Notes on NBFC

8/15/2019 Notes on NBFC

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A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,

195 and is engaged in the !usiness o" #

• loans and ad$ances,

• ac%uisition o" shares & stock & !onds & de!entures & securities issued !y

'o$ernment & local authority & other securities o" like marketa!le nature,

• leasing,

• hire-purchase,

• insurance !usiness,

• chit !usiness

• stock !roking companies

• merchant !anking companies

• NBCs

NBFC does not include any institution hose principal !usiness is that o" #

• agriculture acti$ity,

• industrial acti$ity,

• sale & purchase & construction o" immo$a!le property*

Features o" NBFC+s

• egistration ith B is mandatory

• All the NBFC are not entitled to accept pu!lic deposits

• NBFC can accept pu!lic deposit "or a minimum period o" 1 months and ma.imum o" /

months

• 0hey cannot accept deposits repaya!le on demand

• NBFCs cannot o""er interest rates higher than the ceiling rate prescri!ed !y B

"rom time to time


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• NBFCs cannot o""er gi"ts&incenti$es or any other additional !ene"it to the depositors

• NBFCs (e.cept certain AFCs) should ha$e minimum in$estment grade credit rating*

• 0he deposits ith NBFCs are not insured

• 0he repayment o" deposits !y NBFCs is not guaranteed !y B

• 0here are certain mandatory disclosures a!out the company in the Application Form

issued !y the company soliciting deposits

• " a NBFC de"aults in repayment o" deposit, the depositor can approach

a* Company a Board or

!* Consumer Forum or

c* "ile a ci$il suit to reco$er the deposits*

NBFI’s VERSUS BANK’s

BANKS &NBFIS

Definition

Banking is acceptance o" deposits ithdra a!le !y che%ue or demand2

NBF cannot accept demand deposits

NBF are companies carrying "inancial !usiness

Scope of business

3cope o" !usiness o" the !ank is limited*

0here is a $arious types o" !usiness regarding "inancial acti$ities*

function

0hey generate multiple e.pansion o" credit

4nly mo!ilise sa$ings "or in$estment*

Need for a license


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icense norms are tightly controlled and generally it is percei$ed to !e %uite di""icult to get

a license "or a !ank

t is comparati$ely much easier to get a registration as an NBF*

Types of roup

Banks "orm homogeneous group doing !anking !usiness

NBFC "orm a heterogeneous group

Difference bet!een Ban"s # NBF$s

NBFCs are doing "unctions akin to that o" !anks, hoe$er there are a "e di""erences#

i* NBFC cannot accept demand deposits2

ii* it is not a part o" the payment and settlement system and as such cannot issue che%ues to

its customers 2 and

iii* deposit insurance "acility is not a$aila!le "or NBFC depositors unlike in case o" !anks*

Reistration of NBF$s

n terms o" 3ection 5-A o" the B Act, 196, it is %andatory that e$ery NBFC should

!e reistered !it& RBI to commence or carry on any !usiness o" non-!anking "inancialinstitution as de"ined in clause (a) o" 3ection 5 o" the B Act, 196*

7oe$er, to ob'iate dual reulation, certain category o" NBFCs hich are regulated !y

other regulators are e(e%pted fro% t&e re)uire%ent of reistration !it& RBI #

• 8enture Capital Fund & erchant Banking companies & 3tock !roking companies

registered ith SEBI,

• nsurance Company holding a $alid Certi"icate o" egistration issued !y IRDA

• Nidhi companies as noti"ied under 3ection / A o" the $o%panies Act* +,-.

