NON BANKING FINANCIAL COMPANIES (NBFCS)

MEANING OF NBFC

Non banking finance company is a company registered under the Companies Act 1956. Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank. These institutions are not allowed to take deposits from the public. All operations of these institutions are still exercised under bank regulation.

ROLE OF NBFCS

Promoters utilization of savings Provides easy,timely and unusual credit Financial supermarket Increase standards of living Provides housing finance Banking Facilities Investment Facilities

REQUIREMENTS FOR REGISTRATION WITH RBI

Under Section 45 I(a) of the RBI Act, 1934 non banking financial institution should have a minimum net owned fund of Rs 25 lakh (raised to Rs 2 crore from April 21, 1999).
The company is required to submit its application for registration in the prescribed format along with necessary documents for bank's consideration. The bank issues certificate of registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

NUMBER OF NBFCS REGISTERED WITH RBI

14000

12000
10000 8000 6000 4000 2000 0 Registered NBFCs NBFCs-D NBFCs-ND-SI 2008 2009 2010

CLASSIFICATION OF NBFCS
The NBFCs that are registered with RBI are basically divided into following categories depending upon its nature of business :

Equipment leasing company Hire-purchase company Loan company Investment company Residuary non banking company.

SINCE DECEMBER 2006, RBI HAS CLASSIFIED NBFCS AS :

INVESTMENT COMPANY (IC)

LOAN COMPANY (LC)

ASSET FINANCE COMPANY (AFC)

COMMERCIAL BANKS VS NBFCS

COMMERCIAL BANKS NBFCs

Issue of cheque: In case of commercial banks, a cheque can be issued against bank deposits.

In case of NBFCs , there is no facility to issue cheque against bank deposits.

Rate of interest: Commercial banks charge lesser rate of interest on deposits as compared to NBFCs.

NBFCs charge higher rate of interest on deposits as compared to commercial banks.

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.

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

NBFCs

NBFCs are regulated by SEBI,Companies act,National Housing Bank,Unit Fund Act and RBI.

Types of assets: Commercial banks hold a variety of assets in the form of loans,cash credit,bills of exchange,overdraft etc.

NBFCs specilaize in one type of asset.For eg:Hire purchase company specialize in consumer loans while Housing Finance Companies specialize in housing finance only.

CAN ALL NBFCS ACCEPT DEPOSITS

AND WHAT ARE THE REQUIREMENTS FOR ACCEPTING PUBLIC DEPOSITS?

All NBFCs are not entitled to accept public deposits.

Only those NBFCs holding a valid certificate of registration with authorisation 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 the bank.

RATE OF INTEREST AND PERIOD OF DEPOSIT

Maximum rate of interst a NBFC can offer is 11 % The interest may be paid or compounded at rest not shorter than monthly rest Minimum period of time is 12 months Minimum period of time is 60 months

FUNDING SOURCES OF NBFCS

Funding

sources of NBFCs include debentures, borrowings from banks and FIs, Commercial Paper and inter-corporate loans.

Banks

are also a major source of funding for NBFCs either directly or indirectly. in a way NBFCs have a dependence on banks making them vulnerable to systemic risks in the financial system.

So

FUNDING BY NBFCS

Banks have played the role of intermediaries between the savers and the investors. The dependence on bank credit to fund investments is giving way to raising resources through a range of market based instruments. There are a total of 12,630 NBFCs (end of June 2010) registered with RBI

LIST OF MAJOR PRODUCTS OFFERED BY NBFCS IN INDIA

Construction equipment Commercial vehicles and cars Gold loans Funding of infrastructure assets and plant & machinery Microfinance Loan against shares Small and Medium Enterprises Financing

IT IS SAID THAT RATING OF NBFCS IS

NECESSARY BEFORE IT ACCEPTS DEPOSIT? WHO RATES THEM?

An exception is made in case of unrated AFC companies with CRAR of 15% which can accept public deposit. A NBFC may get itself rated by any of the four rating agencies.

PERFORMANCE OF NBFC SECTOR DURING 2009-10

Hire purchase and loans and advances by NBFCs witnessed a growth of 7.6% and 42.7% respectively during 2009-10 as compared to the previous year. The financial performance of NBFCs-D in 2009-10 witnessed moderate deterioration. The cost to income ratio declined from 74 per cent in 2008-09 to 81.8 per cent in 2009-10. There was a decline in the gross NPAs to gross advances ratio of NBFCs-D in 2009-10 as well.

