BANKING AND INSURANCE

ASSIGNMENT ON:

NON-BANKING FINANCIAL
INSTITUTIONS







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INDEX

Sr No.
Contents
Page No.
1. INTRODUCTION 5
2. NBFC MEANING 7
3. DEFINATION 8
4. CLASSIFICATION OF NBFCs 9
5. ROLE OF NBFC 10
6. FUNCTIONS OF NBFC 13
7. COMMERCIAL BANK V/S NFBC 15
8. TOP 20 NBFCs IN INDIA 17
9. CONCLUSION 18
10. BIBLOGRAPHY 20








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INTRODUCTION:

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

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

The NBFCs in advanced countries have grown significantly and are now coming up
in a very large way in developing countries like Brazil, India, and Malaysia etc. The
non-banking companies when compared with commercial and co-operative banks
are a heterogeneous (varied) group of finance companies. NBFCs are
heterogeneous group of finance companies means all NBFCs provide different
types of financial services.
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NBFCs supplement the role of the banking sector in meeting the increasing
financial need of the corporate sector, delivering credit to the unorganized sector
and to small local borrowers. NBFCs have more flexible structure than banks. As
compared to banks, they can take quick decisions, assume greater risks and tailor-
make their services and charge according to the needs of the clients. Their
flexible structure helps in broadening the market by providing the saver and
investor a bundle of services on a competitive basis.

NBFCs differ widely in their ownership: Some are subsidiaries of large
Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are
owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd,
Muthoot Bankers, Muthoot Financial Services Ltd a key player in Kerala financial
services.

Non-banking Financial Institutions carry out financing activities but their
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
including investment. All such Institutions are financial intermediaries and when
they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or
Investment Institutions.




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NON-BANKING FINANCIAL COMPANY (NBFC)

MEANING:

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

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.
Non-banking institution which is a company and which has its principal business
of receiving deposits under any scheme of arrangement or any other manner,
or lending in any manner is also a non- banking financial company.


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DEFINITIONS OF NBFC

Non-Banking Fi nanci al Company has been defined as:
(i) A non-banking institution, which is a company and which has its principal
business the receiving of deposits under any scheme or lending in any
manner.
(ii) Such other non-banking institutions, as the bank may with the previous
approval of the central government and by notification in the official gazette,
specify.
NBFCs provide a range of services such as hire purchase finance, equipment lease
finance, loans, and investments. NBFCS have raised large amount of resources
through deposits from public, shareholders, directors, and other companies and
borrowing by issue of non-convertible debentures, and so on.
Non-banking Financial Institutions carry out financing activities but their
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilize the public savings for rendering other financial services
including investment. All such Institutions are financial intermediaries and when
they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or
Investment Institutions:
UNIT TRUST OF INDIA.
LIFE INSURANCE CORPORATION (LIC).
GENERAL INSURANCE CORPORATION (GIC).
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CLASSIFICATION OF NBFCs:

This classification is in addition to the present classification of NBFCs into deposit-
taking and Non-deposit-taking NBFCs. Depending on the nature their major
activity, the non-banking financial companies can be classified into the following
categories, they are:


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





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ROLE OF 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 borrowers were commercial bank
cannot reach. These companies encourage savings and promote careful spending
of money without much wastage. They offer attractive schemes to suit needs of
various sections 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) Provides 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 provides unusual
credit means the credit which is not usually provided 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 create a financial supermarket for customers by offering a 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.

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(4) Investing Funds in Productive Purposes:
NBFCs invest the small savings in productive purposes. Productive purposes
mean 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 lease
equipment to industrialists, the industrialists can carry on their 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
term and conditions. They play an important role in fulfilling the basic human
need of housing finance. Housing Finance is 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 investors 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 plays an
important role by providing sound and wise investment advice.
(7) Increase the Standard of living:
People with lesser means are not able to take the benefit of various goods which
were once considered as luxury but now necessity, such as consumer durables
like Television, Refrigerators, Air Conditioners, Kitchen equipments, etc. NBFCs
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also facilitate the improvement in transport facilities through hire- purchase
finance, etc. Improved and increased transport facilities help in 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 forms convenient to public. Generally, they receive
deposits from public by way of depositor a loaner in any form. In turn the NBFCs
issue debentures, units certificates, savings certificates, units, etc. to the public.
(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
investors. They work on the principle of providing a good rate of return on saving,
while reducing the risk to the maximum possible extent. Hence, they help in the
survival of business in the economy by keeping the capital market active and
busy. They also encourage the growth of well- organized business enterprises by
investing their funds in efficient and financially sound business enterprises only.
One major benefit of NBFCs speculative business means investing in risky
activities. The investing companies are interested in price stability and hence
NBFCs, have a good influence on the stock- market. NBFCs play a very positive
and active role in the development of our country.


