Presentation On

Non Banking Finance Companies (NBFC)

By Jayesh
Chaudhari

Introduction
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

NBFCs and Banks

Differentiation
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 .
1. It is not a part of the payment and settlement system and as such
cannot issue cheques to its customers
2. Deposit insurance facility of DICGC is not available for NBFC
depositors unlike in case of ban
3. NBFC cannot indulge primarily in agricultural or industrial activity
4. NBFC cannot engage in construction of immovable property
5. NBFC cannot accept demand deposits
6. NBFC cannot collect deposits in the manner of a bank

Types of
NBFCs in
INDIA

1.Risk-pooling
institutions

2.Contractual
savings
Institution

Insurance
Companies

Institutional
Investor
(Mutual
funds)

3. Market
Maker

Asset Finance
Companies

4.Specialized
sectorial
finance

Limited
financial
service
provider
To specific
sector

5.Financial
service
providers

Financial
service
provider

1. Risk pooling Institution

Insurance companies underwrite economic risks associated with death,

illness, damage to or loss of property, and other risk of loss. They
provide a contingent promise of economic protection in the case of loss.
There are two main types of insurance companies: life insurance and
general insurance. General insurance tends to be short-term, while life
insurance is a longer contract, ending at the death of the insured.

Although insurance companies do not have banking licenses, in most

countries insurance has a separate form of regulation specific to the
insurance business and may well be covered by the samefinancial
regulatorthat also covers banks. There have also been a number of
instances where insurance companies and banks have merged thus
creating insurance companies that do have banking licenses.

In India IRDA(Insurance regulatory and development authority of India)

is regulatory authority of insurance companies.

2.Contractual savings institutions

Contractual savings institutions (also called institutional investors)

provide the opportunity for individuals to invest in collective
investment vehicles in a fiduciary rather than a principle role.
Collective investment vehicles invest the pooled resources of the
individuals and firms into numerous equity, debt, and derivatives
promises. The individual, however, holds equity in the CIV itself
rather what the CIV invests in specifically. The two most popular
examples of contractual savings institutions are mutual funds and
private pension plans.

The two main types of mutual funds are open-end and closed-end
funds. Open-end funds generate new investments by allowing the
public buy new shares at any time. Shareholders can liquidate their
shares by selling them back to the open-end fund at the net asset
value. Closed-end funds issue a fixed number of shares in an IPO. The
shareholders capitalize on the value of their assets by selling their
shares in a stock exchange.

Mutual funds can be delineated along the nature of their

investments. For example, some funds make high-risk, high return
investments, while others focus on tax-exempt securities. Still
others specialize in speculative trading (i.e. hedge funds), a
specific sector, or cross-border investments.

Pension funds are mutual funds that limit the investors ability to
access their investment until after a certain date. In return,
pension funds are granted large tax breaks in order to incentivize
the working public to set aside a percentage of their current
income for a later date when they are no longer amongst the labor
force (retirement income).

3. Market Maker

Market makers are broker-dealer institutions that quote both a buy

and sell price for an asset held in inventory. Such assets include
equities, government and corporate debt, derivatives, and foreign
currencies. Once an order is received, the market maker
immediately sells from its inventory or makes a purchase to offset
the loss in inventory. The difference in the buying and selling
quotes, or the bid-offer spread, is how the market-maker makes
profit. Market makers improve the liquidity of any asset in their
inventory.

4. Specialised sectorial Finance

Specialized sectorial financiers provide a limited range of financial services to a

targeted sector. For example, leasing companies provide financing for
equipment, while real estate financiers channel capital to prospective
homeowners. Leasing companies generally have two unique advantages over
other specialized sectoral financiers. They are somewhat insulated against the
risk of default because they own the leased equipment as part of their
collateral agreement. Additionally, leasing companies enjoy the preferential tax
treatment on equipment investment.

5. Financial Service provide

Other financial service providers include brokers (both securities

and mortgage), management consultants, and financial advisors.
They operate on a fee-for-service basis. For the most part,
financial service providers improve informational efficiency for the
investor. However, in the case of brokers, they do offer a
transactions service by which an investor can liquidate existing
assets.

Classification of NBFCs
1. Liabilities Based Classification
2. Asset Based Classification
3. Size Based Classification

1. Liability based Classification

NBFCs are classified on the basis of liabilities into two categories,
viz,
1. Category A companies, (NBFCs having public deposits or NBFCsD),
2. Category B companies, (NBFCs not having public deposits or
NBFCs-ND).
Activity Based Classification

2. Asset Based Classification

There are mainly Eight types of NBFCs
1.
2.
3.
4.
5.
6.
7.
8.

