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PROJECT ON

RESERVE BANK OF INDIA AND NON BAKING FINANCIALCOMPANYBachelor of Commerce-

Banking & Insurance

Semester V

(2012-2013)

Submitted By

GEETA MEDI

Roll no- 19

GURU NANAK COLLEGE OFARTS,SCIENCE, AND COMMERCE

G.T.B nagar sion (E), Mumbai -400037


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PROJECT ON

RESERVE BANK OF INDIA AND NON BAKING FINANCIALCOMPANY

Bachelor of Commerce-

Banking & Insurance

Semester V

Submitted

In Partial Fulfillment of the requirements

For the award of the Degree of Bachelor of

Commerce- Banking & Insurance


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By

GEETA MEDI

Roll no.19






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C E R T I F I C A T E

This is to certify that Miss. GEETA MEDI of B.Com - Banking & Insurance

Semester V (2012-2013) has successfully completed the project on

RESERVE BANK OF INDIA AND NON BAKING FINANCIALCOMPANYun-

der the guidance of SUDHA MAM

Project guide

Principal

Course Co-ordinator:

Internal Examiner:


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External Examiner:

Declaration

I GEETA MEDI student of B.Com Banking & Insurance Semester

V (2012-2013) hereby declare that I have completed the Project on

RESERVE BANK OF INDIA AND NON BAKING FINANCIALCOMPANY

The information submitted is true and original to the best if my knowledge.

Signature of the student

Name of the student


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ACKNOWLEDGEMENT

I would like to thank a lot of people without whom this project would not have

been complete. First prof. SUDHA she was of utmost help in guiding me struc-

tures this project. She helped me throughout and was always present to help me

whenever I had a doubt.

A research can never be over without access to a good library and in this case I

was blessed as our college library, is very well stocked with books. And the lend-

ing policy made life a lot easier. And not to forget the unconditional support pro-

vided by my parents and friends.


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INDEX

SR. NO CONTENTS PAGE NO.

1 MEANING OF RBI 8

2 FUNCTIONS OF RBI 9

3 STRUCTURE OF RBI 14

4 ADDRESSING CHALLENGES 13

5 NBFC 20

6 FUNCTIONS OF NBFC 23

7 TYPES OF NBFC 24

8 HOW RBI CONTROLLING NBFC 31

9 GUIDLINENS OF RBI TO NBFC 37

10 SWOT OF NBFC 41

11 Future requirements of NBFC 44

12 Current Status of NBFC: 47


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13 CONCLUSION 49

14 BIBLOGRAPHY

RBI and NBFC

RBI and NBFC

Overview on RBI as well as NBFC.

10/20/2012


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Reserve Bank of India

MEANING OF RBI:

The Reserve Bank of India (RBI) is India's central banking institution, which controls the mon-

etary policy of the Indian rupee.

It was established on 1 April 1935 during the British Raj in accordance with the provisions of the

Reserve Bank of India Act, 1934.

The share capital was divided into shares of100 each fully paid which was entirely owned by

private shareholders in the beginning. Following India's independence in 1947, the RBI was na-tionalized in the year 1949.

The RBI plays an important part in the development strategy of the Government of India. It is a

member bank of the Asian Clearing Union.


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Functions of RBI

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations.

The distribution of one rupee notes and coins and small coins all over the country is undertaken

by the Reserve Bank as agent of the Government.

The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency

notes. The assets and liabilities of the Issue Department are kept separate from those of the

Banking Department.

Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold

coin, gold bullion or sterling securities provided the amount of gold was not less than 40 crore

(400 million) in value.

The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee

securities, eligible bills of exchange and promissory notes payable in India.

Due to the exigencies of the Second World War and the post-war period, these provisions were

considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and

foreign exchange reserves of 200crore (2 billion), of which at least 115crore (1.15 billion) should

be in gold and 85crore (850 million) in the form of Government Securities. The system as it ex-

ists today is known as the minimum reserve system.

Monetary authority

The Reserve Bank of India is the main monetary authority of the country and beside that the cen-

tral bank acts as the bank of the national and state governments.


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It formulates implements and monitors the monetary policy as well as it has to ensure an ade-

quate flow of credit to productive sectors.

Objectives are maintaining price stability and ensuring adequate flow of credit to productive sec-

tors. The national economy depends on the public sector and the central bank promotes an ex-

pansive monetary policy to push the private sector since the financial market reforms of the

1990s.

Regulator and supervisor of the financial system

The institution is also the regulator and supervisor of the financial system and prescribes broad

parameters of banking operations within which the country's banking and financial system func-

tions.

Its objectives are to maintain public confidence in the system, protect depositors' interest and

provide cost-effective banking services to the public.

TheBanking Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI) for

effective addressing of complaints by bank customers.

The RBI controls the monetary supply, monitors economic indicators like the gross domestic

product and has to decide the design of the rupee banknotes as well as coins.

Managerial of exchange control

The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderly development and

maintenance of foreign exchange market in India.

Issuer of currency

The bank issues and exchanges or destroys currency notes and coins that are not fit for circula-

tion.


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The objectives are giving the public adequate supply of currency of good quality and to provide

loans to commercial banks to maintain or improve the GDP.

