT shares are "redeemable" Closed-end fund shares, on the other hand, generally are not redeemable. Instead, when closed-end fund investors want to sell their shares, they generally sell them to other investors on the secondary market, at a price determined by the market. In addition, there are variations within each type of investment company, such as stock funds, bond funds, money market funds, index funds, interval funds, and exchangetraded funds (ETFs). Investment companies are regulated primarily under the Investment Company Act of 1940 and the rules and registration forms adopted under that Act. Investment companies are also subject to the Securities Act of 1933 and the Securities Exchange Act of 1934.

7. MUTUAL BENEFIT COMPANIES (Nidhis)

Mutual Benefit financial companies (Nidhis) are NBFCs notified under Section 620A of the Companies Act, 1956 and primarily regulated by Department of Company Affairs (DCA) under the directions / guidelines issued by them under Section 637 A of the Companies Act, 1956. These companies are exempt from the core provisions of the RBI Act viz., requirement of compulsory registration, maintenance of liquid assets and transfer of profits to Reserve Fund.. Directions relating to ceiling on interest rate, maintenance of register of deposits, furnishing receipt to depositors and submission of returns to Reserve Bank are however applicable to these companies.

Recommendations of the Expert Committee on Nidhis

The statutory regulatory framework for Nidhis suggested by the Committee encompass the following stipulations: I. Entry Point Norms

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(i) Entry point barriers of minimum members of 500 and minimum capital fund of Rs.10 lakh, (ii) Use of 'Nidhi' as part of the name of the company to distinguish between a NBFC and a Nidhi company, restrictions on opening branches by Nidhi companies, (iii) Regulation over issue of equity and preference share capital,

II. Prudential Norms (iv) Prudential norms on income recognition, asset classification, credit concentration, provisioning for bad and doubtful debts, (v) Restrictions over voting rights and other managerial aspects including remuneration and loans to Directors, norms for conduct of affairs of the Board of Directors, prohibition of grant of loans to Directors, etc. (vi) Sectoral exposure ceilings for aggregate loans against each type of collateral security,

III. Regulatory Stipulations (vii) Ceiling on interest rates on deposits and loans, (viii) Minimum and maximum period of deposits, (ix) Advertisement and disclosure norms for deposit acceptance, (x) Net owned fund to deposit ratio of 1:20, (xi) Liquid asset requirements of not less than 10 per cent of deposits, (xii) Adequate reporting system and supervisory framework, submission of quarterly and other periodical returns by the Nidhis to the regulatory authority after certification by the auditor, (xiii) Appointment of auditors by the company out of the three names suggested by the regulatory authority,

IV. Other Measures (xiv) Dividend not to exceed 25 per cent per annum, subject to transfer of equivalent amount to the Reserve Fund, (xv) Penal provisions for various violations, and,

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8. RESIDUARY NON-BANKING COMPANIES (RNBCS)

y RNBCs are a class of NBFCs which cannot be classified as equipment leasing, hire purchase, loan, investment, nidhi or chit fund companies, but which tap public savings by operating various deposit schemes, akin to recurring deposit schemes of banks. y The deposit acceptance activities of these companies are governed by the provisions of Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. These directions include provisions relating to the minimum (not less than 12 months) and maximum period (not exceeding 84 months) of deposits, prohibition from forfeiture of any part of the deposit or interest payable thereon, disclosure requirements in the application forms and the advertisements soliciting deposits and periodical returns and information to be furnished to the Reserve Bank.

y The RNBCs are the only class of NBFCs which are enjoined to pay a minimum rate of interest on their deposits. The floor rate of interest for deposits are specified by the Reserve Bank in terms of RNBC Directions, 1987. There is no upper limit prescribed for RNBCs unlike other NBFCs, which can pay any rate of interest subject to the maximum ceiling prescribed by the Reserve Bank. The floor interest rate payable by RNBCs was revised downwards from 6 per cent to 4 per cent per annum (to be compounded annually) on daily deposit schemes and from 8 per cent to 6 per cent per annum (to be compounded annually) on other deposit schemes of higher duration or term deposits. The provisions of prudential norms were extended to RNBCs, under the provisions of the NBFC Prudential Norms (RB) Directions, 1998 and compliance with prudential norms is mandatory and a prerequisite for acceptance of deposits.

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NBFCS REGISTERED WITH RBI Originally, NBFCs registered with RBI were types as: (I) Equipment leasing company;

(II) Hire-purchase companies (III) Investment companies (IV) Loan Companies

However, with effect from December 6, 2006 the above NBFCs r registered with RBI have : y Asset Finance Company (AFC) y Investment Company (IC) y Loan Company (LC)

Asset Finance Company (AFC)

AFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising there from is not less than 60% of its total assets and total income respectively.

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IV. ROLE OF THE NON-BANKING FINANCIAL COMPANIES

(1)Promotes utilization of savings: Non-banking financial companies play an important role in promoting the utilization of savings among public. NBFCs are able to reach certain deposit segments such as unorganized sector and small browsers where commercial banks cannot reach. These companies encourage savings and promote careful spending of money without much wastage. They offer attractive schemes to suit needs of various section of the society. They also attract idle money by offering attractive rates of interest. Idle money means the money which public keep aside, but which is not used. It is surplus money. (2)Provide easy, timely and unusual credit: NBFCs provide easy and timely credit to those who need it .The formalities and procedures in case of NBFCs are also very less. NBFCs also provide unusual credit, unusual credit means the credit which is not usually provide by banks such as credit for marriage expenses, religious functions, etc. The NBFCs are open to all. Every one whether rich or poor can use them according to their needs. (3) Financial supermarket: NBFCs play an important role of a financial supermarket. NBFCs create a financial supermarket for customer by offering variety of services. Now ,NBFCs are providing a variety of services such as mutual funds , counseling ,merchant banking, etc. apart from their traditional services. Most of the NBFCs reduce their risks by expanding their range of products and activities. (4) Investing funds in productive purpose: NBFCs invest the small savings of the public in productive purposes. Productive purposes means they invest the savings of people in businesses which have the ability to earn good amount of returns. For example- in case of leasing companies when the leasing companies lease equipment to industrialists, the industrialist can carry on their

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production with less capital and the leasing company can also earn good amount of profit. (5) Provide housing finance: NBFCs, mainly the housing finance companies provide housing finance on easy terms and conditions. They play important role in fulfilling the basic human need of housing finance. Housing finance generally needed by middle class and lower middle class people. Hence, NBFCs are blessing for them. (6) Provide investment advice: NBFCs, mainly investment companies provide advice relating to wise investment of funds as well as how to spread the risk by investing in different securities. They protect the small investor by investing their funds in different securities. They provide valuable services to investors by choosing the right kind of securities which will help them in gaining maximum rate of returns. Hence, NBFCs play an important role by providing sound and wise investment advice. (7)Increase the standard of living: NBFCs play an important role in increasing the standard of living in India. People with lesser means are not able to take the benefit of various goods which were once considered as luxury but now are necessity, such as consumer durable like television, refrigerator, air condition, kitchen equipments, etc. NBFCs increases the standard of living by providing consumer goods on easy installment basis. NBFCs also facilitate the improvement in transport facilities through hire-purchase finance, etc. improved and increased transport facilities help in the movement of goods from one place to another and availability of goods, increase the standard of living of the society. (8) Accept deposits in various forms: NBFCs accept deposits in different forms convenient to public. Generally, they receive deposits from public by way of depositor a loaner in any other form. In turn the NBFCs issue debentures, unit certificates, savings certificates ,units, etc. to the public.