Asset Finance Company

Investment Company
Loan Company
Core Investment Companies
Infrastructure Finance Companies
Factor
Micro Finance Institutions
Infrastructure Debt Funds

3. Size Based Classification

In 2006, nondeposit taking NBFCs with assets of Rs. 100 crore and
above were

labeled as Systemically Important NonDeposit taking

NBFCs (NBFCsNDSI), and prudential regulations such as capital

adequacy requirements, exposure norms along with, reporting
requirements were made applicable to them

Identify company as an NBFCs

In order to identify a particular company as an NBFC, consider

both, the assets and the income pattern from the last
audited balance sheet to
decide principal business
Financial are 50 per cent of its Total Assets (netted
off by Intangible Assets) Assets more than

Income from financial assets should be more than

50 per cent of the gross income

2. Asset Based Classification

1. Asset Finance Company

Asset Finance Company (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.
60% of Total Assets in Financing Real/Physical
Assets
60% of Total Income arises from the aforesaid
Assets

2. Investment Company

Investment Companies (IC) means any company which is a

financial institution carrying on as its principal business of
acquisition of securities
50% of Total Income arises from the aforesaid Assets
50% of Total Assets in Investment Activity &

3. Loan Company

Loan Company(LC) means any company which is a financial

institution carrying on as its principal business the
providing of finance whether by making loans or
advances or otherwise for any activity other than its own but
does not include an Asset Finance Company
50% of Total Assets in Lending &
50% of Total Income arises from the aforesaid
Assets

4. Infrastructure Finance Co.

IFC means a nonbanking finance company which deploys at least

75 per cent of its total assets in infrastructure loans

Minimum Net Owned Funds INR 300 Lakhs

Acceptance of public deposit not allowed

5. Core Investment Companies

CIC means an NBFC which carries on the business of acquisition of
shares and securities and which satisfies the following conditions:
Not less than 90% of Net Assets should be in
the form of
Investment in Group Companies
Not less than 60% of Net Assets are held as
equity stake
in Companies

6. NBFC Factor

NBFC Factor means a company which carries on factoring

business as its principal business and satisfies the following
criteria:
Min Net Owned Funds 5 Crores
At least 75% of its total assets should be
financial assets
At least 75% of its gross income should be
from factoring business

7. NBFC MFI
An NBFCMFI is defined as a nondeposit taking NBFC (other
than a company licensed under Section 25 of the Indian
Companies Act, 1956) that fulfils the following conditions:
Min NOF 5 Crores
Not less than 85% of its net assets are in the
nature
of qualifying assets

8. IDFNBFC

IDFNBFC means a nondeposit taking NBFC that has Net

Owned Fund of Rs 300 crores or more and which invests only in
Public Private Partnerships (PPP) and post
commencement operations date (COD) infrastructure projects
which have completed at least one year of satisfactory
commercial operation and becomes a party to a Tripartite
Agreement.

NBFCs Accepting Deposits

Only those NBFCs holding a valid Certificate of Registration with

authorization to accept Public Deposits can accept/hold public
deposits.
The NBFCs accepting public deposits should have minimum
stipulated Net Owned Fund and comply with the Directions issued
by RBI.
The maximum rate of interest a NBFC can offer is fixed by RBI
from time to time.
The NBFCs are allowed to accept/renew public deposits for a
minimum period of 12 months and maximum period of 60
months.

Ceiling on Acceptance of Public

Deposits
Category of NBFC

Ceiling on public deposits

EL/HP
Companies
maintaining 1.5 times of NOF or Rs 10
CRAR of 15% without credit rating
crore whichever is less
EL/HP Companies with CRAR of
12%
and
having
minimum 4 times of NOF
investment grade credit rating
LC/IC with CRAR of 15% and 1.5 times of NOF
having
minimum
investment
grade credit rating
EL: Equipment Leasing
HP: Hire Purchase
LC: Loan Company
IC: Investment Company
CRAR: Capital to Risk weighted Assets
Ratio

Defaults in Repayment of Deposit

If an NBFC defaults in repayment of deposit, the depositor can

approach Company Law Board or Consumer Forum or file a civil
suit to recover the deposits.

NBFCs Regulations

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.

NBFCs cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time.

NBFCs cannot offer gifts/incentives or any other additional benefit

to the depositors.

The deposits with NBFCs are not insured.