The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system

of the country to utilize it in its best advantage, and to maintain the reserves.

RBI maintains the economic structure of the country so that it can achieve the objective of price

stability as well as economic development, because both objectives are diverse in themselves.

Developmental role

Performs a wide range of promotional functions to support national objectives.

Banker of Banks

Nagpur branch holds most of India's gold deposits

RBI also works as a central bank where account holders (are commercial bank's) can deposit

money.

RBI maintains banking accounts of all scheduled banks.Commercial banks create credit. It is the

duty of the RBI to control the credit through the CRR, bank rate and open market operations.
http://en.wikipedia.org/wiki/File:Nagpur_Reserve_Bank.JPGhttp://en.wikipedia.org/wiki/File:Nagpur_Reserve_Bank.JPGhttp://en.wikipedia.org/wiki/File:Nagpur_Reserve_Bank.JPGhttp://en.wikipedia.org/wiki/File:Nagpur_Reserve_Bank.JPG


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As banker's bank, the RBI facilitates the clearing of checks between the commercial banks and

helps inter-bank transfer of funds.

It can grant financial accommodation to schedule banks. It acts as the lender of the last resort by

providing emergency advances to the banks.

It supervises the functioning of the commercial banks and take action against it if need arises.


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Structure of RBI


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Central Board of Directors

The Central Board ofDirectors is at the top of the Reserve Banks organisational structure. Ap-

pointed by the Government under the provisions of the Reserve Bank of India Act, 1934, the

Central Board has the primary authority and responsibility for the oversight of the Reserve Bank.

It delegates specific functions to the Local Boards and various committees. The Governor is the

Reserve Banks chief executive. The Governor supervises and directs the affairs and business of

the RBI. The management team also includes Deputy Governors and Executive Directors. The

Central Government nominates fourteen Directors on the Central Board, including one Director

each from the four Local Boards. The other ten Directors represent different sectors of the econ-

omy, such as, agriculture, industry, trade, and professions. All these appointments are made for a

period of four years. The Government also nominates one Government official as a Director rep-

resenting the Government, who is usually the Finance Secretary to the Government of India and

remains on the Board during the pleasure ofthe Central Government. The Reserve Bank Gov-

ernor and a maximum of four Deputy Governors are also ex officio Directors on the Central

Board.

Local Boards

The Reserve Bank also has four Local Boards, constituted by the Central Government under the

RBI Act, one each for the Western, Eastern, Northern and Southern areas of the country, which

are located in Mumbai, Kolkata, New Delhi and Chennai. Each of these Boards has five mem-

bers appointed by the Central Government for a term of four years. These Boards represent terri-

torial and economic interests of their respective areas, and advise the Central Board on matters,

such as, issues relating to local cooperative and indigenous banks. They also perform other func-

tions that the Central Board may delegate to them.


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Offices and Branches

The Reserve Bank has a network of offices and branches through which it discharges its respon-

sibilities. The units operating in the four metrosMumbai, Kolkata, Delhi and Chennai are

known as offices, while the units located at other cities and towns are called branches. Currently,

the Reserve Bank has its offices, including branches, at 27 locations in India. The officesand

larger branches are headed by a senior officer in the rank of Chief General Manager, designated

as Regional Director while smaller branches are headed by a senior officer in the rank of General

Manager.

Central Office Departments

Over the last 75 years, as the functions of the Reserve Bank kept evolving, the work areas were

allocated among various departments. At times, the changing role of the Reserve Bank necessi-

tated closing down of some departments and creation of new departments. Currently, the Banks

Central Office, located at Mumbai, has twenty-seven departments. (Box No.3) These depart-

ments frame policies in their respective work areas. They are headed by senior officers in the

rank of Chief General Manager.


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The Central Board has primary authority for the oversight of RBI. It delegates

specific functions through its committees, boards and sub-committees.


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Board for Financial Supervision (BFS)

In terms of the regulations formulated by the Central Board under Section 58 of the RBI Act, the

Board for Financial Supervision (BFS) was constituted in November 1994, as a committee of the

Central Board, to undertake integrated supervision of different sectors of the financial system.

Entities in this sector include banks, financial institutions and non-banking financial companies

(including Primary Dealers). The Reserve Bank Governor is the Chairman of the BFS and the

Deputy Governors are the ex officio members. One Deputy Governor, usually the Deputy Gov-

ernor in-charge of banking regulation and supervision, is nominated as the Vice-Chairperson and

four directors from the Reserve Banks Central Board are nominated as members of the Board by

the Governor. The Board is required to meet normally once a month. It deliberates on various

regulatory and supervisory policy issues, including the findings of on-site supervision and off-

site surveillance carried out by the supervisory departments of the Reserve Bank and gives direc-

tions for policy formulation. The Board thus plays a critical role in the effective discharge of the

Reserve Banks regulatory and supervisory responsibilities.

Audit Sub-Committee

The BFS has constituted an Audit Sub-Committee under the BFS Regulations to assist the Board

in improving the quality of the statutory audit and internal audit in banks and financial institu-

tions. The Deputy Governor in charge of regulation and supervision heads the sub-committee

and two Directors of the Central Board are its members.

