A Report on NBFCs in India

A REPORT ON NBFCs IN INDIA

Mr. Sankar Rajan

Summer Intern, April- June
2010
Amrita School of Business,
Coimbatore

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 A Report on NBFCs in India

TABLE OF CONTENTS

Executive Summary................................................................................................3
Non-Banking Financial Institutions (NBFIs)............................................................5
Non-Banking Financial Company (NBFC)..............................................................6
NBFCs: Why are they required?.............................................................................6
Re-classification of NBFCs.....................................................................................7
NBFCs are different from Banks.............................................................................9
Residuary Non-Banking Companies (RNBCs) ....................................................11
Ceiling on RNBCs taking Deposits.......................................................................11
Interest Payment on Deposits...............................................................................11
Eligibility Criteria for Starting NBFC......................................................................12
Capital Requirement.............................................................................................14
Net Owned Fund...................................................................................................14
Classification of NBFCs according to RBI............................................................14
Regulations on NBFCs taking Deposits...............................................................15
Ceiling on NBFC-D (Taking Public deposits).......................................................16
Ongoing Regulations: NBFCs-D (Holding Public Deposits).................................18
Other Regulations: NBFCs-ND (Not Holding Public Deposits)............................18
Directions given to NBFCs and its Auditors by RBI..............................................20
A Special Mention : FDI in NBFC sector..............................................................21
References............................................................................................................23

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 A Report on NBFCs in India

Executive Summary

India growth story is most talked about and why not? The country’s
GDP is pegged to grow at a rate of more than 7.5%. India’s Stock
market has given the best returns in the last 6-8 months of more than
60%. The household savings continues to be as high as 35% inspite of
slowdown and recessionary pressures. Forex reserves have increased
by more than 10billion $ in the 1 st quarter and the total reserves are
up, to 262 billion $. Current Budget focuses on reducing fiscal deficit
by the measures of disinvestments and improving the infrastructure of
the country. Overall the country is all set to grow at a rapid pace and
the government has laid a strong foundation for this. Having realized
this, one can strongly say that sufficient liquidity has to be maintained
in the system to enhance credit and economic growth.

NFBIs (Non Banking Financial Institutions) play an important role in

realizing the economic growth. They have access to larger markets and
provide financing for almost all activities.

Think of buying an automobile, and one will find financing companies

that provide EMIs at the doorstep. Think of buying any electronics, one
would be amazed the number of financing companies that one can
approach to make a deal. Thus the competitiveness of the companies
combined with fierce penetration across the length of the country
enables NBFIs to grow at a rapid pace.

In the following document, NBFIs in India are discussed with a focus on

NBFCs. The total assets managed by NBFCs amount to 95,727 crore as
on June 2009. This accounts for around 9.1 % of assets of the total
financial system [1]. Hence the business carried out by NBFCs is of great
importance for overall development of the country. Thus RBI is

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 A Report on NBFCs in India

implementing various schemes and policies for maintaining enough

liquidity for funding requirements. Also various regulations are levied
on NBFCs for making the overall system robust.

[1]
.Source: RBI

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 A Report on NBFCs in India

Non-Banking Financial Institutions (NBFIs)

Non-Banking Financial Institutions (NBFIs) play an important role in the

Indian financial
system given their unique position of providing complimentary and
competitiveness to banks. They score over the traditional banks by
providing enhanced equity and risk-based products.

Fig1.The Hierarchy of NBFCs in India

NBFIs

Non-banking
Development Insurance Primary
financial Mutual
Finance companie dealers
companies Funds
Institutions (DFIs) s (PDs)
(NBFCs)

Hire
Investment Equipment Loan
Purchase
Company Leasing Company
Leasing

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 A Report on NBFCs in India

Non-Banking Financial Company (NBFC)

Non-Banking Financial Company (NBFC) is a company registered under

the Companies Act, 1956. It is engaged in the business of loans,
securities, insurance, chit funds etc
They also provide products/services that includes margin funding,
leasing and hire purchase, corporate loans, investment in non-
convertible debentures, IPO funding, small ticket loans, venture capital
etc.
As in the diagram, NBFCs are classified into four categories
1. Hire- Purchase Leasing
2. Loan Company
3. Investment Company
4. Equipment Leasing Company

Some of the prominent NBFCs in India are

 Infrastructure Development Finance Corporation (IDFC)

 Rural Electric Corporation ( REC)
 Industrial Finance corporation of India (IFCI )
 GE Capital

Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were
permitted to accept public deposits [2]

Source: RBI Annual Report 2008-2009

[2]

NBFCs: Why are they required?