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(9) Promote economic growth: NBFCs play a very important role in the economic growth of the country. They increase the rate of growth of the financial market and provide a wide variety of choices to investors. They work on the principle of providing a good rate of return on savings, while reducing the risk to the maximum possible extent. Hence they help in the survival of business.

The following are the Books and Records normally maintained by a Non Banking Finance Company y Cash Book & Bank Book y Depositors Ledger y Due Date & Renewal Register y Interest Register y Loan Ledger y Investment Ledger y General Ledger

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V. FUNCTIONS OF NON-BANKING FINANCIAL COMPANIES

The main function of NBFCs are as follows: 1) Receiving Benefits : The primary function of NBFCs is to receive the deposits from the public in various ways such as issue of debenture , savings certificate , subscription , unit certification ,etc. thus the deposits of NBFCs are made of monitory receive from public by way of deposits or loan or investment or any other form . 2) Lending Money : Another importance function of NBFCs is to lend to public . NBFCs provide financial assistance through : a) Hire purchase finance : Hire purchase finance is given by NBFCs to helps small importance operation professional and middle income group people to buy equipment on basis of hire purchase . After the last installment of hire purchase is paid by the buyer the ownership of the equipment passes the buyer . b) Leasing finance : In leasing finance the borrower of the capital equipment is allowed to use it as hire against the payment of monthly rent .The borrower need not purchase the capital equipment but he buys the right to use it. c) Housing finance : NBFCs provide housing finance to public . they finance for construction of houses ,development of plots, lands etc.

d) Other types of finance provided by NBFCs includes : Compensation finance, finance for religious ceremonies, marriages, social activities paying of old debts etc.
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e) Investment of surplus money : NBFCs invest their surplus money in various profitable areas .In case of investment companies their main function is to invest in securities share the benefits with small investors .

VI. REGULATIONS OF NBFCS

y 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. y However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, y Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or Housing Finance Companies regulated by National Housing Bank. y A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999).

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. NBFCs authorized to accept/hold public deposits besides having minimum stipulated Net Owned Fund (NOF) should also comply with the Directions such as investing part of the funds in liquid assets, maintain reserves, rating etc. issued by the Bank.

25

Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. 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. y 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. y NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. y NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. y NBFCs (except certain AFCs) should have minimum investment grade credit rating. y y y The deposits with NBFCs are not insured. The repayment of deposits by NBFCs is not guaranteed by RBI. Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.

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VII. RESPONSIBILITIES

The NBFCs accepting public deposits should furnish to RBI y Audited balance sheet of each financial year and an audited profit and loss account in respect of that year as passed in the annual general meeting together with a copy of the report of the Board of Directors and a copy of the report and the notes on accounts furnished by its Auditors; y Statutory Annual Return on deposits y Certificate from the Auditors that the company is in a position to repay the deposits as and when the claims arise; y Quarterly Return on liquid assets; y Half-yearly Return on prudential norms; y Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above or with assets of Rs. 100 crore and above irrespective of the size of deposits ; y Monthly return on exposure to capital market by companies having public deposits of Rs. 50 crore and above; and y A copy of the Credit Rating obtained once a year along with one of the Halfyearly Returns on prudential norms as at above

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VIII. BANKS VERSES NON BAKING FINANCIAL COMPANIES

In a country like India with a huge population, it is impossible for banks to cater to all sections of the society as many areas are inaccessible and remote. Also, to provide banking facilities to the illiterate and the poor, finance institutions that work on similar lines as banks are required. In India, this requirement has traditionally been fulfilled by NBFC, or non banking financial company. As the name suggests, NBFC is not a bank though it performs many functions similar to that of banks.. NBFC were created by the government of India as it felt the need to provide banking facilities to the poor and underprivileged who could not get access to banks. NBFC is required to be registered under the Companies Act 1956 to be able to perform functions similar to a bank. Normally, a NBFC is engaged in the business of loans and advances, acquisition of shares, debentures, stocks, bonds and securities issued by the government. It also indulges in hire-purchase, leasing, insurance and chit business.

Commercial Banks Verses Non Baking Financial Companies : While commercial and non banking financial companies are both financial intermediaries receiving deposits from public and lending them . Commercial Bank is called as Big Brother while NBFCs called as Small Brother. But there some important difference between both of tem , they are as follows :

NO. COMMERCIAL BANK

NON -BANKING FINANCIAL COMPANIES

Issue of cheque In case of commercial banks, a in case of NBFCS , there e is no facility cheques are issued against bank
28

deposits .
2

to issue cheques against deposits.

Rate of Interest Commercial bank offer lesser rate of NBFCs offer higher rate of interest on interest on deposits and charge less deposits and charge higher rate of interest on loan as compared interest to NBFCs . on loan as rate of

compared to

commercial bank .

Facilities Provided by Them Commercial bank can enjoy benefits NBFCS are not given such facilities of certain facilities like deposits insurance cover facilities ,refinancing facilities,etc.

Laws Which Governs Them Commercial bank are regulated by NBFCs are regulated by different Banking regulated by Act 1949 and regulation such as SEBI, Companies RBI Act, National housing Bank , Unit fund Act and RBI. NBFC is incorporated under company act of 1956

Types of Assts Commercial bank hold variety of NBFCs specialization in one type of

assets in the form of loans, cash assets for e.g. Hire purchase companies credit, bill of exchange overdraft . specializes in consumer loan while Housing finance companies specialise in housing finance only.

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Banking Versus NBFCs Regulatory In India:

BANK Functional restriction Carrying on checking A/C, Remittance functions and Permitted typical retail banking Acceptance deposits of

NBFCs

Not permitted

term Permitted ,subject to term Permitted restriction(short term limitations

subject ,but

to term

deposits are accepted by deposit is at least 1 year bank) Trusteeship nominee Leasing and hire purchase Banks allowed to a limit of No limit 10%of there assets Operating lease Treated as a non-finance Business Securitization Permitted ,though treated as non-financial business function, Permitted No express bar is there

Permitted subject to capital Permitted subject to capital norms and other limitation norms and other limitation

Licensing restriction Need for license Any new bank needs a It is comparative much license.. licensing norms easier to get registration as are tightly control and an NBFC. Besides there currently registered , many of which are available for sale. Ownership structure/ change in ownership Indian ownership Not more than 10% of While prior intimation of capital in bank may be takeover is required in case acquired by foreign owner . of NBFCs , there is no need to for change in
30

generally, it is difficult to are some 30000 NBFCs get a license for bank

voting control. There is no limit to percentage of

holding permitted in a case of the NBFCs Foreign ownership Up to 74% in the banking 100%capital may be held companies may be acquired by foreign owner subject to for foreign owners minimum requirement norms Capital adequacy requirement and provision Credit control and sectroral Part of assets of bank is Only assets restriction 15% of deposits capitalization under FDI

blocked due to SLR and liabilities of nbfcs is to CRR held in certain permitted securities.

