nonbankingfinancialcompanies-101111110725-phpapp02.ppt

7/27/2019 nonbankingfinancialcompanies-101111110725-phpapp02.ppt

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NON-BANKINGFINANCIALCOMPANIES

Udit Khandelwal


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What is a Non-Banking Financial Company (NBFC)?


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A Non-Banking Financial Company (NBFC) is a

company registered under the Companies Act, 1956and 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.

It does not include any institution whose principal

business is that of agriculture activity, industrialactivity, sale/purchase/construction of immovable

property.


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A non-banking institution which is a company and which has

its principal business of receiving deposits under any scheme or

arrangement or any other manner, or lending in any manner.

The deposits received do not involve investment, asset

financing, or loans.

Besides the above class of NBFCs the Residuary Non-Banking

Companies are also registered as NBFC with the Reserve Bankof India.

RESIDUARYNON-BANKINGCOMPANY

.


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DIFFERENCEBETWEENNBFCSANDBANKS

(i) a NBFC cannot accept demand deposits (demand

deposits are funds deposited at a depository institution

that are payable on demand -- immediately or within a

very short period -- like your current or savings

accounts.)

(ii) it is not a part of the payment and settlement system and

as such cannot issue cheque to its customers drawn to

itself; and

(iii) deposit insurance facility of DICGC (Deposit Insuranceand Credit Guarantee Corporation ) is not available for

NBFC depositors unlike in case of banks.


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The NBFCs that are registered with RBI are:

(i) equipment leasing company;

(ii) hire-purchase company;(iii) loan company;

(iv) investment company.

With effect from December 6, 2006 the above NBFCs registered

with RBI have been reclassified as

(i) Asset Finance Company (AFC)

(ii) Investment Company (IC)(iii) Loan Company (LC)


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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.

ex: 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

ex: Stock Broking Companies, Gilt firms

Loan Companies (LC)

LCs are loan giving companies which operate in the business of providingloans. These can be housing loans, gold loans etc

ex: Mannapuram Gold Finance, HDFC

TYPESOFNBFC


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NBFCS: OVERVIEW

13000+ players registered under RBI : A & B categories

Spread all across the country

Approx. 570 NBFCs authorized to accept public deposits (Catg. A)

Assets worth Rs. 15000 Crore financed annually & growing steadily

Asset financing

Commercial vehicles

Passenger cars

Multi-utility & multi-purpose vehicles

Two-wheelers & Three-wheelers

Construction equipments

Consumer durables


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ROLEOFNBFCS

As recognized by RBI & Expert Committees / Taskforce

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


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ROLEOFNBFCS(CONTD..)

70-80% of Commercial Vehicles are finance driven

Indian economy is more dependent on roads

Heavy Govt. outlay for mega road projects

Heavy replacement demand anticipated30 lacs commercialvehicles by the year 2007

Another Rs.6000 Crores required for phasing out old commercialvehicles

CRISIL in its study has placed commercial vehicle financing

under low risk category Each commercial vehicle manufactured, sold and financed gives

employment to minimum 20 persons (direct and indirect)


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CUSTOMERSERVICE

The key factor for our survival & growth

NBFCs provide prompt, tailor made service with least hassles. This more than

compensates for the higher lending rates of NBFCs as compared to Banks & FIs

All customers get direct and easy access to and individual attention of the top

management

NBFCs cater to a class of borrowers who :-

- Do not necessarily have a high income- But have adequate net worth

- Are honest and sincere (gauged by the personal touch maintained

with them).


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A company 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 should have a minimum net owned fund of Rs 25 lakh

(raised to Rs 200 lakh w.e.f April 21, 1999). The company isrequired to submit its application for registration in the

prescribed format along with necessary documents for Banks

consideration. The Bank issues Certificate of Registration

after satisfying itself that the conditions as enumerated inSection 45-IA of the RBI Act, 1934 are satisfied.

REGISTRATION

www.professoraugustin.com


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In case a NBFC defaults in repayment of deposit what course of action

can be taken by depositors?