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 A Report on NBFCs in India

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.
Re-classification of NBFCs

From December 6, 2006 NBFCs registered with RBI have been

reclassified as

1. Asset Finance Company (AFC)

2. Investment Company (IC)
3. Loan Company (LC)

Asset finance Companies (AFC)

AFC are financial institutions whose principal business is of financing
physical assets such as automobiles, tractors, construction equipments
material handling equipments and other machines.
Eg: Bajaj Auto Finance corp. , Fullerton India etc

Investment Companies (IC)

ICs generally are involved in the business of shares, stocks, bonds,
debentures issued by government or local authority that are
marketable in nature

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 A Report on NBFCs in India

Eg: Stock Broking Companies, Gilt firms

Loan Companies (LC)

LCs are loan giving companies which operate in the business of
providing loans. These can be housing loans, gold loans etc
Eg: Mannapuram Gold Finance, HDFC

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NBFCs are different from Banks

 NBFCs cannot accept demand deposits ( Demand deposits are

funds deposited in an institution, that are payable immediately
on demand e.g.: Savings account, Current account etc)
 A NBFC cannot issue cheques, to their customers and is not a
part of the payment and settlement system
 Deposit insurance facility of Deposit Insurance Credit
Guarantee Corporation (DICGC) is not available for NBFC
depositors
 They are allowed to 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 cannot offer gifts/incentives or any other additional
benefit to the depositors.
 They should have minimum investment grade credit rating,
from the credit rating agencies

Fig2:

Pulic Deposits in NBFCs & RNBCs

35000
30000
25000
INR (Crores)

Public Deposits
20000
15000 Expon. (Public
10000 Deposits)

5000
0
98

00

02

04

06

08

10
19

20

20

20

20

20

20

Year

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 A Report on NBFCs in India

Source:RBI, Note: The figures for 2009 & 2010 are estimated figures

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 A Report on NBFCs in India

Residuary Non-Banking Companies (RNBCs)

They form a part of NBFCs however their functioning is different from

the regular 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.

Ceiling on RNBCs taking Deposits

• 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
• To ensure the safely of public investments RNBCs 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 Payment on Deposits

• The amount payable by way of interest, premium, bonus or other
advantage, by a RNBC in respect of deposits received shall not
be less than 5% (to be compounded annually) on the amount
deposited in lump sum or at monthly or longer intervals; and at

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the rate of 3.5% (to be compounded annually) on the amount

deposited under daily deposit scheme.
• Further, an 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.

Eligibility Criteria for Starting NBFC

Initial Procedure
• The Start up NBFC should be incorporated under the Companies
Act, 1956
• It should be registered with RBI, under Section 45-I of the RBI
Act, 1934
• The company is required to submit the application for
registration in the prescribed format along with necessary
documents for RBI's consideration. RBI then issues certificate of
registration after satisfying itself that the conditions as
enumerated in Section 45-IA of the RBI Act, 1934 are satisfied
• For registration with RBI, the company is required to fill the
application, which can be downloaded from
www.rbi.org.in/scripts/BS/viewforms.aspx.
• After downloading the EXCEL based application form, data should
be keyed in, it can be uploaded in the RBI's Secure website
https://secweb.rbi.org.in. Once uploaded, the company will get a
CoR (Company Application Reference Number). Subsequently,
the company should take the hard copy of the same with the
supported documents and submit it to the concerned regional
office.

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NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant

Banking Companies/Stock Broking Companies etc need not be
registered with RBI they are governed by SEBI. Insurance companies
holding a valid certificate of registration are regulated by IRDA,
Housing finance companies regulated by National Housing Bank.

Nature of Business
The company should not have its principal business as
(a) Agricultural operations
(b) Industrial activity
(b) The purchase or sale of any goods (other than securities) or the
providing of any services
(c) 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

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Capital Requirement

The start up company should have a minimum net owned fund (NOF)
of Rs 25 lakh which is raised to Rs 200 lakh from April 21, 1999.
Net Owned Fund
Paid-up capital and free reserves, minus accumulated losses, deferred
revenue expenditure and other intangible assets
Less,
(i) Investments in shares of subsidiaries/companies in the same group/
all other NBFCs
(ii) The book value of debentures/bonds/ outstanding loans and
advances, including hire purchase and lease finance made to, and
deposits with, subsidiaries/ companies in the same group, in excess of
10% of the owned funds.