PERFORMANCE OF NBFC SECTOR DURING 2009-10

Non-interest cost at 97.4 per cent continued to constitute the dominant share in total cost of the NBFCs-D. Gross NPA and net NPA ratios of AFCs and loan companies declined during 2009- 10 as compared to the previous year There was a decline in the gross NPAs to gross advances ratio of NBFCs-D in 2009-10 as well.

PERFORMANCE OF NBFC SECTOR DURING 2009-10

It may be pointed out that the NBFC sector has been witnessing a consolidation process in the last few years. The total assets of deposit-taking NBFCs-D sector registered a significant growth during 2009-10 mainly on account of increase in the assets of asset finance companies. As at end-March 2010, around three-fourths of the total assets of the NBFCs-D sector were held by assets finance companies.

PERFORMANCE OF NBFC SECTOR DURING 2009-10

The pattern of deployment of funds by NBFCs ND-SI in the year ended March 2010 remained broadly in line with that witnessed during the previous year. The financial performance of the NBFCs-ND-SI sector improved marginally. In case of NBFCs the benefit is that in most of the funding transaction there is exposure on the asset and not on the corporate, unlike in case of banks.

PERFORMANCE OF NBFC SECTOR DURING 2009-10

Also NBFCs have been able to provide funding to un-banked regions or where banks are not aggressive on providing financial assistance. NBFCs are more diversified in their exposures unlike banks.

FUTURE PROSPECTS OF NBFC SECTOR

NBFCs are the perfect or even better alternatives to the conventional Banks. They offer quick and efficient services.

Since NBFCs have been kept outside the purview of SARFAESI Act, a reform in this area is quite urgently needed.
The coming years will be very crucial for NBFCs.

SIGNIFICANCE OF NBFCS IN INDIA

According to the Economic Survey 2010-11, it has been reported that NBFCs as a whole account for 11.2 per cent of assets of the total financial system. NBFCs have come to be regarded as important financial intermediaries. In the past and RBI has been modifying its regulatory and supervising policies from time to time to keep pace with the changes in the system.

SIGNIFICANCE OF NBFCS IN INDIA

NBFCs have turned out to be engines of growth and are integral part of the Indian financial system. Since the 90s crisis the market has seen explosive growth, as per a Fitch Report1 the compounded annual growth rate of NBFCs was 40% NBFCs have been pioneering at retail asset backed lending, lending against securities, microfinance etc and have been extending credit to retail customers in under-served areas and to unbanked customers.

LEADING NBFC MONEY MATTERS FINANCIAL SERVICES RAISES RS 445 CR THROUGH QIP
Money Matters Financial Services Ltd. (MMFSL), a Mumbai-based NBFC has raised Rs 445 Cr ($100 Mn) at Rs 625.25 per share through Qualified Institutional Placement The funds is proposed to be primarily used for meeting funding requirement and capital expenditure MMFSL is debt market financial services company focused on providing advisory, consultancy

ABOUT MONEY MATTERS FINANCIAL SERVICES LTD. (MMFSL)

MMFSL is registered as a non deposit taking NBFC primarily focused in the business of financial advisory services to corporates and institutional clients in the areas of debt syndication, debt placement and financial restructuring. It also provides merchant banking & broking services through its subsidiaries. MMFSL has about 98 employees as of June 30, 2010 and operates out of Mumbai, Delhi and Bengaluru. MMFSL also provides, either directly or through our subsidiaries, services related to investment banking, corporate finance and other equity and debt linked products to corporate.

CHALLENGES & FUTURE OUTLOOK

While NBFCs have witnessed substantial growth over the years, there are few areas of concern which need to be addressed. In the past few years, the increased competition from banks in the retail finance segment has led to excess diversification by NBFCS from their core business activities. NBFCs have also ventured into riskier segments.

CHALLENGES & FUTURE OUTLOOK

Although some improvement has been witnessed in auto sales in last few months, the demand for vehicle finance is likely to remain subdued. Given that growth in vehicle finance might remain low in the medium term, NBFCs are expected to focus on rural and semi-urban markets. Credit requirements of rural population are primarily met by banks from organised sector or local money lenders.

There is a large section of rural population which does not have access to credit either because of their inability to meet the lending covenants of banks or due to high interest rates of local money lenders.

CONCLUSION

NBFCs are gaining momentum in last few decades with wide variety of products and services. They play a vital role in the development financial system of our country. NBFCs are doing more fee-based business than fund based.

The NBFCs play a vital role in converting services and provide credit to the unorganized sector and small borrower

COMPILED BY :
SHREEYA. SHAH AZMINA. PUNJANI ASHMA MEHTA SALIM LAKDAWALA RAK SAKPAL SHANTANU

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