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IX. BROAD CLASSIFICATION OF NBFCS

A. NBFCs not accepting public deposits B. NBFCs accepting public deposits

What is Public Deposits Public deposits means any receipt of money by way of deposit or loan or in any other form but however which excludes the following, a. . Amount received by way of share capital b. Amount contributed as a capital by partners of firm c. Amount received from bank or financial institutions d. Amount received in the ordinary course of business by way of security deposits, dealership deposits, earnest money and advances against order of goods or properties or services e. Amount received from a registered money lender (not being a company) f. Amount received from Government or Semi Government Bodies g. Any amount received by company from any other company (inter corporate deposits) h. Amount received from a director or shareholder by a Private company (subject to furnishing a declaration that amount has not been given out of borrowed funds) i. Amount raised by issue of bonds or debentures j. Amount brought in by promoters by way of unsecured loans in pursuance or in accordance with lending institution

A. NBFCs Not Accepting Public Deposits NBFCs not accepting public deposits can be further classified in 2 categories 1. NBFCs engaged in Loan Investment, Hire Purchase Finance and Equipment leasing 2. NBFC which acquires shares or securities of their group companies

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Matters of Compliance (NBFC not accepting Public Deposit)

NBFC not accepting Public Deposit will be regulated in limited manner a. Within 30 days of commencement of new financial year a Resolution to be passed to the effect that company do not hold any Public Deposits and would not accept any Public Deposit during the year. b. Auditor to mention in Audit Report about Grant or refusal of registration (if incorporated before 9/1/97). c. Auditor to mention in Audit Report whether company has obtained a certificate of Registration from RBI (if incorporated on or after 9/1/97) d. As far as accountings are concerned directions of prudential norms shall be applicable for different accounting and disclosure y y y y y y Income from Investments Accounting Standards issued by ICAI Accounting for Investments Clarification of Assets (standard/sub standard/Doubtful/loan) Provisioning requirement Disclosure of Provisioning etc.

e. NBFC having assets more than 50 crores to constitute audit committee. f. Auditor should verify that, if any of the NBFC regulations are applicable, then the same are properly complied with. qualified statement. g. Auditor can also report directly to the reserve bank of India for such qualified or unfavorable statement. If comments are unfavorable or

qualified, the auditors report shall also state the reason for such unfavorable or

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B. NBFCs ACCEPTING PUBLIC DEPOSITS

 Norms For Nbfcs Accepting Public Deposits: Following important norms or rules to be followed by NBFCs accepting public deposits: 1. what constitute public deposit ? Public deposit includes fixed or reoccurring deposits which are receive from friends, relatives, shareholders of a public limited company and money raised in issued of secured debentures and bond or from borrowing of banks or financial institutions .Deposits from directors or inter-corporate deposits received from foreign national citizens and from shareholders of private limited companies.

2. Who is allowed to accept deposits from public? The NBFCs which have net owned capital of less than Rs.25 lakh will not be permitted to accept deposit from the public. In order to raise funds the NBF can borrow from some other source also.

3. NBFCs have to submit financial statement: The NBFCs will have to submit their annual financial statement and returns if they accept public deposit.

4. Certain deposits are not regulated by RBI: The RBI has given directions to NBFCs accepting public deposit to regulate the amount of deposit. Rate of interest, time period of deposit, brokerage and borrowing received by them. The directions do not include amount received or generated by central bank or state government. Amount received from IDBI, ICICI NABARD, Electricity Boards and IFCI are also not included in direction of RBI. Amount received from mutual funds, directors of firm and shareholders also do not come under the category of amount received for regulation from RBI. 5. Ceilings (limits on interest): There is a maximum limit on the rate of interest of deposits. The limit charges with RBI directions. 6. Period of deposits:
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The deposit can be accepted for a minimum period of 12 months and a maximum period of 2 year.

7. Register of depositors: The NBFCCs have to maintain a register of depositors with details like name, address, amount, date of each deposit, maturity period and other details according to the require by RBI.

8. Credit rating: To protect the public NBFCs are require to get themselves approved by the RBI through credit rating agencies. The NBFCs which have not owned funds of Rs. 25 lakhs can obtain public deposits if they are credit rated and they receive a minimum investment grade for their fixed deposits from an approved rating agency

The NBFCs have to submit this different agency is as follows: y The credit analysis and research limited (CARE) gives the minimum rating of BBB in triple B rating. y The investment information and credit rating Agency of the India LTD. gives the minimum rating of (MA-) y The credit rating information services of India Ltd. (CRISIL) and gives a minimum rating of (FA-) y FITCH Rating India Pvt. Ltd. provides (BBB-) as its acceptable rating. If the credit rating is below the minimum investment grate the NBFCs has to send report to the RBI within 15 days of received the grating. During that time the NBFC has to accept the deposits and within 3 years makes the repayments to the depositors. These regulation are part of the RBI move to ensure that NBFCs who accept deposits are adequately capitalized and have some minimum net owned funds. .
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9. Guideline for Prudential Norms : Prudential norms means the rules for income recognition according standards asset classification , CRAR ratio , etc. Prudential norms laid by RBI for NBFCs are as follows : a. Income recognition : Income from non performing assets shall be taken into account only when it is receive and on accrual basis .An assets become an NPA when it stops to generate any income b. Assets classification : NBFCs should classified their loans and advances and any other forms of credit into broad groups namely : y Standards assets : Standard assets are those in which there is no default in repayment of principle or interest .In simple words a standard assets is not an NPA assets and is completely risk free. y A sub-standard Assets A sub-standards asset is one which has been classify as a NPA for a period of not more than 2 years. y A Doubtful assets : A Doubtful assets is one which has remained as NPA for a period of more than 2 year. y Loss Assets : A loss assets is one where loss has been identified by the NBFC or auditors or the RBI inspection but the amount has not been written off wholly or partly .

36

c. Provision on Bad and Doubtful Debts : NBFCs should may provision for bad and doubtful debts on the basis of classification of assets as shown below:

Nature of Assets
1 2 3 4 (a) Standards Asset Sub-standards Asset Loss Assets Doubtful assets

Provision to be made
NIL 10% 100%

To the extent of the advance 100% not covered by realizable value of security.

(b) (c) (d)

Doubtful up to one year Doubtful between one to 3 year More than 3 year

20% 30% 50%

d. Capital To Risk Adequacy Ratio : The Capital TO Risk Adequacy Ratio for NBFCs with net owed funds of Rs. 25 lakhs is 12% from the march 31st 1999. e. Disclosure of balance sheet : The NBFCs have to show NPAs bad and doubtful debts provision in depreciation in investment in the balance sheet .

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 Requirement For Public Deposit y An NBFC having Net Owned Funds of Rs. 200.00 lakhs and above only can accept Public Deposits y It has obtained Minimum Stipulated Credit Rating from any one of the approved Credit Rating Agencies at least once in a year y Copy of the Credit Rating should be sent to the RBI along with the Return on Prudential Norms. y If the Credit Rating is either down graded or upgraded, the NBFC is required to report this fact to the RBI within 15 days from the date when it receives such information. y 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. y 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 y y y y Date of Receipt Name of the Depositor Amount of Deposit in words and figures Rate of Interest
38

Maturity Date

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.