Board for Regulation and Supervision of Payment and Settlement

Systems (BPSS)

The Board for Regulation and Supervision of Payment and Settlement Systems provides an over-

sight and direction for policy initiatives on payment and settlement systems within the country.

The Reserve Bank Governor is the Chairman of the BPSS, while two Deputy Governors, three

Directors of the Central Board and some permanent invitees with domain expertise are its mem-

bers. The BPSS lays down policies for regulation and supervision of payment and

settlement systems, sets standards for existing and future systems, authorizes such systems, and

lays down criteria for their membership.


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Subsidiaries of RBI

The Reserve Bank has the following fully - owned subsidiaries:

Deposit Insurance and Credit Guarantee Corporation (DICGC)

With a view to integrating the functions of deposit insurance and credit guarantee, the Deposit

Insurance Corporation and Credit Guarantee Corporation of India were merged and the present

Deposit Insurance and Credit Guarantee Corporation (DICGC) came into existence on July 15,

1978. Deposit Insurance and Credit Guarantee Corporation (DICGC), established under the

DICGC Act 1961, is one of the wholly owned subsidiaries of the Reserve Bank. The DICGC in-

sures all deposits (such as savings, fixed, current, and recurring deposits) with eligible banks ex-

cept the following:

(i) Deposits of foreign Governments;

(ii) Deposits of Central/State Governments;

(iii) Inter-bank deposits;

(iv) Deposits of the State Land Development Banks with the State co-operative bank;

(v) Any amount due on account of any deposit received outside India;

(vi) Any amount, which has been specifically exempted by the corporation with the previous ap-

proval of Reserve Bank of India. Every eligible bank depositor is insured upto a maximum of

Rs.1,00,000 (Rupees One Lakh) for both principal and interest amount held by him.

National Housing Bank (NHB)

National Housing Bank was set up on July 9, 1988 under the National Housing Bank Act, 1987

as a wholly-owned subsidiary of the Reserve Bank to act as an apex level institution for housing.

NHB has been established to achieve, among other things, the following objectives:

To promote a sound, healthy, viable and cost effective housing finance

system to all segments of the population and to integrate the

housing finance system with the overall financial system.

To promote a network of dedicated housing finance institutions to

adequately serve various regions and different income groups.

To augment resources for the sector and channelise them for housing.

To make housing credit more affordable.

To regulate the activities of housing finance companies based on


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regulatory and supervisory authority derived under the Act.

To encourage augmentation of supply of buildable land and also building

materials for housing and to upgrade the housing stock in the country.

To encourage public agencies to emerge as facilitators and suppliers of

serviced land for housing.

Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

The Reserve Bank established BRBNMPL in February 1995 as a wholly-owned subsidiary to

augment the production of bank notes in India and to enable bridging of the gap between supply

and demand for bank notes in the country. The BRBNMPL has been registered as a Public Lim-

ited Company under the Companies Act, 1956 with its Registered and Corporate Office situated

at Bengaluru. The company manages two Presses, one at Mysore in Karnataka and the other at

Salboni in West Bengal.

National Bank for Agriculture and Rural Development (NABARD)

National Bank of Agriculture and Rural Development (NABARD) is one of the subsidiaries

where the majority stake is held by the Reserve Bank. NABARD is an apex Development Bank

with a mandate for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and,village industries, handicrafts and other rural crafts. It also has the

mandate to support all other allied economic activities in rural areas, promote integrated and sus-

tainable rural development and secure prosperity of rural areas.

Staff Strength

As on June 30, 2009, the Reserve Bank had a total staff strength of 20,572. Nearly 46% of the

employees were in the officer grade, 19% in the clerical cadre and the remaining 35% were sub

staff. While 17,351 staff members were attached to Regional Offices, 3,221 were attached to var-

ious Central Office departments.


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Training and Development

The Reserve Bank attaches utmost importance to the development of human capital and skill up-

gradation in the Indian financial sector. For this purpose, it has, since long, put in place several

institutional measures for ongoing training and development of the staff of the banking industry

as well as its own staff.

Training Establishments

The Reserve Bank currently has two training colleges and four zonal training centres and is also

setting up an advanced learning centre. The Reserve Bank Staff College (originally known as

Staff Training College), set up in Chennai in 1963, offers residential training programmes, pri-

marily to its junior and middle-level officers as well as to officers of other central banks, in vari-

ous areas. The programmes offered can be placed in four broad categories: Broad Spectrum,

Functional, Information Technology and Human Resources Management. The College of Agri-

cultural Banking set up in Pune in 1969, focuses on training the senior and middle level officers

of rural and co-operative credit sectors. In recent years, it has diversified and expanded the train-

ing coverage into areas relating to non-banking financial companies, human resource manage-

ment and information technology. Both these colleges together conduct nearly 300 training pro-

grammes every year, imparting training to over 7,500 staff. The Reserve Bank is also in the

process of setting up the Centre for Advanced Financial Learning (CAFL) replacing the Bankers

Training College, Mumbai. In addition, the Reserve Bank also has four Zonal Training Centres

(ZTCs), in Chennai, Kolkata, Mumbai (Belapur) and New Delhi, primarily for training its cleri-

cal and sub-staff. However, of late, the facilities at the ZTCs are also being leveraged for training

the junior officers of the Reserve Bank.