• Chit companies as de"ined in clause (!) o" 3ection o" the $&it Funds Act* +,/0

• 7ousing Finance Companies regulated !y National 1ousin Ban"

2or"in of NBF$


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• Filing o" application in prescri!ed "orm

• 3u!mit it in regional o""ice o" B

• :rocessing !y B

• B issue certi"icate

Re)uire%ents for Reistration !it& RBI

A company incorporated under the Companies Act, 195 and desirous o" commencing

!usiness o" non-!anking "inancial institution as de"ined under 3ection 5 (a) o" the B

Act, 196

• 3hould ha$e a %ini%u% net o!ned fund o" s 5 lakh (raised to Rs 033 la"& e"

April 1, 1999)*

• 0he company is re%uired to su!mit its application "or registration in the prescri!ed

"ormat along ith necessary documents "or Bank+s consideration*

• 0he Bank issues Certi"icate o" egistration a"ter satis"ying itsel" that the conditions

as enumerated in 3ection 5-A o" the B Act, 196 are satis"ied*

NBF$s and 4ublic Deposits

• All NBFCs are not entitled to accept pu!lic deposits*

• 4nly those NBFCs holding a $alid Certi"icate o" egistration ith authori;ation to

accept :u!lic


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E5 6 14 $o%panies !it& $RAR of +07 and &a'in %ini%u% in'est%ent rade credit

ratin

+8- ti%es of N9F or Rs +3 crores !&ic&e'er is less

: ti%es of N9F

5$ 6 I$ !it& $RAR of +-7 and &a'in %ini%u% in'est%ent rade credit ratin

+8- ti%es of N9F

• :resently, the %a(i%u% rate of interest a NBF$ can offer is ++78 0he interest

may !e paid or compounded*

• 0he NBFCs are alloed to accept 6 rene! public deposits for a %ini%u% period of

+0 %ont&s and %a(i%u% period of .3 %ont&s8

•

0hey cannot accept deposits repayable on de%and*

I%portant Reulations relatin to Acceptance of Deposits by NBF$s

i* 0he NBFCs are allo!ed to accept 6 rene! public deposits "or a minimum period o" 1

months and ma.imum period o" / months* 0hey cannot accept deposits repaya!le on

demand*

ii* NBF$s cannot offer interest rates &i&er t&an t&e ceilin rate prescribed by RBI

fro% ti%e to ti%e * 0he present ceiling is 11 per cent per annum* 0he interest may !e paid orcompounded at rests not shorter than monthly rests*

iii* NBFCs cannot offer ifts 6 incenti'es or any ot&er additional benefit to t&e

depositors8

i$* NBFCs (e.cept certain e%uipment leasing & hire-purchase "inance companies) should

ha$e %ini%u% in'est%ent rade credit ratin8

$* 0he deposits !it& NBF$s are not insured *

$i* 0he repay%ent of deposits by NBF$s is not uaranteed by RBI8

$ii* 0here are certain mandatory disclosures a!out the company in the Application Form

issued !y the co%pany solicitin deposits8

Sub%ission of Returns to RBI


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0he NBFCs accepting pu!lic deposits should "urnish to B

i;Audited balance s&eet o" each "inancial year and an audited profit and loss account in

respect o" that year as passed in the general meeting together ith a copy o" the

report o" the Board o" yearly Return on prudential nor%s2

$i* 1alf>yearly A5? Returns !y companies ha$ing pu!lic deposits o" s* / crores and a!o$e

or ith assets o" s* 1// crores and a!o$e irrespecti$e o" the si;e o" deposits 2

$ii* ?ont&ly return on e(posure to capital %ar"et !y companies ha$ing pu!lic deposits o" s

5/ crores and a!o$e2 and

$iii* A copy of t&e $redit Ratin o!tained once a year along ith one o" the 7al"-yearly

eturns on prudential norms as at ($) a!o$e*

Types of NBF$


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INVEST?ENT $9?4AN@

n$estment Company is any "inancial intermediary hose principal !usiness is that o" !uying

and selling o" securities*

• t is a company hose main !usiness is holding securities o" other companies purely

"or in$estment purposes*

• 0he in$estment company in$ests money on !ehal" o" its shareholders ho in turn

share in the pro"its and losses*

• =.ample # utual Fund Companies

?UTUA5 BENEFIT FINAN$IA5 $9?4AN@ ?BF$;