Forms and particulars of advertisement y 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: o The name of the company; o The date of incorporation of the company; o The business carried on by the company and its subsidiaries with details of branches or units, if any; o Brief particulars of the management of the company; o Names, addresses and occupations of the directors; o Profits of the company before and after making provisions for tax for the three financial years immediately preceding the date of advertisement; o Dividends declared by the company in respect of the said years;

39

o A summarized financial position of the company as in the two audited balance sheets immediately preceding the date of advertisement.

Validity Of the Advertisement An advertisement issued in accordance with these rules shall be valid until the expiry of six months from the date of closure of the financial year in which it is issued or until the date on which the balance sheet is laid before the company in general meeting or where the annual general meeting for any year has not been held, the latest day on which that meeting should have been held in accordance with the provisions of the Companies Act, 1956 (1 of 1956), whichever is earlier, and a fresh advertisement shall be made in each succeeding financial year for invitation of deposits during that financial year. 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 3[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

 Branches And Appointment Of Agents To Collect Deposits No NBFC shall open its branch or appoint agents to collect deposits except as provided hereunder: 1. a) non-banking financial company having the certificate of registration issued under Section 45 IA of the Reserve Bank of India Act, 1934 (2 of 1934) and otherwise entitled to accept public deposits as per Paragraph 4(4) of these Directions, may open its branch or appoint agents if its Within the State where its Registered Office is situated and

b) NOF is more than Rs. 50 crores anywhere in India and its credit is AA or
40

above. 2. (a) for the purpose of opening a branch, a non-banking financial company shall notify to the Reserve Bank of its intention to open the proposed branch; (b) on receipt of such advice, the Reserve Bank may, on being satisfied that in the public interest or in the interest of the concerned non-banking financial company or for any other relevant reasons to be recorded, reject the proposal and communicate the same to the non-banking financial company; If no advice of rejection of the proposal under (b) above is communicated by the Reserve Bank within 30 days from the receipt of such advice, the non-banking financial company may proceed with its proposal

 Guidelines For New Deposits The Reserve Bank of India has issued 'know your customer' guidelines for nonbanking financial companies, which are similar to those for commercial banks. These guidelines, the RBI said, would be applicable to all NBFCs, including Miscellaneous Non-Banking Companies (chit fund companies) and Residuary NonBanking Companies. Guidelines
y

Customer identification: 'Know Your Customer' (KYC) should be the key guiding principle for identification of an individual / corporate customer (depositor or borrower).

Accordingly, the KYC framework should have two-fold objective, (i) to ensure customer identification and verifying his identity and residential address; and (ii) to monitor transactions of a suspicious nature.

NBFCs should ensure that the identity of the customer, including beneficial owner is done based on disclosures by customers themselves.
41

Typically easy means of establishing identity would be documents such as Permanent Account Number (PAN), ration card, driving license, Election Commission's identity card, passport, et cetera in case of individuals and registration certificate, partnership deed/agreement, et cetera and other reliable documents in respect of companies, firms and other bodies.

Verification through such documents should be in addition to the introduction by a person known to the NBFC.

Procedures for existing customers

y

In respect of existing customers, NBFCs should ensure that gaps and missing information in compliance of KYC guidelines on customer identification procedure is filled up and completed before June 30, 2004.

Ceiling and monitoring of cash transactions

y y

NBFCs would normally not have large cash withdrawals and deposits. However, wherever transactions of Rs 10 lakh (Rs 1 million) and above are undertaken, they should keep record of these transactions in a separate register maintained at branch, as well as at Registered Office.

Such information should be made available to regulatory and investigating authorities, when demanded.

Guidelines and monitoring procedures

y

The board of directors of NBFCs should formulate policies and procedures to operationalise the guidelines and put in place an effective monitoring system to ensure compliance by their branches.

Early computerization of branch/office reporting will facilitate prompt generation of such reports and monitoring.

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Internal control systems

y

Duties and responsibilities should be explicitly allocated among the staff for ensuring that policies and procedures are managed effectively and that there is full commitment and compliance to an effective KYC programme in respect of both existing and prospective customers/clients.

Internal audit/inspection
y

Internal auditors must specifically scrutinize and comment on the effectiveness of the measures taken by branches / offices of NBFC in adoption of KYC norms and steps towards prevention of money laundering.

Specific cases of violation should be immediately brought to the notice of head / controlling / registered office.

Record keeping
y

NBFCs should prepare and maintain proper documentation on their customer relationships and cash transactions of Rs 10 lakh and above.

The records of all such transactions should be retained for at least ten years after the transaction has taken place and should be available for perusal and scrutiny by audit functionaries as well as regulators and law enforcement authorities; as and when required, at the branch as well as at registered office.

Training of staff and management

y

It is important that all the operating and management staff is made fully aware of the implications and understand the need for strict adherence to KYC norms.

NBFCs may take suitable steps to impart training to their operational staff on anti-money laundering measures.

These guidelines have been issued under Sections 45K and 45L of the RBI Act, 1934 and any contravention of the same will attract penalties under the relevant provisions of the Act, the RBI said

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X.

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 o Net Owned Funds o Credit Rating o 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 with in the ceiling prescribed (prescribed on time to time basis) by RBI. Brokerage paid is within the ceiling of 2% of the Public Deposits 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
44

 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 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 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.
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XI. RECOMMENDATION COMMITTEES

The RBI Act, 1934 was amended on 1st December ,1964 by the Reserve Bank Act 1963 to include provision relating to NBFCs receiving deposits and financial institution. It was observed that the exiting legislative and regulatory framework required further refinement and improvement because of the raising the number of defaulting NBFCs and need for the efficient and quick system for Redressal of grievances of the individual depositors .With a view to review the existing framework and address these shortcoming , various committees were formed and report were submitted by them , some of the committees and recommendation were are given hereunder : 1. JAMES RAJ COMMITTEE(1974) The James Raj Committee was constituted by the RBI in 1974 . After studying the various money circulation schemes which were floated in the country during that time and taking in to consideration the impact of such schemes on the economy. Committee after extension research and analysis had suggested for a ban on prize chit and other scheme 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. 2. DR. A.C.SHAH COMMITTEE(1992) The working group on financial companies constitute in April 1992 i.e. the Shah committee set out agenda for the reforms in the NBFCs sector. This committee made wide ranging recommendation covering , inter-alia entry point norms , compulsory registration of large sized NBFCs , prescribing prudential norms for NBFCs on the line of bank, stipulation of credit rating for acceptance of public deposits and more statutory power to RBI for better regulation of NBFCs .

46

3. KHAN COMMITTEE(1995) This Group was set up with the objective of designing a comprehensive and effective supervisory framework for the NBFCs segment of financial system . The important recommendation of this committee are as follows : i. Introduction of a supervisory rating system for the registration of NBFCs. ii. Supervisory attention and focus of RBI only those NBFCs having net owned fund of RS-100 lakhs and more . iii. Introduction of the system whereby the names of the NBFCs which had not complied with the regulatory framework / directions of the bank or had failed to submit the prescribed return consecutively for two year published in NBFCs regional newspapers.