Academic Institutions

The Reserve Bank has also set up autonomous institutions, such as, National Institute of Bank

Management (NIBM), Pune; Indira Gandhi Institute for Development Research (IGIDR), Mum-

bai; and the Institute for Development and Research in Banking Technology (IDRBT), Hydera-


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bad. National Institute of Bank Management (NIBM) was established as an autonomous apex

institution with a mandate of playing a pro-active role of a think-tank of the banking system.

The Institute is engaged in research (policy and operations), education and training of senior

bankers and development finance administrators, and consultancy to the banking and financial

sectors. Publication of books and journals is also integral to its objectives. International Mone-

tary Fund (IMF), in collaboration with Australian Government Overseas Aid Programme (AUS-

AID) and the Reserve Bank, has set-up its seventh international centre, the Joint India-IMF

Training Programme (ITP) in NIBM for South Asia and Eastern Africa regions. The Indira Gan-

dhi Institute of Development Research (IGIDR) is an advanced research institute for carrying out

research on development issues. Starting as a purely research institution, it quickly grew into a

full-fledged teaching cum research organisation when in 1990 it launched a Ph.D. programme in

the field of development studies. The objective of the Ph.D. programme is to produce analysts

with diverse disciplinary background who can address issues of economics, energy and environ-

ment policies. In 1995 an M. Phil programme was also started. The institute is fully funded by

the Reserve Bank.


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Addressing Current and Future Challenges

Building on the firm foundation of our rich tradition, the Reserve Bank

is also changing with the times.

The Reserve Banks mandateyesterday, today and tomorrowis to set a monetary and finan-

cial course that will sustain the nations economic growth and health during global downturns,

periods of volatility and global upturns alike. Our actions prior to and during the recent period of

global financial upheaval exemplify these commitments. We have demonstrated willingness to

take pro-active measures to preserve gains and to ensure that progress is sustainable. The Re-

serve Bank responses during extraordinary times are aimed at maintaining financial stability in-

cluding maintaining sufficient rupee and foreign exchange liquidity to ensure that credit contin-

ues to flow to businesses and consumers and financial markets remain stable. We also continue

to address the challenge of ensuring that the national financial and monetary policy-making con-

tribute to positive, sustainable and inclusive growth across the income spectrum.

RBI: Some Notable Actions

The Reserve Banks willingness to use conventional and unconventional measures has helped

buffer the nation from severe crises. Here are some examples of our responses post-reforms:

. 2004 : Market Stabilisation Scheme - A

sterilisation instrument, like CRR and OMOs,used to absorb excessive forex flow and the result-

ant rupee liquidity

. 2004: Using prudential norms like risk weights and provisioning norms for commercial real es-

tate and capital market loans portfolio of banks to guard against their excessive bulging

. 2008-09 : Carefully considered and calibrated reduction of interest rates until situation stabi-

lised; and took various steps to make domestic and forex liquidity available; both, confidence

building moves

. 2011: Marginal Standing Facility Under which scheduled commercial banks can borrow

overnight (even by dipping into SLR portfolio) at their discretion up to one percent of their re-

spective NDTL at 100 basis points above the repo rate to provide a safety valve against unantici-

pated liquidity shocks

. 2012: Using Open Market Operations and CRR as pure LAF, liquidity instruments


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Customer Service: How Can they Help You?

customer outreach policy is aimed at informing the public, so that they know what to expect,

what choices they have and what rights and obligations they have in relation to banking services.

Our customer service initiatives are designed to protect customers rights, enhance the quality of

customer service and strengthen the grievance redressal mechanism in the banking sector as a

wholeand at the Reserve Bank itself. Our efforts include:

Customer Service Department (CSD): Questions? Problems? Concerns? Communicate

with this department ([email protected]) which was set up in 2006, based at the central office

in Mumbai, to respond to system-level customer issues.

Banking Codes and Standards Board of India: The Reserve Bank established this board

to encourage transparency in lending and fair pricing. This will give customers more confidence

in the system and encourage more usage of formal banking.

Banking Ombudsman: The Reserve Banks quasi-judicial authority for resolving disputes be-

tween commercial banks, primary cooperative banks and regional rural banks and their custom-

ers. There is one Banking Ombudsman in virtually every state.

(www.bankingombudsman.rbi.org.in)


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NBFC

Non-bank financial companies (NBFCs) are financial institutions that provide banking services

without meeting the legal definition of a bank, i.e. one that does not hold a banking license.

These institutions are not allowed to take deposits from the public. Nonetheless, all operations

of these institutions are still exercised under bank regulation.

However this depends on the jurisdiction, as in some jurisdictions, such as New Zealand, any

company can do the business of banking, and there are no banking licenses issued.

If an organization in New Zealand intends to describe itself as a bank and intends to use the word

bank in its title it must first receive approval and official registration and thus license from the

nation's central bank, the Reserve Bank of New Zealand.


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Functions of NBFC

1] Receiving of Deposits: The primary function of non-banking financial institution is to receive

deposits from the public in various ways such as issue of debentures, unit certificates, savings

certificates, subscription etc. Hence, deposits of non-banking companies comprise of money re-

ceived from the public by way of deposits or a loan or in any other form.