The repayment of deposits by NBFCs is not guaranteed by RBI.

The NBFCs having assets size of Rs. 500 crore and above but not
accepting public deposits are required to submit Quarterly Return on
important financial parameters of the company.

The NBFC is required to furnish the information in respect of any

change in the composition of its Board of Directors, address of the
company and its Directors and the name/s and official designations
of its principal officers and the name and office address of its
Auditors.

Overdue Interest

Overdue interest is payable to the depositors in case the company has

delayed the repayment of matured deposits.

Such interest is payable from the date of receipt of such claim by the
company or the date of maturity of the deposit whichever is later, till
the date of actual payment.

If the depositor has lodged his claim after the date of maturity, the
company would be liable to pay interest for the period from the date
of claim till the date of repayment. For the period between the date of
maturity and the date of claim it is the discretion of the company to
pay interest.

Depositors of NBFCs

Public deposits are unsecured.

A proper deposit receipt which should, besides the name of the

depositor/s state the date of deposit, the amount in words and
figures, rate of interest payable and the date of maturity should be
insisted. The receipt shall be duly signed by an officer authorized
by the company in that behalf.

The Reserve Bank of India does not accept any responsibility or

guarantee about the present position as to the financial soundness
of the company or for the correctness of any of the statements or
representations made or opinions expressed by the company and
for repayment of deposits/discharge of the liabilities by the
company.

Role of Official Liquidator

The liquidator performs duties of winding up.

Becomes custodian of the property of the company and runs the

day-to-day affairs of the company.

Draw up a statement of affairs of the company in prescribed form

containing particulars of assets of the company, its debts and
liabilities, names/residences/occupations of its creditors, the debts
due to the company and such other information as may be
prescribed.

The liquidator realizes the assets of the company and arranges to

repay the creditors according to the scheme approved by the court.

Publishes
in
the
newspaper
inviting
claims
depositors/investors in compliance with court orders.

from

Owned Fund and Net Owned

Fund

Owned Fund means aggregate of the paid-up equity capital and free
reserves as disclosed in the latest balance sheet of the company after
deducting there from accumulated balance of loss, deferred revenue
expenditure and other intangible assets.

The amount of investments of such company in shares of its

subsidiaries, companies in the same group and all other NBFCs and
the book value of debentures, bonds, outstanding loans and advances
made to and deposits with subsidiaries and companies in the same
group is arrived at. The amount thus calculated, to the extent it
exceeds 10% of the owned fund, is reduced from the amount of owned
fund to arrive at Net Owned Fund.

Responsibilities

Audited balance sheet of each financial year and an audited profit and
loss account in respect of that year as passed in the 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.
Statutory Annual Return on deposits - NBS 1;
Certificate from the Auditors that the company is in a position to repay
the deposits as and when the claims arise;
Quarterly Return on liquid assets;
Half-yearly Return on prudential norms;
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
Monthly return on exposure to capital market by companies having
public deposits of Rs. 50 crore and above; and
A copy of the Credit Rating obtained once a year along with one of the
Half-yearly Returns on prudential norms.

Prepayment of Public Deposits

NBFCs cannot grant any loan against a public deposit or make

premature repayment of a public deposit within a period of three
months (lock-in period) from the date of its acceptance.
A NBFC subject to above provisions, if it is not a problem
company, may permit after the lockin period premature
repayment of a public deposit at its sole discretion, at the rate of
interest prescribed by the company.
A problem NBFC is prohibited from making premature repayment
of any deposits or granting any loan against public
deposits/deposits, as the case may be.
The prohibition shall not, however, apply in the case of death of
depositor or repayment of tiny deposits i.e. up to Rs. 10000/subject to lock in period of 3 months in the latter case.

Maintenance of Liquid Asset

The minimum level of liquid asset to be maintained by NBFCs is 15

per cent of public deposits outstanding as on the last working day
of the second preceding quarter.
Of the 15%, NBFCs are required to invest not less than ten percent
in approved securities and the remaining 5% can be in
unencumbered term deposits with any scheduled commercial
bank.

Residuary Non-Banking Company

(RNBC)

Residuary Non-Banking Company is a class of NBFC which is a

company and has as its principal business the receiving of
deposits, under any scheme or arrangement or in any other
manner and not being Investment, Leasing, Hire-Purchase, Loan
Company.
These companies are required to maintain investments as per
directions of RBI, in addition to liquid assets.

