NON BANKING FINANCIAL

COMPANY(NBFC)
Presented by:
Pervez Tamboli (Roll No. 55)
What will Cover?
 Introduction
 Role of NBFC
 Classification of NBFCs
 Eligibility & Registration of NBFC
 Accepting Deposit mechanism of NBFC
 Prudential Norms on NBFCs
 FDI in NBFCs
What is NBFC?
“Non-Banking Financial Company (NBFC) is a company
registered under the Companies Act, 1956. and conducting
financial business as their principle business.’
Any company 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 etc.

E.g: Sundaram Finance, Cholamandalam Investments, Bajaj

Finance Ltd.
NBFCs: Why are they required?

 NBFCs are required as they have a greater reach to

various markets and have great efficiency in
mobilizing funds. Generally banks to reduce their
operational costs establish NBFC. NBFC enjoys many
liberal policies by RBI in comparison with the
commercial banks. However this scenario is
changing. RBI now has strict measures for NBFCs
also.
 All NBFCs are under direct control of RBI in India.
Role of NBFCs

 As recognized by RBI and expert committees

 Development of sectors like Transport & Infrastructure

 Substantial employment generation
 Help & increase wealth creation
 Broad base economic development
 Irreplaceable supplement to bank credit in rural segments
 major thrust on semi-urban, rural areas & first time buyers / users
 To finance economically weaker sections
 Huge contribution to the State exchequer
 Dynamic of Indian financial system

Financial Intermediaries Financial Market Financial Assets

Banks NBFC Mutual Insurance Money Mkt Capital Mkt

Funds Organization
Leasing Companies
Hire-Purchase/Consumer Primary Secondary
Finance Companies Mkt Mkt
Housing Finance
Companies
Venture Capital Funds
Merchant Banking
Organization
Primary/Direct Indirect Derivatives
Credit Rating Agencies
Stock broking firms
Mutual Fund Units Forward
Depositories Equity  Innovative Future
Preference Security Receipts
debt Option
Debenture instruments
 Hierarchy of NBFCs in India
NBFIs

Development Non Banking

Finance Financial Insurance
Mutual Funds
Institutions Company Company
(DFI) (NBFC)

Investment Hire-Purchase Equipment

Loan Company
Company Leasing Leasing
Re-Classification of NBFCs

With effect from December 6, 2006 , the NBFCs

registered with RBI have been reclassified as
follows:-
Asset Finance
(AF)

Investment
NBFCs
Company (IC)

Loan Company
(LC)
Classification of NBFCs according to RBI
 
NBFCs are classified into two categories
NBFC accepting deposits from customers
NBFC which do not take deposits from customers

NBFCs

Accepting Not Accepting

Deposits Deposits
NBFC-D NBFC- ND
Residuary NBFCs
 Residuary Non-Banking Company is a class of NBFC whose
principal business is receiving of deposits, under any scheme
or arrangement. The deposits received do not involve
investment, asset financing, or loans.

 These companies are required to maintain investments as per

directions of RBI, in addition to liquid assets. The functioning
of these companies is different from those of NBFCs in terms
of method of mobilization of deposits and requirement of
deployment of depositors' funds

 Sahara Mutual Fund was the first RNBC started in India.

Historical Background
 The history of the NBFC Industry in India is a story of under-
regulation followed by over-regulation. Policy makers have
swung from one extreme position to another in their attempt
to set controls and then restrain them so that they do not curb
the growth of the industry.

 James Raj Committee (1974)

 Chakravarthy Committee (1984)
 Vaghul Committee (1987)
 Narsimhan Committee (1991)
 Dr. A.C.Shah Committee (1992)
 Khanna Committee (1995)
 Vasudev Committee (1998)
 NBFCs v\s Banks
 NBFCs are doing functions akin to that of banks, however
there are a few differences:
NBFC cannot accept demand deposits
It is not a part of the payment and settlement system
Accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months.
They cannot offer interest rates higher than the ceiling rate
prescribed by RBI from time to time. (Currently the ceiling
rate is 12.5%)
They should have minimum investment grade credit rating
from the credit rating agencies
Who Can’t be NBFC’s?

The company with its principal business as

(a) Agricultural operations
(b) Industrial activity
(c) The purchase or sale of any goods (other than securities) or
the providing of any services
(d) The purchase, construction or sale of immovable property,
Moreover no portion of the income should be derived from the
financing of purchases, constructions or sales of immovable
property by other persons
Registration of NBFCs with RBI
 In terms of Section 45-IA of the RBI Act, 1934, it is mandatory
that every NBFC should be registered with RBI to commence
or carry on any business of non-banking financial institution
as defined in clause (a) of Section 45 I of the RBI Act, 1934.
 NBFC’s Exempted from Registration with RBI:

 Housing Finance Companies

 Merchant Banking Companies

 Nidhi Companies

 Insurance Companies

 Chit Fund Companies

Eligibility criteria for starting NBFC

Incorporation status:

 A company must be 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

Capital Requirement:

 The start up company should have a minimum net owned fund

(NOF) of Rs 25 lac which is raised to Rs 200 lac from April 21,
1999.
Net Owned Fund (NOF)
Particulars Amt
Paid Up Capital XXXX
Free Reserve XXX
Less:
Accumulated Losses (XX)
Deferred revenue exp. (XX)
Other intangible assets (XX)
Investment in shares of Subsidiaries (XX)
Finance made & Deposits with NBFC in excess of (XX)
10% of owned fund
NOF 200 Lakhs
Minimum Investment Level Credit Rating:

NBFC with Minimum NOF can accept public deposits,

provided they obtain minimum investment Level ratings for
their Fixed assets deposits from one of the approved rating
agencies at least once in a year as per RBI guidelines.