2] Lending of money: Another equally important function is lending of money. Non-banking

companies provide financial assistance in various forms-hire purchase finance, leasing finance,

consumption finance, and finance for social activities and so on. Easy and timely finance is

available and generally those customers who have been denied of bank finance approach these

companies and enjoy the credit facilities extended by them.

3] Investment of money: These companies also invest their surplus money on various outlets. In

the case of investment companies, their main function is to invest on principle securities and pass

on the benefits to small investors.

Services provided

Services Rendered by NBFCs:

1] Mobilisation of savings: The NBFCs play a positive role in accessing certain deposits seg-

ments. These companies encourage savings and promote thrift among public. They offer attrac-

tive schemes to suit the needs of different classes of customers and attract the idle money by of-

fering attractive rates of interest too. It is found that nearly 98 percept of the deposits received by

them are at the rate of 13 percept and above.

2] Provision of easy, simple and adequate credit: NBFCs offer and timely credit to those who are

in need of it. They do not follow much formalities and procedures. Moreover, they provide loans

even for meeting unusual expenses like marriage and other religious functions. The NBFCs are

accessible to all.


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3] Acting as financial supermarket: NBFCs provide a financial supermarket to customers by of-

fering a variety of services. They are very keen in scanning for diversification activities. A varie-

ty of services like mutual funds, specialist forex operations, counseling, merchant banking etc.

are being provided by them apart from their traditional services. Most of these companies reduce

risk through this diversification process.

5] Channelizing funds for productive purposes: NBFCs mobilize the small savings of the public

and direct them to productive ventures. Industrialists are able to carry on their production with

lesser capital since the capital intensive equipment is supplied to them by leasing companies.

4] Encouraging thrift and developing savings habit: NBFCs encourage thrift and develop savings

habit among people by receiving deposits from the public in various forms convenient to them.

Generally, they mobilize the savings the savings of the people through the issue of debentures,

unit certificates, savings certificates, chits, subscriptions, etc.

5] Providing housing finance: When commercial banks are generally reluctant to enter into the

field of housing finance, NBFCs, particularly Housing Finance Companies provide housing fi-

nance on convenient terms and thereby they play a significant role in fulfilling one of the basic

requirements of the mankind.

4] Increasing the standard of living: People with limited means are not able to enjoy the consum-

er durable goods. By providing consumer goods on easy instalments basis, these NBFCs increase

the standard of living of the people. Above all, an impetus has been given to the transport opera-

tors. Increased transport facilities facilitates the movement of goods from one place to another

and this availability of all kinds of goods, in turn, increases the standard of living of the people.

5] Promoting economic development: NBFCs play an expanded role so as accelerate the pace of

growth of the financial market and to provide a wider choice to investors. Most of them work on

the principle of providing a good return on savings while reducing the risk through diversifica-

tion. Thus, they promote business stability in the economy by keeping the capital market active

and busy. They also promote the growth of enterprises only. Moreover, they do not indulge in

speculative activities. They are interested in price stability and thus, they have a healthy influ-


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ence on the stock market. Thus, they contribute positively to the economic development of any

country.

6] Rendering investment advice: These companies, particularly investment companies provide

expert advice in investment of funds as well as for supervising investment. They provide protec-

tion to small investors by providing the much needed diversification of investment. They render

invaluable services to investors particularly to small ones by choosing the right type of securities

which will give the maximum yield.

Commercial Banks v/s Non-Banking Companies

Commercial banks and non-banking companies are both financial intermediaries receiving de-

posits from public and lending them or investing them as the case may be according to circum-

stances. Hence, NBFCs are called Para banks. But there are some vital differences between them.

They are:

1] Cheque can be issued against bank deposit whereas no such facility is available in the case of

NBFCs.

2] The commercial banks can manufacture credit out of the raw material of deposits by creating

claims against themselves. But, NBFCs cannot create credit as commercial banks do. They can

lend only out the resources on hand. So, they have limited capacity to create credit.

3] Commercial banks are able to enjoy certain facilities like rediscounting facilities, deposit in-

surance coverage facilities, refinancing facilities,

Etc. These facilities are not extended to NBFCs.

4] Generally, the commercial banks offer lesser rate of interest and also charge lesser rate of in-terest than that of the NBFCs.

5] Commercial banks are subjected to strict supervision and control of the RBI whereas the

NBFCs are more or less completely free from the RBI's control.


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6] A variety of assets in the form of loans of various types, cash credits, overdrafts, bills dis-

counting etc. are held by commercial banks whereas the asset of NBFCs are more or less special-

ized in nature. For instance, hire purchase companies specialize in consumer loans and housing

finance companies specialize in housing finance alone.

Though the NBFCs are competing with the commercial banks in tapping the savings of the pub-

lic in the form of deposits, most of the deposits of these companies find their way ultimately to

the commercial banks. In one way or other, they are re-deposited with banks. Besides, some

NBFCs do keep a certain percentage of their deposits with the nationalized banks. Hence, it is

vital that these two sectors must work hand in hand with each other in the Indian financial sys-

tem. When compared to banks, the volume of business done by these NBFCs is small


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Types of NBFC

Depending upon their nature of activities, non- banking finance companies can be classified into

the following categories:

1.Development finance institutions :

Development finance institution (DFI) is generic term used to refer to a range of alter-

native financial institutions including microfinance institutions, community development

financial institution and revolving loan funds.