4. NARASIMHAN COMMITTEE(1991) This committee was formed to examine all aspects relating to the organization structure and functioning of financial system 5. RECOMMENDATIONS OF TASK FORCE ON NBFCS (1998)

Financial Companies Regulation Bill, 2000

The Task Force constituted by Government of India (Chairman: Shri C.M. Vasudev) to review the regulatory and supervisory framework for NBFCs and unincorporated bodies and address the shortcomings in dealing with the investors' complaints submitted its report on October 28, 1998. The recommendations, which have since been accepted by the Government, can be stratified into four broad strands, according to their status of implementation, viz recommendations which (a) were implemented with immediate effect (on December 18, 1998) by modifying the existing notification/Directions; (b) required statutory amendments, (c) required amendments to the Directions under the RBI Act, and (d) needed to be implemented over a period of time through administrative action. The Government of India framed the Financial Companies Regulation Bill,
47

2000 to implement the recommendations requiring statutory changes, as also consolidate the law relating to NBFCs and unincorporated bodies with a view to ensure depositor protection,

State Acts for Protection of Interests of Depositors

The Task Force on NBFCs had recommended that State Governments should be empowered to initiate penal action against those NBFCs which function illegally or accept public deposits without any authorisation.

FINANCIAL COMPANIES REGULATION BILL, 2000 The RBI Act, 1934 relating to the regulation and supervision of financial companies, hitherto known as non-banking financial companies (NBFCs). This included prohibition of acceptance of deposits by unincorporated bodies and incorporating the recommendations of the Task Force on NBFCs, which had made certain recommendations to this effect. The salient features of the proposed legislation, which are materially different from the corresponding provisions of RBI Act or are new provisions are as follows: I. Basic Stipulations (i) The draft bill has been named as 'Financial Companies Regulations Bill, 2000'. All the NBFCs will be known as Financial Companies instead of NBFCs. (ii) The term 'public deposit' has been defined in the Bill for the first time and the definition would mean the same as at present in the NBFC Directions. (iii) There would be a nine member Advisory Council for Financial Companies under the Chairmanship of Deputy Governor, drawing on members from the representatives of Associations of Financial Companies and other experts in related areas to advise the Reserve Bank. (iv) NBFCs holding /accepting public deposits would be prohibited from carrying on any non-financial business without the prior approval of the Reserve Bank and the non-financial business presently carried on by them would have to be wound up or transferred to a subsidiary within three years. Any other business or fee-based activity like insurance agency business, portfolio management, etc., would require prior approval of the Reserve Bank.
48

II .Entry Point Norms (v) The requirement of obtaining the COR from the Reserve Bank would be compulsory for all financial companies, irrespective of whether the companies accept public deposits or not. However, the nonpublic deposit taking financial companies would require minimum owned fund of Rs.25 lakh, whereas the public deposit taking financial companies would require minimum net owned fund (NOF) of Rs.2 crore and a specific authorization from the Reserve Bank to accept public deposits. (vi) There would be powers with the Reserve Bank to (a) prescribe different capital for different classes of financial companies, (b) raise the requirement of minimum owned fund (entry norm) from Rs.25 lakh toRs.200 crore for new financial companies not accepting public deposits, (c) raise the minimum NOF(entry norm) from the present ceiling of Rs.2 crore to Rs.10crore in the case of new financial companies intending to accept public deposits, and (d) raise the minimum NOF from the present level of Rs.25 lakh to Rs.2 crore for theexisting financial companies accepting public deposits. However, sufficient time would be allowed to such financial companies to attain the enhanced capital requirement. (vii) The requirement of creation of reserve fund would be applicable only to the financial companies accepting public deposits, as against the earlier requirement applicable to all NBFCs. (viii) Unsecured depositors would have first charge on liquid assets and assets created out of the deployment of the part of the reserve fund. (ix) The financial companies would require prior approval of the Reserve Bank for any change in the name, change in the management or change in the location of the registered office.

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6. MALEGAM COMMITTEE REPORT (January 21, 2011) The Board of Directors of the Reserve Bank of India, at its meeting held on October 15, 2010 formed a Sub-Committee of the Board to study issues and concerns in the microfinance sector in so far as they related to the entities regulated by the Bank. The composition of the Sub-Committee was as under:Shri Y.H. Malegam Chairman Shri Kumar Mangalam Birla Dr. K. C. Chakrabarty Smt. Shashi Rajagopalan Prof. U.R. Rao Shri V. K. Sharma (Executive Director) Member Secretary The terms of reference of the Sub-Committee were as under:-.

1. To review the definition of microfinance and Micro Finance Institutions (MFIs) for the purpose of regulation of non-banking finance companies (NBFCs) undertaking microfinance by the Reserve Bank of India and make appropriate recommendations. 2. To examine the prevalent practices of MFIs in regard to interest rates, lending and recovery practices to identify trends that impinge on borrowers interests. 3.To examine and make appropriate recommendations in regard to applicability of money lending legislation of the States and other relevant laws to NBFCs/MFIs. 4 To examine the role that associations and bodies of MFIs could play in enhancing transparency disclosure and best practices 5. To recommend a grievance redressal machinery that could be put in place for ensuring adherence to the regulations recommended at 3 above.

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Recommendations Recommendation 1: New Category of NBFCs Called NBFC MFIs Recommend that a separate category be created for NBFCs

operating in the Microfinance sector, such NBFCs being designated as NBFC-MFI. The Sub-Committee recommends that a NBFC-MFI may be defined as A company (other than a company licensed under Section 25 of the Companies Act, 1956) which provides financial services pre-dominantly to low-income borrowers with loans of small amounts, for short-terms, on unsecured basis, mainly for incomegenerating activities, with repayment schedules which are more frequent than those normally stipulated by commercial banks and which further conforms to the regulations specified in that behalf. Recommendation 2: NBFC To Satisfy Certain Conditions NBFC MFI Recommend that a NBFC classified as a NBFC-MFI should satisfy the following conditions: a) Not less than 90% of its total assets (other than cash and bank balances and money market instruments) are in the nature of qualifying assets. To Be Classified as

b) For the purpose of (a) above, a qualifying asset shall mean a loan which satisfies the following criteria :. i. the loan is given to a borrower who is a member of a household whose annual income does not exceed Rs-50000

ii. the amount of the loan does not exceed Rs. 25,000 and the total outstanding indebtedness of the borrower including this loan also does not exceed Rs. 25,000;

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iii. the tenure of the loan is not less than 12 months where the loan amount does not exceed Rs. 15,000 and 24 months in other cases with a right to the borrower of prepayment without penalty in all cases;

iv. the loan is without collateral;

v. the aggregate amount of loans given for income generation purposes is not less than 75% of the total loans given by the MFIs;

vi. the loan is repayable by weekly, fortnightly or monthly installments at the choice of the borrower. 7. RBIS RECOMMENDATIONS FOR NBFCS Tuesday, 30 August 2011

1. RBIs committee has recommended narrowing of arbitrage between banks and NBFCs largely by capping the latters leverage .The new norms will require NBFCs to maintain Tier I ratio of 12% versus 6% for banks. In a worst case, the ROE impact of the new Tier I requirement could be up to 600bps 2. The other important recommendations are on setting of liquidity norms, aligning asset classification and provisioning norms with banks and raising standards of supervision and governance. Stringent asset classification and provision norms could impact PFC and REC more than others; IDFC and HDFC are less affected. Higher Tier I ratio will lower arbitrage and cap ROE The RBI committee has targeted capital adequacy norms to narrow the regulatory arbitrage between the business models of banks and NBFCs. 3 The committee has recommended raising the Tier I CAR from 10% (applicable from Mar-12) to 12% over a three year period, which will be twice that of banks. As per RBI, this is likely to moderate growth rates and ensure
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well capitalised balance sheet to absorb the risk of asset quality pressures. While most of the large NBFCs are well capitalised with Tier I CAR +16% 4 Committee has recommended period of 3 years to improve Tier I CAR, LIC HF has lower Tier I of 9% and HDFCs Tier I ratio is at 12% (but its warrant conversion in Aug-12 will boost tier I ratio). In a worst case, the ROE impact of the new Tier I requirement could be up to 600bps. The risk weight on capital market and commercial real estate exposure has been raised to 150% and 125%, respectively.