Name of rating agencies Level of minimum investment

grade credit rating (MIGR)
CRISIL FA- (FA MINUS)
ICRA MA- (MA MINUS)
CARE CARE BBB (FD)
FITCH Ratings India Pvt. Ltd tA-(ind)(FD)
Ceiling on NBFC-D (Taking Public
deposits)
(I) NBFCs having Net Owned Fund (NOF) of more than
200 Lacs
Category of NBFC Ceiling on public deposits
AFCs maintaining CRAR of 15% 1.5 times of NOF or Rs 10 crore
without credit rating whichever is less
AFCs with CRAR of 12% and 4 times of NOF
having minimum investment
grade credit rating
LC/IC with CRAR of 15% and 1.5 times of NOF
having minimum investment
grade credit rating
Ceiling on NBFC-D (Taking Public
deposits)
(ii) NBFCs having NOF more than 25 lakhs but less
than 200 Lakhs
Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15% Equal to NOF (1xNOF)

without credit rating
AFCs with CRAR of 12% and 1.5 times of NOF
having minimum investment
grade credit rating
LC/IC with CRAR of 15% and Equal to NOF( 1xNOF)
having minimum investment
grade credit rating
Ongoing Regulations: NBFCs-D
(Holding Public Deposits)
 The NBFCs accepting public deposits should furnish
to RBI:
 Audited balance sheet of each financial year
 Audited P&L a\c of each financial year
 Statutory Annual Return on deposits
 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
 A copy of the Credit Rating obtained
 Monthly return on exposure to capital market by
companies having public deposits of Rs 50 crore and above
Other Regulations: NBFCs-ND (Not
Holding Public Deposits)
 The NBFCs-ND having assets size of Rs 100 crore
are required to submit a Monthly Return on
important financial parameters of the company

 Board resolution to be passed to the effect that the

company have neither accepted public deposit nor
would accept any public deposit during the year
Prudential Norms
 NBFCs should comply with RBIs policies and
directions regarding prudential norms and
Deployment of funds:

Income Recognition
Accounting Standards
Classification of Assets
Provision for NPA (Non Performing assets)
Capital Adequacy
Declaration of Purpose, Quantum & Advances of Loan
Maintenance of Liquid Assets:
 Minimum level of liquid asset to be maintained by NBFCs is
15 % 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

10% in approved securities and the remaining 5% can be
in unencumbered term deposits with any scheduled
commercial bank.. Thus, the liquid assets may consist of
government securities, government guaranteed bonds and
term deposits with any scheduled commercial bank.
Other Obligatory
 Reserve Fund appropriation
 Advertisement and Statement in Lieu of

Advertisement
 Register of Deposits
 Downgrading of Credit Rating
 Information of Safe Custody of Approved

Security
While making deposits with a NBFC, the following aspects should
be borne in mind:

(I) Public deposits are unsecured.

(ii) 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.

(iii) 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.
FDI in NBFC sector
 FDI/NRI investments allowed in the following 19 NBFC
activities:
Merchant banking
Underwriting
Portfolio Management
Services
Investment Advisory Services
Financial Consultancy
Stock Broking
Asset Management
Venture Capital
Custodial Services
Factoring
Credit Reference Agencies
Credit rating Agencies
Leasing & Finance
Housing Finance
Forex Broking
Credit card business
Money changing Business
Micro Credit
Rural Credit
Regulations for FDI in NBFCs

 Minimum Capitalization Norms for Fund based

NBFCs:
 For FDI up to 51% - US$ 0.5 million should be brought
upfront
 For FDI above 51% and up to 75% - US $ 5 million should
be brought upfront
 For FDI above 75% and up to 100% - US $ 50 million out of
which US $ 7.5 million should be brought upfront and the
balance in 24 months
Minimum capitalization norms for Non-
fund based activities:
 Minimum capitalization norm of US $ 0.5 million is
applicable in respect of all permitted non- fund based
NBFCs with foreign investment

 Joint Venture operating NBFC’s which have 75% or less

than 75% foreign investment will also be allowed to set up
subsidiaries for undertaking other NBFC activities, subject
to the subsidiaries also complying with the applicable
minimum capital inflow

 FDI in the NBFC sector is put on automatic route subject to

compliance with guidelines of the Reserve Bank of India.
THANK YOU