These institutions provide a crucial role in providing credit in the form of higher risk

loans, equity positions and risk guarantee instruments to private sector investments in de-

veloping countries.

DFIs are backed by states with developed economies. In 2005, total commitments (as

loans, equity, guarantees and debt securities) of the major regional, multilateral and bilat-

eral DFIs totaled US$45 billion (US$21.3 billion of which went to support the private

sector).

DFIs have a general mandate to provide finance to the private sector for investments that

promote development.

The purpose of DFIs is to ensure investment in areas where otherwise, the market fails to

invest sufficiently.

DFIs aim to be catalysts, helping companies implement investment plans and especially

seek to engage in countries where there is restricted access to domestic and foreign capi-

tal markets and provide risk mitigation that enables investors to proceed with plans they

might otherwise abandon.


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DFIs specialize in loans with longer maturities and other financial products. DFIs have a

unique advantage in providing finance that is related to the design and implementation of

reforms and capacity-building programmes adopted by governments

2.Leasing companies:

Is any financial institution whose principal business is that of leasing equipments or fi-

nancing of such an activity?

3.Investment companies:

An investment company is a company whose main business is holding securities of oth-

er companies purely for investment purposes.

The investment company invests money on behalf of its shareholders who in turn share in

the profits and losses.

4.Modaraba companies :

"Mudarabah" is a special kind of partnership where one partner gives money to another

for investing it in a commercial enterprise.

The investment comes from the first partner who is called "rabb-ul-mal", while the man-

agement and work is an exclusive responsibility of the other, who is called "mudarib".

5.House finance companies:

Related to financecompanies which provide finance to buy houses.


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6.Venture capital companies:

Venture capital (VC) is financial capital provided to early-stage, high-potential, high

risk, growth startup companies.

The venture capital fund makes money by owning equity in the companies it invests in,

which usually have a novel technology or business model in high technology industries,

such as biotechnology, IT, software, etc.

The typical venture capital investment occurs after the seed funding round as growth

funding round (also referred to as Series A round) in the interest of generating a return

through an eventual realization event, such as an IPO or trade sale of the company.

Venture capital is a subset of private equity. Therefore, all venture capital is private equi-

ty, but not all private equity is venture capital

7.Discount & guarantee houses

8.Corporate development companies :

Corporate Development refers to the planning and execution of a wide range of strategies to

meet specific organizational objectives.

The kinds of activities falling under corporate development may include initiatives such as

recruitment of a new management team, plans for phasing in or out of certain markets or

products, considering a partner for a strategic alliance, establishing relationships with strate-

gic business partners, identifying and acquiring companies, securing financing, divesting of

assets or divisions, increasing intellectual property assets and so on.


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There is no formula for "corporate development" and the activities encompassed are often the

role of the CEO or other executives or experienced business consultants.

However, particularly in larger companies, corporate development is provided as a charter

for a particular executive or team.

In these cases, the opportunities and initiatives are numerous enough to justify specialists,

instead of being delegated to the office of the CEO and line of business executives.

When focused on product or financial issues, corporate development executives often have

MBA, CFA or CPA credentials.

Often the internal corporate development executives come from a legal background, due tothe complex contractual issues associated with many transactions.

The process of corporate development can also be applied to the task of growing the company

through mergers and acquisitions.

In this scenario, the project development will involve identifying potential target companies for

acquisitions or unions resulting in a new and more aggressive corporation.

The team will consider all possible outcomes from any given potential merger or acquisition and

attempt to project if the action is likely to result in positive growth or could possibly impair the

company permanently.

One of the manifestations of corporate development has to do with reshaping the management

arm of the corporation.

This may involve a process of phasing certain management positions out of the existing struc-

ture or creating new positions in an effort to strengthen the management team.


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As part of this type of approach, corporate development may also demand that one or more cur-

rent managers are released from the company and replaced with people who possess skills re-

quired to move the company forward.

When this is the case, the corporate development team will handle the functions of recruitment

and evaluation of potential hires.

Just as a management team may be revamped, corporate development may also be employed to

change the current focus for clients.

This may mean looking into the potential for breaking into new markets with existing products

or developing complementary products that will allow this type of expansion.

Corporate development strategy would monitor the trends associated with a corporation's prod-

ucts or services and helps the corporation establish strategies to find more customers.

In addition, corporate development works to maximize the profits of a corporation by figuring

out the appropriate pricing for a given good or service.

A corporate development team also leads discussions with sales department heads regarding how

to market corporate goods, organize marketing campaigns, analyze market research and incorpo-rate any customer advice or complaints into marketing strategies in such cases; extensive indus-

try specific business experience is often preferred which is why companies may hire an external

firm to help them engage in such moves


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How RBI controlling NBFC

By Supervision:

The RBI has instituted a strong and comprehensive supervisory mechanism for NBFCs.

The focus of the RBI is on prudential supervision so as to ensure that NBFCs function on

sound and healthy lines and avoid excessive risk taking.