5 In order to minimise the risk of short-term liquidity crunch, the committee has recommended that NBFCs should hold liquid assets (cash, short-term bank deposits, G-Secs, treasury bills and money market instruments) that cover net cash outflow over next 30 days.

Focus on corporate governance and supervision Firstly, RBI has recommended a. Raising the minimum asset base of registered NBFCs and b. Ensuring that principal activity forms 75% of total assets and/or income. In case of large NBFCs, RBI has proposed to a. Enhance disclosure norms and b. Enhance functions of the board. ROE gap between NBFCs will widen; HDFC and IDFC are top picks These believe that the new norms will increase profitability gap among NBFCs the ones with better quality of loans and higher core profitability (ROA) will be able to deliver higher ROE.

Other recommendations include Amendment of the Reserve Bank of India Act to insist on a minimum asset size of over Rs. 50 crore for registering new NBFCs.

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Existing NBFCs below this limit may deregister or be asked to seek a fresh certificate of registration at the end of two years, the working group said.

The transfer of shareholding of 25% or above, and merger or acquisition of any registered NBFC should have prior RBI approval, it added.

XII. NBFCs COMPANIES FOR STUDY

Companies 1. LIC Housing finance 2. Reliance capital 3. Shiram Transport finance 4. IDFC

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HOUSING FINANCE COMPANY

LIC HOUSING FINANCE LTD

The main objective of the Company is providing long term finance to individuals for purchase / construction / repair and renovation of new / existing flats / houses. The Company also provides finance on existing property for business / personal needs and gives loans to professionals for purchase / construction of Clinics / Nursing Homes / Diagnostic Centers / Office Space and also for purchase of equipments. The Company possesses one of the industry's most extensive marketing network in India : Registered and Corporate Office at Mumbai, 6 Regional Offices, 13 Back Offices and 158 marketing units across India. In addition the company has appointed over 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates (CRAs) to extend its marketing reach. Back Offices spread across the country conduct the credit appraisal and administrative functions.

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The Company has set up a Representative Office in Dubai and Kuwait to cater to the Non-Resident Indians in the GLCC countries covering Bahrain, Dubai, Kuwait, Qatar and Saudi Arabia. Today the Company has a proud group of over 10,00,000 prudent house owners who have enjoyed the Company's financial assistance.

Profile & Progress

Provides loans for homes, construction activities, and corporate housing schemes.

Around 91% of the loan portfolio derived from the retail segment and the rest from large corporate clients financial products and venture capital fund.

y y

An offshoot of Life Insurance Corporation of India (LIC), incorporate in 1989. 1352 Direct Sales Agents (DSAs), 7085 Home Loan Agents (HLAs) and 777 Customer Relationship Associates (CRAs) comprise its pan-Indian marketing network.

Listed on the Bombay Stock Exchange Limited, National Stock Exchange of India Limited and the Luxembourg Stock Exchange.

y y y y y y

More than 10,00,000 satisfied customers across the country since inception. Improved return on net worth by 267 basis points to 23.80 percent Reduced net NPA to a record low of 0.21 percent Enhanced PAT 37.30 percent to Rs. 531.62 crore Un-interrupted dividend payment record since 1990. Recommended 30 percent increase in dividend over previous year i.e from 100 percent to 130 percent.

MACRO ECONOMIC ANALYSIS Opportunities

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Easy availability of finance from the housing finance companies and commercial banks at lower interest rates, increased salaries and availability of fiscal and tax benefits are propelling the demand for housing properties. The growth of the Information Technology Enabled Services (ITES), industry has been a significant contributor of housing property demand in recent years. ITES firms are moving from traditional centers like Mumbai, Delhi, Bangalore, Hyderabad and Chennai to the National Capital Region, Pune, Chandigarh, Jaipur, etc. in order to be cost effective. This is resulting in not only the boom in residential property markets but also in the institutional property markets in these cities. There is great demand for modern office buildings and commercial spaces in India.

Threats (bottlenecks) Impact of legal charges and documentation fees There are taxes / duties / fees payable to the state at the construction stage. There are two aspects of the cost namely: i) monetary cost and; ii) cost in terms of time devoted in obtaining various permissions and clearances.

The number of permissions and documentation required can be quite large. Further, permissions have to be taken from different departments and that too sequentially. This delays the process of housing construction and occupation. The actual fees imposed by the government are not necessarily high but the time taken to obtain requisite permissions is very long, procedures cumbersome and sometimes involves extra payments to facilitate the movement of files and getting the transaction through, is significant vis--vis the statutory fees. The delays highlight the sluggishness of the market by increasing the gap between change in demand and the market response to it.

Future Outlook:

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It is estimated that the housing finance industry will be able to maintain a higher growth in fresh origination of residential home loans over next three to five years mainly due to increased affordability of the borrower i.e. ratio of average property price to average annual income. The average age of borrowers has declined over the years, while the number of double-income households has grown significantly thereby enabling them to borrow higher loan quantum due to increased affordability and repayment capacity. The growth drivers will continue to increase demand for selfoccupied residential housing; Revival of economy will certainly lead to a steady increase in monthly incomes across key sectors. Rising proportion of double income households, renewed confidence in higher income generation, reassurance of job security and availability of variety of financing options should stimulate growth of the housing sector. All these factors will further boost the impact of increased affordability, leading to the sectors steady and comfortable growth. Looking forward, LIC Housing Finance would like to remain focused in end-user segment for growth and increased profitability and wish to make the coming year, a year of further consolidation and progress by crossing greater milestones.

RELIANCE CAPITAL

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Reliance Capital Limited a Non-Banking Financial Company (NBFC) registered with the Reserve Bank of India under section 45-IA of the Reserve Bank of India Act, 1934. as a public limited company in 1986 and is now listed on the Bombay Stock Exchange and the National Stock Exchange (India). RCL has a net worth of over Rs '3,300 crore and over 165,000' shareholders. On conversion of outstanding equity instruments, the net worth of the company will increase to about Rs 4,100 crore. It is headed by Anil Ambani and is a part of the Reliance ADA Group. Reliance Capital ranks among the top 3 private sector financial services and banking companies, in terms of net worth.