• Nidhis or utual Bene"it Finance Companies are one o" the oldest "orms o" non-

"inancial companies* t is a company structure in hich the company>s oners are alsoits clients*

• 0hat is, the mutual company>s pro"its are distri!uted to its participating customers

each year in proportion to their indi$idual e.posures to the company*

• any insurance companies are structured as mutual companies*

• 3ome o" the important o!?ecti$es o" Nidhis are to ena!le the mem!ers to sa$e money,

to in$est their sa$ings and to secure loans at "a$ora!le rates o" interest*

• 0hey ork on the principles o" complete mutuality o" interest and are generally ell-

managed*

• 0he 'o$ernment has granted certain concessions under 3ection /A o" the

Companies Act, 195*

• :rimarily regulated !y


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• oan company means any "inancial institution hose principal !usiness is that o"

pro$iding "inance, hether !y making loans or ad$ances or otherise "or any acti$ity

other than its on (e.cluding any e%uipment leasing or hire-purchase "inance acti$ity)*

• A loan is a type o" de!t* ike all de!t instruments, a loan entails the redistri!ution o"

"inancial assets o$er time, !eteen the lender and the !orroer*

RESIDUAR@ N9N>BANKIN $9?4ANIES RNB$S;

• Company hich recei$es deposits under any scheme or arrangement, !y hate$er name

called, in one lump-sum or in instalments !y ay o" contri!utions or su!scriptions or !y

sale o" units or certi"icates or other instruments, or in any manner are called NBCs*

• NBCs are a class o" NBFCs hich cannot !e classi"ied as e%uipment leasing, hire

purchase, loan, in$estment, nidhi or chit "und companies, !ut hich tap pu!lic sa$ings

!y operating $arious deposit schemes*

• 0he deposit acceptance acti$ities o" these companies are go$erned !y the pro$isions

o" esiduary Non Banking Companies (eser$e Bank) 4UR$1ASE $9?4AN@

•

Any "inancial intermediary hose principal !usiness relates to hire purchasetransactions or "inancing o" such transactions*

• A method o" !uying goods through making installment payments o$er time*

• nder a hire purchase contract, the !uyer is leasing the goods and does not o!tain

onership until the "ull amount o" the contract is paid*

• 7ire purchase com!ines elements o" !oth a loan and a lease* ou reach an agreement

ith the dealer to pay an initial deposit, typically anything !eteen 1/D and 5/D, and

then pay o"" the !alance in monthly installments o$er an agreed period o" time* At theend o" this period, the product is yours*

E=UI4?ENT 5EASIN $9?4AN@

=%uipment leasing company is any "inancial institution hose principal !usiness is that o"

leasing e%uipments or "inancing o" such an acti$ity*


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5easin

easing is a process !y hich a "irm can o!tain the use o" a certain "i.ed assets "or

hich it must pay a series o" contractual, periodic, ta. deducti!le payments*

•0he lessee is the recei$er o" the ser$ices or the assets under the lease contract andthe lessor is the oner o" the assets* 0he relationship !eteen the tenant and the

landlord is called a tenancy, and can !e "or a "i.ed or an inde"inite period o" time

(called the term o" the lease)* 0he consideration "or the lease is called rent*

:40ANC=

• Non !anking "inancial institutions ha$e the "olloing importance in ndian economy*

• 'reater reach*

• Fle.i!ility in tapping resources*

• etail ser$ices to small and medium !usiness*

• mportant component o" "inancial market*
http://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Timehttp://en.wikipedia.org/wiki/Considerationhttp://en.wikipedia.org/wiki/Rentinghttp://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Leasehttp://en.wikipedia.org/wiki/Timehttp://en.wikipedia.org/wiki/Considerationhttp://en.wikipedia.org/wiki/Renting

Documents

Notes on NBFC