The RBI has put in place a four pronged supervisory framework based on:

On-site inspection;

Off-site monitoring supported by state-ofthe

art technology;

Market intelligence; and

Exception reports of statutory auditors ofNBFCs.

The thrust of supervision is based on the asset size of the NBFC and whether it accepts/ holds

Deposits from the public.

The system of on-site examination put in place during 1997 is structured on the basis of

assessment and evaluation of CAMELS (Capital, Assets, Management, Earnings, Liquidity,

and Systems and Procedures) approach and the same is akin to the supervisory model adopt-ed by the RBI for the banking system.

Market intelligence systemis also being strengthened as one of theimportant tools of su-

pervision.


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This process of continuous and on-going supervision is expected to facilitate RBI to pick

up warning signals,which can result in triggering supervisory action promptly.

The returns being submitted by the NBFCs arc reviewed and re-looked at intervals to

widen the scope of information so as to address the requirements either for supervisory ob-

jectives or for furnishing the same to variousinterest groups on the important aspect of the

working of these companies.

The companies notholding public deposits arc supervised in a limited manner with com-

panies with asset size of Rs.100crore and above being subjected to annual inspection and

other non-public deposit companies by rotation once in every 5 years.

The exception reports, if any, from the auditors of such companies coupled with adverse

market information and the sample check at periodical intervals are the main tools for moni-

toring the activities of such companysvis--vis the RBIregulations.

By Policy Developments

The RBI introduced a number of measures toenhance the regulatory and supervisory

standards of this sector, to bring them on parwith commercial banks over a period of

time.

The regulatory norms, applicable to NBFCs are presented in Box 6.2. Regulatory

measures adopted during the year aim at aligning the interest rates in this sector with the

rates prevalent in the rest of the economy, tightening prudential norms, standardizing op-

erating procedures and aligning the RBIs regulations with the requirements of the

amended Companies Act.

ALSO by imposing certain norms and restrictions some of them are

as follows.


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A)

1)Certificate of Registration:

No company, other than those exempted by the RBI, cancommence or ea. the business of

non-banking financial institutionwithout obtaining a CoR RBI.

The pre-requisite for eligibility for such a CoR is that the NBFC have a minimum NOF of

Rs. 25 lakh (since raised to Rs. 2crore on and April 21, 1999 for anynew applicant

NBFC). The RBI considers grant CoR after satisfyingitself about the companys compli-

ance with the c enumerated in

2)Maintenance of Liquid Assets:

NBFCs have to invest in unencumbered approved securities, valued at a not exceeding

current market price, an amount which,at the close of business on any day, shall not be

less than 5.0per cent but not exceeding 25.0 per cent specified by RBI, of thedeposits out-

standing at the close of business on the working day of the second preceding quarter.

3)Creation of Reserve Fund:

Every non-banking financial company shall create a reserve fundand transfer thereto a

sum not less than 20.0 per cent of its netprofit every year as disi in the profit and loss ac-

count and beforeany dividend is declared. Such fund to be created by every NBFC

Of the fact whether it accepts] deposits or not. Further,no appropriation can be made from

the fund ft. purpose withoutprior written approval of RBI.

B) Deposit Acceptance Related Regulations:

1)Ceiling on quantum of public deposits:


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Loan and investment companies - 1.5 times of NOF if the company has NOF of

Rs. 25 lakh, minimum investment grade (MIG) creditrating, comply with all the

prudential norms and has CRAR of15 per cent. Equipment leasing and hire pur-

chase financecompanies - if company has NOF of Rs. 25 lakh and complies

with all the prudential norms.

i. with MIG credit rating and 12 per cent CRAR - 4 times of NOF

ii. without MIG credit rating but CRAR 15 per cent or above -1.5 times of NOF,

or Rs. 10crore, whichever is less.

2)Investment in liquid assets:

NBFCs - 15 per cent of outstanding public deposit liabilities as

at the close of business on the last working day of the second

preceding quarter, of which

i. not less than 10 per cent in approved securities and

ii. Not more than 5 per cent in term deposits with scheduledcommercial

banks.

Directions for investments by RNBCs were rationalized in June

2004 with a view to reducing the overall systemic risk in the

Financial sector and safeguarding the interest of the depositors.

In this regard the following roadmap was prescribed:

a) From the quarter ended June 2005 and onwards, RNBCs were

permitted to invest only to the extent of 10% of the Aggregated

Liabilities to Depositors (ALDs) as at the second preceding

Quarter or one time of their Net Owned Funds, whichever is


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Non-Banking Financial Companies lower, in the manner which in their

opinion of the company is safe as per approval of its Board of Directors.

b) From the quarter ended June 2006 onwards, this limit would

stand abolished and RNBCs would not be permitted to invest

any amount out of ALDs as per their discretion. However, to

avoid strain, in complying with 100% directed investments

by companies, the same had been modified to 95% of ALD

up to March 31, 2007 and 100% of ALD thereafter. These

liquid asset securities are required to be lodged with one of

the scheduled commercial banks or Stock Holding Corporation

Of India Ltd.. or a depository or its participant (registered

with SEB1).Effective October 1, 2002, government securities

are to be necessarily held by NBFCs either in Constituents

Subsidiary General Ledger Account with a scheduled

Commercial bank or in a demit account with a depository

participant registered with SEBI.These securities cannot be

withdrawn or otherwise dealt with for any purpose other than

Repayment of public deposits.