Note: NBFCs that were in existence who had previously NOF of Rs25
Lakhs (before the act) are given a time period of 3 years to attain a
NOF of 200 Lakhs. However RBI can still extend this time period for an
additional 3 years subject to the condition that such NBFCs should
intimate the RBI about attaining the NOF within 3 months from the
date of attainment

Classification of NBFCs according to RBI

NBFCs are classified into two categories

(i) NBFC accepting deposits from customers
(ii) NBFC which does not take deposits from customers

• NBFCs taking deposits from public are referred to as NBFC-D

and those who dont take public deposits are referred to as
NBFC- ND

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• Those NBFCs NBFCs-ND with an asset size of Rs.100 crore and

above (as per the last audited balance sheet) are designated as
systemically important NBFCs- ND (NBFCs-ND-SI)
• NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent
by March 31, 2010 and 15 per cent by March 31, 2011

Regulations on NBFCs taking Deposits

1. 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
2. New NBFCs are not allowed to raise public deposits for period of
two years from the date of registration. After completion of two
years, detailed review is taken of the company by the regulator
3. 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
4. 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.
5. NBFCs cannot accept deposits from NRI except deposits by debit
to NRO account of NRI provided such amount do not represent
inward remittance or transfer from NRE/FCNR account.
6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with
or without credit rating) are not entitled to accept public deposits
7. Evaluation of the quality of management in respect of the
promoters/directors is taken into consideration while giving
allowance for taking public deposits

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Minimum Investment Level Credit Rating:

The symbols of minimum investment grade rating of the Credit rating
agencies are:

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 Lakhs

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
having minimum investment 4 times of NOF
grade credit rating
LC/IC with CRAR of 15% and
having minimum investment 1.5 times of NOF
grade credit rating

AFC= Asset Finance Company

LC/IC= Loan Company/ Investment Company

(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

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 A Report on NBFCs in India

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

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Ongoing Regulations: NBFCs-D (Holding Public Deposits)

.
The NBFCs accepting public deposits should furnish to RBI:
• 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 (Asset Liability Management) 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
• A copy of the Credit Rating obtained once a year along with one
of the Half-yearly returns on prudential norms

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

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 A Report on NBFCs in India

General Norms: RBI

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.

Creation and Maintenance of Reserve fund:

All NBFCs are required to create a reserve fund and transfer not less
than 20% of their net profit (before declaration of dividend) to the
fund

Submission of Certificate:
All NBFCs should submit a certificate from their Statutory Auditors
every year to the effect that they continue to undertake the
business of NBFI requiring holding of CoR (Company Application
Reference Number) under Section 45-IA of the RBI Act, 1934.

Information Exchange:
NBFCs are 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.

Prudential Norms

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 A Report on NBFCs in India

NBFCs should comply with RBIs policies and directions regarding

prudential norms and Deployment of funds

o Income Reconition
o Accounting Standards
o Classification of Assets
o Provision for NPA (Non Performing assets)
o Capital Adequacy
o Declaration of Purpose, Quantum & Advances of Loan

Directions given to NBFCs and its Auditors by RBI

• RBI is empowered to give directions to NBFCs and their auditors
in matters related to
1) Profit and Loss account
2) Balance Sheet
3) Books of Accounts
4) Disclosure of liabilities
5) Any other matters or queries

• Special Audits can be done by the RBI of any NBFC and also
appoint auditors for the same
• RBI can prohibit any NBFC for taking public deposit for violation
of any provisions of RBI act
• Nomination facility for deposits held by a NBFC is introduced. It is
on the lines of bank deposits
• If an NBFC is downgraded to below minimum investment grade
rating, it has to stop accepting public deposit, report the position
within fifteen working days to the RBI.
• Once downgraded, within 3 years It has to reduce the amount of
excess public deposit to nil or to the appropriate extent

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permissible under paragraph 4(4) of Non-Banking Financial

Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998

A Special Mention : FDI in NBFC sector

FDI/NRI investments allowed in the following 19 NBFC activities shall
be as per levels indicated below:

Merchant banking Credit Reference Agencies

Underwriting Credit rating Agencies
Portfolio Management
Leasing & Finance
Services
Investment Advisory
Housing Finance
Services
Financial Consultancy Forex Broking
Stock Broking Credit card business
Asset Management Money changing Business
Venture Capital Micro Credit
Custodial Services Rural Credit
Factoring

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

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 A Report on NBFCs in India

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
• Foreign investors to set up 100% operating subsidiaries without
the condition to disinvest a minimum of 25% of its equity to
Indian entities, subject to bringing in US$ 50 million as per
minimum capitalization norms above (without any restriction on
number of operating subsidiaries without bringing in additional
capital)

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 A Report on NBFCs in India

• 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.

References

Web References
• www.rbi.org.in, accessed from 19th April to 23rd April 2010
• nbfc.rbi.org.in, accessed from 19th April to 23rd April 2010
• www.economywatch.com, accessed from 19th April to 23rd April
2010
Publications
• Statutory guide for Non Banking Financial Companies-
Taxmann’s Publications

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