If a 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


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Category of NBFC Ceiling on public

deposits

AFCs maintaining CRAR of

15% without credit rating

AFCs with CRAR of 12% and

having

minimum investment grade

credit rating

1.5 times of NOF or Rs

10 crore

whichever is less

4 times of NOF

LC/IC with CRAR of 15%

and

having minimum investment

grade credit rating

1.5 times of NOF

CEILINGONPUBLICDEPOSITS


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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)

SYMBOLSOFMINIMUMINVESTMENT

GRADERATING


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Regulations on NBFC :

i) The NBFCs are allowed to accept/renew public deposits for aminimum period of 12 months and maximum period of 60 months.

They cannot accept deposits repayable on demand.

ii) NBFCs cannot offer interest rates higher than the ceiling rate

prescribed by RBI from time to time. The present ceiling is 11 per

cent per annum. The interest may be paid or compounded at rests

not shorter than monthly rests.

iii) NBFCs cannot offer gifts/incentives or any other additional benefit

to the depositors.

iv) NBFCs (except certain AFCs) should have minimum investmentgrade credit rating.


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v) The deposits with NBFCs are not insured.

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

vii) There are certain mandatory disclosures about the company in the

Application Form issued by the company soliciting deposits.


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WORKINGANDCURRENTPOSITION

OFNBFCS


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Cost of Funding - Shot up during the crisis due to short tenure borrowings,

stabilized now & expected to be less volatile due to larger proportion of long

term Funding

Many NBFCs took advantage of the lower interest rate regime at the shorter end of

the yield curve by borrowing short term funds (3months1 year) at lower rates and

lending for maturities ranging from 3-4 years at higher rates.

Average borrowings costs increased from around 9.5-10.0% in FY08 to

11.5-12.0% in FY09. This shows the severity of the impact as financial crisisaffected funding costs in the second half of FY09

The response by NBFCs was to gradually replace short term funding with long

term sources.


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Asset Quality Deteriorated more due to unsecured loans which is

now virtually stopped by most players, provisioning has improved

& asset quality expected not

to worsen further.

Aggregate Gross NPA (The net non-performing assets to loans )ratio

trended from around 1.1% for FY08 to around 2.1% in FY09.

Unsecured lending has virtually stopped for many NBFCs and

underwriting norms have also been tightened in general for other asset

classes


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The systemically important non-deposit taking non-banking

financial companies (NBFCs-ND-SI) were permitted to raise short-

term foreign currency borrowings.

Allowed banks to avail liquidity support under the LAF for the

purpose of meeting the

funding requirements of NBFCs through relaxation in the

maintenance of SLR up to 1.5 per cent of their NDTL.

Risk weights on banks exposures to claims on NBFCs-NDSI

were reduced to 100 per

cent from 150 per cent.

Deferring the higher CAR norms for NBFCs-ND-SI by 1 year.

MEASURESTOOVERCOMETHECRISIS


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Overall positive outlook on the sector due toThe better ALM position,

Focus on relatively safer asset classes and

The demonstrated acceptance of the sector as systemically

important by the regulator.

Mergers with profitable companies

Short term foreign buying allowed.

Portfolio diversification

Including asset management companies

House finance companies

Ventured into insurance sector.

OUTLOOK


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RBI has been taking efforts to tighten control over NBFCs, which are moreloosely regulated than banks.

Any takeover or merger involving deposit-taking NBFCs now requires the prior

approval of RBI. In addition, the management of the merged entity must comply

with the fit and proper criteria of RBI.

RBI also chided NBFCs involved in micro-finance for charging high rates while

accessing cheaper fundsfrom banks.

RBISREGULATIONREVISIONOFNBFCSINITS

ANNUALREPORT(AUGUST25TH2010)


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The end-borrowers do not get the benefit of low interest rates, as NBFCs are

assigned the responsibility of managing the loans. Consequently, the borrower

continues to pay the same rate of interest, which is as high as 23.6-30 per cent.

According to the banking regulator, there are 12 systematically important non-

deposit NBFCs that are lenders with an asset size of at least Rs 100 croreengaged in micro-finance lending.

The main sources of fundsfor these NBFCs are borrowings from banks and

financial institutions. Most of them have received large amounts as foreign direct

investment and many of them are now largely foreign-owned,

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