Deposits by RNBCs

There is no ceiling on raising of deposits by RNBCs but every RNBC

has to ensure that the amounts deposited and investments made
by the company are not less that the aggregate amount of
liabilities to the depositors.
Such companies are required to invest in a portfolio comprising of
highly liquid and secured instruments viz. Central/State
Government securities, fixed deposit of scheduled commercial
banks (SCB), Certificate of deposits of SCB/FIs, units of Mutual
Funds, etc.

Interest rate payable by RNBCs

The amount payable by a residuary non-banking company in

respect of deposits received shall not be less than the amount
calculated at the rate of 5% (to be compounded annually) on the
amount deposited in lump sum or at monthly or longer intervals;
and at the rate of 3.5% (to be compounded annually) on the
amount deposited under daily deposit scheme.
Further, a RNBC can accept deposits for a minimum period of 12
months and maximum period of 84 months from the date of
receipt of such deposit.
They cannot accept deposits repayable on demand.

RBI Regulations on Banking Stakes in

NBFCs

Foreign banks operating in India and Local banks will not be

permitted to own more than 10% of deposit taking finance
company.
The restriction would not apply to investment in housing finance
companies.

RBI Regulations on Banking Stakes in

NBFCs

Foreigners are eager to enter Indias tightly regulated financial

sector to benefit from rapid growth in consumer and business
lending, but RBI is wary of opening up the sector.
With some exceptions banks can typically invest in a finance
company, either deposit taking or non deposit taking, only upto 10
percent of the capital funds.
The combined exposure in all finance companies can go up to 40%
of the capital funds.

Major NBFCs in India

Housing Development Finance companies

Power Finance Corporation
Reliance Capital
Infrastructure Development Finance Company
Rural Electricity Corp.
Shree Global
Shriram Transport Finance
Bajaj Holdings
M & M Financials
Muthoot Finance
Birla Global Finance
Cholamandalam Investment & Finance Co. Ltd
First Leasing Company of India
LIC Housing Finance
Sundaram Finance
CanFin Homes
Countrywide Finance

Formation Procedure
A company with main object clause/ancillary clause for carrying out
NBFI activities (check object clause)
Obtain checklist of requirements from RBI website
Fill up prescribed form, available on RBI website, according to
instructions with the requirements
Fill up the eform provided in excel format Get the required
certifications of the statutory auditors/chartered accountants (as the
case may be)
Submit softcopy on RBI website before submission of the hard copy.
Obtain the printout of successful submission of the softcopy.
Mention the date of
submission on the print if date is not
appearing on print.
Submit the hardcopy application in duplicate to regional office of RBI
Each page in the application file should be numbered Prepare the
application in triplicate so that a replica is with the applicant for
future reference.

Commencement of Business

NBFC must commence its business within 6 months

from the date of CoR
If not commenced within 6 months, CoR will stand
withdrawn
No change in control prior to commencement of its
business
CoR: Certificate of Registration

Raising
of Funds

Equity/preference
instruments, bond,
commercial papers,
debentures, deposits,
bank finance to NBFCs
etc

Public Issue

Private Placement

Compliances Cos Act, 2013

Borrowing Vs Lending
Passing of Board Resolution under Section 179 of the
Companies Act, 2013
Shareholders Resolution under Section 180(1)(a) and Section
180(1)(c) of the Companies Act, 2013
Preferential issue Section 42 of the Companies Act, 2013 and
Rules made there under
Compliance under Companies (Acceptance of Deposits) Rules,
2013 (yet to be notified) will not be applicable if NBFC is a
borrower.

Compliances SEBI Laws

Borrowing Vs
Lending
Compliance with applicable rules & regulations of recognized
stock exchange in India
Compliance with the SEBI (Issue of Capital and Disclosure
Requirements) Regulations, 2009
Compliance with the SEBI (Issue and Listing of Debt Securities)
Regulations, 2008
Compliance with SEBI (Debenture Trustee) Regulations, 1993

Compliances RBI Laws

Borrowing Vs Lending
Issuance of NonConvertible Debentures (Reserve Bank)
Directions, 2010, as issued by the RBI (applicable if maturity
period is upto 1 year)
RBI Circular dated July 27, 2013 (Raising Money through Private
Placement by NBFCsDebentures etc.)
NonBanking Financial Companies Acceptance of Public Deposits
(Reserve Bank) Directions, 1998
Master Circular on ECB Guidelines dated
Consolidated FDI Policy 2013 issued by DIPP

No. of Subsidiaries

Section 186(1) of the Companies Act,2013

Exemption to NBFCS not available
Two layers of investment companies are allowed
Horizontal Vs Vertical