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FUNCTIONS OF NON- BANKING FINANCIAL COMPANIES
(1) Receiving Benefits:
The primary function of nbfcs is receive deposits from the public in various ways
such as issue of debentures, savings certificates, subscription, unit certification,
etc. thus, the deposits of nbfcs are made up of money received from public by
way of deposit or loan or investment or any other form.
(2) Lending Money:
Another important function of nbfcs is lending money to public. Non- banking
financial companies provide financial assistance through.
(a) Hire Purchase Finance:
Hire purchase finance is given by nbfcs to help small important operators,
professionals, and middle income group people to buy the equipment on
the basis on Hire purchase. After the last installment of Hire purchase paid
by the buyer, the ownership of the equipment passes to the buyer.
(b) Leasing Finance:
In leasing finance, the borrower of the capital equipment is allowed to use
it, as a hire, against the payment of a 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 the public, they finance for construction
of houses, development of plots, land, etc.
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(d) Other Types of Finance Provided by NBFCs:
Consumption finance, finance for religious ceremonies, marriages, social
activities, paying off old debts, etc. NBFCs provide easy and timely finance
and generally those customers which are not able to get finance by banks
approach these companies.
(e) Investment of Surplus Money:
NBFCs invest their surplus money in various profitable areas.











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Commercial Bank (v/s) Non-Banking Financial Companies
While commercial banks and non-banking financial companies are both financial
intermediaries (middleman) receiving deposits from public and lending them.
Commercial bank is called as Big brother while the NBFC is called as the
Small brother. But there are some important differences between both of them,
they are as follows:

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

In case of NBFCs there is no facility
to issue cheques against bank
deposits.
2 Rate of Interest:
Commercial bank offer lesser rate
of interest on deposits and charge
less rate of interest on loans as
compared to NBFCs.


NBFCs offer higher rate of interest
on deposits and charge higher rate
of interest on loans as compared to
Commercial banks.
3 Facilities Provided by them:
Commercial banks can enjoy the
benefit of certain facilities like
deposit insurance cover facilities,
refinancing facilities, etc

NBFCs are not given such facilities.



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4


Law which governs them:
Commercial banks are regulated by
Banking Regulation Act 1949 and
RBI.

NBFCs are regulated by different
regulation such as SEBI, Companies
Act, National Housing Bank, Unit
Fund Act and RBI.
5 Types of Assets:
Commercial banks hold a variety of
assets in the form of loans, cash
credit, bill of exchange, overdraft
etc.

NBFCs specialize in one types of
asset. For e.g.: Hire purchase
companies specialize in consumer
loans while Housing Finance
Companies specialize in housing
finance only.










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List of Top 20 Non-Banking Financial Companies in India



Company Name Market Cap.
(Rs. Billion)*
HDFC
Power Finance Corp.
Reliance Capital
IDFC
Rural Electricity Corp.
Shree Global
Shriram Transport Finance
Bajaj Finserv
Indiabulls
Religare Enterprises
Bajaj Holdings
M&M Financial
LIC Housing Finance
Edelweiss Capital
KGN Industries
Shriram City
IFCI
JM Financial
India Infoline
Centrum Finance
445.3
150.1
105.2
77.1
67.4
61.5
39.7
27.1
25.7
24.5
23.5
22.6
20.1
17.9
17.1
15.8
15.8
15.8
13.1
11.1
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CONCLUSION:
NBFCs are gaining momentum in last few decades with wide variety of products
and services. NBFCs collect public funds and provide loan able funds. There has
been significant increase in such companies since 1990s. They are playing a vital
role in the development financial system of our country. The banking sector is
financing only 40 per cent to the trading sector and rest is coming from the NBFC
and private money lenders. At the same line 50 per cent of the credit requirement
of the manufacturing is provided by NBFCs. 65 per cent of the private
construction activities was also financed by NBFCs. Now they are also financing
second hand vehicles. NBFCs can play a significant role in channelizing the
remittance from abroad to states such as Gujarat and Kerala.
NBFCs in India have become prominent in a wide range of activities like hire
purchase finance, equipment lease finance, loans, investments, and so on. NBFCs
have greater reach and flexibility in tapping resources. In desperate times, NBFCs
could survive owing to their aggressive character and customized services. NBFCs
are doing more fee-based business than fund based. They are focusing now on
retailing sector-housing finance, personal loans, and marketing of insurance.
Many of the NBFCs have ventured into the domain of mutual funds and
insurance. NBFCs undertake both life and general insurance business as joint
venture participants in insurance companies. The strong NBFCs have successfully
emerged as Financial Institutions in short span of time and are in the process of
converting themselves into Financial Super Market.
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The NBFCs are taking initiatives to establish a self-regulatory organization (SRO).
At present, NBFCs are represented by the Association of Leasing and Financial
Services (ALFS), Federation of India Hire Purchase Association (FIHPA) and
Equipment Leasing Association of India (ELA). The Reserve Bank wants these three
industry bodies to come together under one roof. The Reserve Bank has emphasis
on formation of SRO Particularly for the benefit of smaller NBFCs.














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BIBLOGRAPHY
Books:
1) Statutory guidances for non- banking financial companies.
Taxman.

Websites:
www.nbfc.com
www.rbi.com
www.howstuffworks.com
www.Wikipedia.com