Reliance Capital has interests in

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y y y y y y y

Asset management. Mutual funds. Life and general insurance. Private equity and proprietary investments. Stock broking. Depository services and financial products. Consumer finance and other activities in financial services. RELIANCE Pvt. Ltd. have got approvals from RBI as NBFC and the

National Housing Bank for doing the business of retail financing i.e. consumer finance and homes finance respectively. Mutual Fund, Portfolio Management, Business mix of Reliance Capital Asset Management Insurance Consumer Finance & Home Finance Offshore Fund Life Insurance, General Insurance Mortgages, Loans against Property , Business Loans, Loans for Commercial Vehicles, Loans for Construction Equipment, Auto Loans, Loans against shares, Business Loans

Broking and Distribution

Stocks

Commodities

and

Derivatives,

Wealth Management Services, Portfolio Management Services, Investment Banking, Foreign Exchange and Offshore Investment, Third Party Products Asset Reconstruction institution broking Other Businesses ,Private Equity ,Exchange venture capital

FINACIAL PERFORMANCE OF RELIANCE CAPITAL

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Reliance Capital has interests in asset management and mutual funds; life and general insurance; commercial finance; equities and commodities broking; investment banking; wealth management services; distribution of financial products; exchanges; private equity; asset reconstruction; proprietary investments and other activities in financial services. Reliance Commercial Finance aims to enable people fulfill all their ambitions by creating assets for personal & business requirements. It offers an exhaustive suite of financial solutions Mortgages Loans, Loans against property, Loans for Commercial Vehicles, Loans for Construction Equipment, SME Loans, Auto Loans, business loans, Loans against Securities and Infrastructure Financing Whats more, with the help of our easy-to-use loan calculator, you can decide on the tenure, interest rate and the loan amount that best suits you. Reliance Commercial Finance has a loan book size of Rs. 13,030 crore (US$ 2.9 billion), with a customer base of over 1,05,000 customers, as on June 30, 2011, across the top 18 Indian metros. Reliance Commercial Finance prides itself in creating customized financial solutions for our partners and customers by offering great Turnaround Time. . Reliance Capital has a net worth of Rs. 7,887 crore (US$ 2 billion) and total assets of Rs. 32,419 crore (US$ 7 billion) as on June 30, 2011.

Macro Economic Analysis

Opportunities y y y y Low retail penetration of financial services / products in India Tremendous brand strength and extensive distribution reach Opportunity to cross sell services Increasing per-capita GDP
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y Threats y y y y

Changing demographic profile of the country in favor of the young

Competition from local and multinational players. Execution risk. Regulatory changes. Attraction and retention of human capital.

Future Outlook

India has survived one of the worst global crises in history better than most other economies. The recent recovery in many of the leading macro indicators of economic activity has led many to believe that the worst is over for the Indian economy and we are on our way to a higher growth trajectory. There has been a resurgence in sales across a variety of sectors from automobiles to cement, steel and electricity production. Rail and port traffic too has seen an up tick.

SHRIRAM TRANSPORT FINANCE

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Shriram Transport Finance

It presence in financial services viz., commercial vehicle financing business, consumer finance, life and general insurance, stock broking, chit funds and distribution of financial products such as life and general insurance products and units of mutual funds. Apart from these financial services, the group is also present in nonfinancial services business such as property development, engineering projects and information technology Company was incorporated in the year 1979 and is registered as a Deposit taking NBFC with Reserve Bank of India under Section 45IA of the Reserve Bank of India Act, 1934. STFC decided to finance the much neglected Small Truck Owner. Shriram understood the power of 'Aspiration' much before marketing based on 'Aspiration' became

MAJOR DEMAND DRIVERS 1. Roadways have remained a dominant transport mode: Over the last few decades, roadways have dominantly improved their share due to greater coverage, higher flexibility of door-to-door delivery and lower risk of handling losses. Further, the governments investment in the development of national highways over the last few years has led to higher demand for road transport. With

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further improvement in road infrastructure and higher growth expected in road transport (which are primarily transported through roadways), road freight is expected to account for 63.5 percent of the total freight movement. 2. Higher replacement demand: Higher CV sales over the last few years were also supported by replacement demand which stemmed from stricter regulations on overloading and emissions. The Supreme Court, in November 2005, banned overloading of goods trucks and trailers in excess of prescribed gross vehicle weight. To reduce pollution, the Automotive Research OWNERSHIP TREND IN CVS Shriram Transport caters to small truck operators (STO owning less than five trucks) and first-time users (FTU),and is currently the only organized player financing this segment (others are private financiers). STOs and FTUs control around 75 percent of the total truck fleet; however, they have poor freight origination skills and are therefore dependent on brokers for a majority of their contracts.

Public issue of NCDs

To explore and develop additional source of financing and with a view to meet The Companys business operations, The Company, pursuant to the Securities and Exchange Board of India (Issue and Listing of Debt Securities) Regulations, 2008 and subject to the necessary approvals, consents and permissions, issued and allotted Secured Non Convertible Debentures, through a public issue and raised a sum of Rs. 99,999.96 lacs. Considering the potential in raising funds by issue of non convertible debentures (NCDs), The Board, at its meeting held on January 18, 2010, has decided to offer and allot, subject to the aforementioned Regulations and such approvals as may be necessary, secured / unsecured, NCDs not exceeding Rs. 50,000 lacs in one or more trenches through another public issue which is was opend for public subscriptions in May 2010.

SWOT ANALYSIS Strengths

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y y

The pioneer in the pre-owned CVs financing sector Knowledge-driven (products as well as local customers) and relationship-based business model.

Significant expertise and experience in valuation of pre-owned CVs as well as in recovery/collection of monthly payments from customers

Pan-India presence with 484 branch offices all over the country.

A well-defined and scalable organization structure, capable of supporting surging growth Low delinquency as assets are backed with adequate cover and are easy to repossess with immediate liquidity

Strong financial track record driven by fast growth in AUM with low Non Performing Assets (NPAs)

Experienced and stable management team Strong relationships with public, private as well as foreign banks, institutions and investors

Weaknesses y The Companys business and its growth are directly linked to the GDP growth of the country. y Any slowdown in GDP growth may have a negative impact on the business

Opportunities y Growth in the CV market driven by the economic growth and the infrastructure development in the country y Strong demand for construction equipment Strong demand for passenger CVs Strong demand for pre-owned tractors Loans for working capital requirements of CV users

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Partnerships with private financiers will enable the Company to enhance its reach without significant investments in building infrastructure

Threats y Maintaining relationships with customers who are mobile and have no proper documentation y y Maintaining asset quality Regulatory changes in the Non-Banking Financial Company (NBFC) and transportation sectors