L/G/S to Specified Category

Section 185 of the Companies Act, 2013
Loan, Guarantee & security to Related Party
Exemption to those companies who provide the same in the ordinary
course ofbusiness
Interest on the loan as per the rate prescribed by the RBI

Investment, Loan, Guarantee

etc.
Section 186 of the Companies Act, 2013
Exemption to those companies who are engaged in the business of
financing of companies
Interpretation of the word financing

Merger & Amalgamation

Prior Public Notice
Copy of Courts order to be delivered to RBI within 1 month from the
date of order
option to every depositor to decide whether to continue the deposits
NBFC D : Prior permission of the RBI
Cross Border Merger RBI is yet to specify Rules, presently prior
permission is required

FDI in NBFCs
Approval Route/FIPB approval
18 categories under NBFC
Minimum Capitalization Norms
Not allowed to set up subsidiary for any other activity
Leasing & Finance covers only financial leases
and not operating leases.

Provisioning Norms
Classification of Assets
Standard Assets
Interest and Principal Repayment are regular
Substandard assets
Doubtful Assets
Loss Assets
Non Performing Asset(NPA) : Interest/Principal outstanding
for more than 6 month

Statutory Auditor Certificate (All

NBFCs)
Submission of certificate from
statutory auditors
Certificate at the end of FY certifying the eligibility of the
company to hold Certificate of Registration as NBFC
Certificate to indicate asset and income pattern
To be given within one month from the finalization of the balance
sheet not later than 30th Dec. in any case
"Every non-banking financial company shall finalise its balance
sheet within a period of 36 3 months from the date to which it
pertains"
Auditors to submit Report to the Board of Directors
The auditor shall also make a separate report to the Board of
Directors of the Company

Matters to be included in the auditors report

The auditors report (Issued to Directors) on the accounts of a NBFC shall
include a statement on the following matters, namely:
In the case of all nonbanking financial companies
I. Whether the company is engaged in the business of NBFI and
whether it has obtained a Certificate of Registration (CoR) from the Bank
II. In the case of a company holding CoR issued by the RBI,
whether that company is entitled to continue to hold such CoR in terms
of its asset/income pattern as on March 31st of the applicable year.
III. If the company is classified as AFC, Whether the NBFC has been
correctly classified as AFC as defined in RBI Directions with reference to
the business carried on by it during the applicable financial year.

In the case of an NBFCND

The auditor shall include a statement on:
i.
Whether the Board of Directors has passed a resolution for non
acceptance of any public deposits.
ii.
Whether the company has accepted any public deposits during
the relevant period/year;
iii. Compliance with the prudential norms
Additional Reporting in respect of NBFCNDSI
(a) Calculation and compliance with Capital adequacy requirements
(b) Whether annual statement of capital funds, risk assets/exposures and
risk asset ratio (NBS7) was furnished to the bank within the stipulated
period

Other Requirements:
1. Reasons to be stated for unfavourable or qualified statements
2. Obligation of auditor to submit an exception report to the Bank
(RBI)
Auditor to make a report to the regional office containing the
details of unfavorable or qualified statements and about the
noncompliance, as the case may be, in respect of the company

Recent Amendments
NBFCs need to display grievance redressal mechanism and contact
details of grievance redressal officer at prominent place in
offices/branches/places of business
Fair Practices Code (which should preferably in the vernacular
language as
understood by the borrower) based on the guidelines
announced
in
place
all NBFCs
withcompliances
the approvaland
Revision inshould
formatbe
forput
submission
of by
returns
for PMLA
ofUploading
their Boards
of Reports in 'Test Mode' on FINnet Gateway for PMLA
Reporting
Facility to NBFCNDSI Direct Access to Negotiated Dealing System
Order Matching
Change in Loan to Value ratio for companies predominantly in loan
against gold products

 Amendments to definition of infrastructure loan

NBFCs cannot become partners in partnership firms
Review of Guidelines on entry of NBFCs into Insurance Business
RBI issued NBFC (Opening of Branch/Subsidiary/Joint
Venture/Representative Office or Undertaking Investment Abroad
by
Directions,
2011
NBFCs)
Guidelines
for Credit
Default Swaps NBFCs as users
Revision in External Commercial Borrowings (ECB) Policy
Infrastructure Finance Companies (IFCs)
Guidelines on classification of frauds, approach towards
monitoring of and reporting system for frauds for deposit taking
NBFCs to apply for NBFCNDSI also.