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INFRASTRUCTURE DEVELOPMENT FINANCE COMPANY

Infrastructure Development Finance

Infrastructure Development finance Company Limited (IDFC or the Company) was set up in 1997 to act as a financier and catalyst for the development of private sector sponsored infrastructure projects in India. Over the last 12 years, and more so since the Initial Public Offering (IPO) in July 2005, IDFC has pursued a focused growth strategy to evolve rapidly into a one-stop-shop for infrastructure finance in India, capable of meeting the increasingly complex and ambitious requirements of an expanding client base. Infrastructure typically involves projects with long gestation periods, with each project going through different phases of implementation. Broadly speaking, it begins with conceptualizing a project. Then the full project plan is developed, followed by financial closure. Next comes the execution phase, where the underlying physical infrastructure is actually created. Finally, the project moves to
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revenue generation, when the underlying asset starts getting utilized and generates actual income streams. Each of the phases has different risk return profiles. IDFCs expertise lies in a deep understanding of the risks and opportunities associated with the different phases of a projects lifecycle, and appropriately packaging differentiated financial solutions that best meet the requirements of investors and clients at the different stages by progressively expanding the range of its skills, products and services beyond the traditional project lending to investment banking as well as different types of asset management. This diversified range of product and service capability has strengthened IDFCs core business model and has propelled the Company into one of Indias premier financial services platform leveraging knowledge and talent to span the areas of infrastructure project finance, asset management and investment banking. Much of IDFCs business is about mobilizing international as well as domestic capital. Naturally, like other businesses, it has to deal with demand and supply side issues. While the demand side issues are domestic in nature and relate largely to the appetite for private investment especially in the Infrastructure sector, the supply side issues are more global. These include factors like cost of capital, liquidity and investor confidence that are intrinsic to international capital flows. Macro Economic Analysis y The infrastructure NBFC status,, will allow IDFC to improve fund mobilization and ease overall funding pressure on the firm. the status will give it higher single-party/group y Exposures, and borrowing from banks could increase to 20% of net worth. Non-infrastructure NBFCs can currently raise up to 15% of net worth. y Additionally, the firms plan to raise Rs3,500 crore over the next 12 months is a pre-emptive bid to raise capital and stay relevant with the SBIs of the world, The state-owned State Bank of India is Indias largest lender. y In the next three years, the opportunity in the infrastructure landscape looks quite attractive so we think it is a good time to capitalize on the opportunity, he said, estimating that infrastructure lenders could stand to lend close to Rs3 trillion over the next three-four years, especially in power, roads and gas distribution

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XIII.

RESEARCH METHODOLOGY

RESEARCH DESIGN Since the research is for industry analysis and it is structured for NBFCS. The research uses secondary data for analysis and interpretation. OBJECTIVE The confined objectives of the present study are: y y To analyze the market of NBFCs in India To study the financials of NBFCs

DATA COLLECTION There are two methods of data collection that can be considered when collecting data for research purpose. These data collection types include the following: 1. Primary data 2. Secondary data Both the secondary and primary data collection methods were used in the study.

PRIMARY DATA The primary data required for this study was collected by visiting the financial institute and analyzing the information provided by them.

SECONDARY DATA The secondary data for the research was collected from books and internet websites, annual reports etc. The source of the secondary data was NBFCs and Internet.

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DATA ANALYSIS AND INTERPRITATION

EXHIBIT 1

The above graph denotes the percent of people who have company policy. 40% people said that yes they have company policy 60% people said that they have bank policy because its more safety.

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EXHIBIT 2

The above graph denotes percentage of people have company policy Analyses of the graph are as follows 15% people said that they have Reliance Company policy. 9% said that they preferred to IDFC. 13% said they have interested in Shriram Transport Finance ltd. 18% said that having LIC Housing Finance Company policy. 45% having other company policy.

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EXHIBIT 3

The above graph denotes percentage of people like take laons against Analyses of the graph are as follows 12% people said that they have like to take mortgage loan. 40% said that they preferred to loans on property. 20% said they have interested in loans for commercial vehicle. 18% said that will take loans against securities and infrastructure financing.

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EXHIBIT 4

Analyses of the graph are as follows 60% people said that they like safety of the loans 25% said that they preferred to loans on returns. 9% said they have interested in loans for commercial vehicle. 6% said that will take loans against securities and infrastructure financing.

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EXHIBIT 5

The above graph denotes percentage of people have company policy Analyses of the graph are as follows 17% people said that service as excellent. 55% said that they service is good. 20% said they service is average. 5% said that is poor. 3% said service is very poor.

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EXHIBIT 6

The above graph denotes the percent of people who like to company policy for family member. 70% people said that yes they have company policy 30% peaple said that they have bank policy because its more safety.

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EXHIBIT 7

The above graph denotes percentage of factors affect development Analyses of the graph are as follows 15% people said that innovative product service has to develop 65% said that they customer service is develop more to satisfy customers. 12% said that economic growth has to develop. 8% said that development in promotion.

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EXHIBIT 8

The above graph denotes percentage people like company Analyses of the graph are as follows 45% people said that innovative product service has to develop 55% said that they customer service has to develop more to satisfy customer.

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XIV. RECOMMENDATION:

Domestic Financial markets can be integrated by making NBFCs Channel partners to Banks. It will help in better allocation and funds availability. It will also help in better management of Financial services sector in India..

Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to be more transparent and hassle free. There should be more stringent norms for the defaulters.

Strengthening the professionalism of NBFC sector through education and training: NBFCs are organized players. Regulatory body needs to educate people about NBFC.

To reduce in interest cost and hence benefit the ultimate consumer.

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XV.

CONCLUSION:

NBFSc are gaining momentum in last few decades with wide variety or products and services. NBFSc 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 financial only 40% to the trading sector and rest is coming from the NBFS and private money lenders. At the same line 50%of the credit requirement of the manufacturing is provided by NBFSc. 65% of the private construction activities was also financed by NBFSc. Now they are also financing second hand vehicles. NBFSc can play a significant role in channelizing the remittance from abroad to states such as Gujarat and Kerala. NBFSc In India have become prominent in a wide range of activities like hire purchase finance equipment lease finance, loans, investment, and so on. NBFSc have greater reach and flexibility in tapping resources. In desperate times, NBFSc could survive owing to their aggressive character and customized services. NBFSc are doing more fee-based business than fund based. They are focusing now on retailing sectorhousing finance, personal loans and marketing of insurance. Many of the NBFSc have ventured into domain of mutual funds and insurance. NBFCs undertaken both life and general insurance business as joint venture participation in insurance companies. The strong NBFSc have successfully emerged as financial Institution in short span of time and are in the process of converting themselves into financial super market. The NBFSc are taking initiatives to establish a self-regulatory organization (SRO). At present , NBFSc are represented by the association of leasing and finance services (ALFS), federation of India Hire purchase association and equipment leasing association of India. The reserve Bank wants these three industry bodies to come together under one root. The reserve Bank has emphasis on formation of SRO particularly for the benefits of smaller NBFSc.

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XVI. BIBLIOGRAPHY

y y y y y y y

Guidance taken from Suyog kavle MBA in finance Books on Banking and insurance Economic Times http://www.rediff.com/money/2011/jan/07rbi.htm http://www.nbfc.rbi.org.in http://www.banknetindia.com/finance/fbanking.htm http://www.financialexpress.com/news/Column---Why-NBFCs-may-not-wantto-be-banks/

http://rbidocs.rbi.org.in/rdocs/Forms/PDFs/CIC260411F.pdf

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XVII. ANNEXURE  Questionnaire

1. Do you have any company policy? o Yes o No

2. Which company policy do you have? o Reliance capital o IDFC o Shriram Transport o LIC housing finance ltd. o Any other

3. Which policy do you like to choose? o Mortgages Loans o Loans against property o Loans for Commercial Vehicle o Loans against Securities and Infrastructure Financing

4. Factors that would affect your decision while purchasing the company policy? o Returns o Safety o Liquidity o Market condition

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5. The services in your company are provided in timely manner. o Excellent o Good o Average o Poor o Very poor

6. Are you or your family member are planning to buy an company policy? o Yes o No

7.

Major areas where development takes place in company? o Innovative product service o Customer service o Economic growth o Promotion

8. Who maintain the good relation with the customer? o Bank o Nbfcs

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