3)Period of Deposits :

No demand deposits

NBFCs12 to 60 months

RNBCs12 to 84 months

MNBCs (chit Funds)6 to 36 months

4)Ceiling of deposit rate:

NBFCs, MNBCs andNidhis - 11.0 per cent per annum (effective March 4,2003)

RNBCs - Minimum interest of 4.0 per cent on daily deposits and


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6.0 per cent on other than daily deposits. Interest may be paid or

Compounded at periods not shorter than monthly rests.

5)Advertisement methodology for acceptance of depos-

its/public deposits :

Every company which accepts deposits by advertisement has to comply with the ad-

vertisement rules prescribed in this regard, the deposit acceptance form should con-

tain certain prescribed information, issue receipt for deposits and maintain a deposit

register. Etc.

6)Submission of returns :

All NBFCs holding or accepting public deposits have to submit periodical returns to

RBI at Quarterly, half yearly and annual intervals.

C) Prudential Norms applicable to only those NBFCs which are

accepting/holding public deposits.

1) Capital to Risk Assets Ratio CRAR):

The NBFCs holding/accepting public deposits are required to maintain CRAR as

under:

i. Equipment leasing companies/hire purchase financecompanies (with MIG credit

rating) 12 percent

ii. Equipment leasing companies/hire purchase finance

companies (without MIG credit rating) 15 percent

iii. Loan/investment companies 15 percent

iv. RNBCs 12 per cent


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CRAR comprisestier I and tier II capital To be maintained on a

Daily basis and not merely on the reporting dates. Tier I Capital

core capital or NOF but includes compulsorily convertiblepreference shares

(CCPS) as a special case for CRAR purposes. Tier

II Capitalall quasi-capital like preference shares (other than

CCPS) subordinated debt, convertible debentures, etc. Tier III

Capital not to exceed tier I capital General provisions and loss

reserves not to exceed 1.25 per cent of the riskweighted

Assets. Subordinated debt issued with original tenor of 60 months

Or more.

2) Restrictive norms:

Acceptance of public deposits not allowed if the prudential norms are not

complied with fully.

Any NBFC defaulting in repayment of the matured deposits prohibited from cre-

ating any further assets until the defaults are rectified.

Investments in real estate, except for own use, restricted to 10per cent of the

owned fund. Investments in unquoted shares restricted as under:EL/HP Compa-

nies 10 percent of owned fund Loan/investment companies 20 per cent of owned

fund No further investments in real estate or unquoted shares in case of excess po-

sition held till its regularization.

Sufficient adjustment period allowed - further extension on merits of each case.

3) Credit/investment concentration norms :

Single borrower exposure limits credit - 15 percent of owned fund

Investments - 15 percent of owned fund

Single group of borrower exposure limits credit - 25 percent of owned fund


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Composite (credit and investments) exposure limits

Single borrower - 25 percent of owned fund

Single group of borrowers - 40 percent of owned fund

Exposure norms also applicable to own group companies and

Subsidiaries.

A) Includes all forms of credit and credit related and certain

Other receivables as also off balance sheet exposures.

B) Debentures/bonds to be treated as credit for the purpose of

Prudential norms but as investments for the purpose of

Balance sheet and compliance with investment obligations.

4)Reporting System: Half yearly return :

Half-yearly returns to be submitted as at the end of March and September every year,

A) Time allowed for submission - 3 months from the due date,

B) The return to be certified by the statutory auditors of the

Company. However, it need not wait for audit and the figures

furnished therein could be the unaudited figures but must

be certified by auditors

d) Prudential Norms applicable to all NBFCs irrespective of

whether they accept/hold public deposits or not.

1) Income Recognition Norms.

The recognition of income on the NPA is allowed on cash basis only. The

unrealized income recognized earlier is required to be reversed.

2) NPA norms.


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Recognition of income on accrual basis before the asset becomes NPA as under:

Loans and Advances: up to 6 months and 30 days

past due period (past due period done away with effect from March

31, 2003) Lease and Hire Purchase Finance: 12 months

3) Restrictive Norms

Loans against own shares not allowed.

4) Policy on demand/call loans:

Companies to frame a policy for demand and call loans relating to cut-off date for

recalling the loans, the rate of interest,

Periodicity of such interest, periodical reviews of such performance,etc.

5) Accounting Standards

All the Accounting Standards and Guidance Notes issued by

Institute of Chartered Accountants of India (ICAl) is applicable

to all NBFCs in so far as They are not inconsistent with theguidelines of RBI.

6) Accounting for investments

All NBFCs to have a well-defined investment policy.

Investments classified into two categories

(1) Long term and

(ii) Current investments.

Long term investments to be valued as per Accounting Standard,Issued by ICAI.

Current investments to be classified into - (a) quoted and (b)unquoted.

Current quoted investments to be valued at lower of cost or marketvalue.


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Block valuation permitted - Notional gains or losses within the

Block permitted to be netted - but not inter-block, net notionalgains to be ignored

but notional losses to be provided for.

Valuation norms for current unquoted investments are as under:

i. Equity shares (at lower of cost or breakup value or fair value)

i. Re I/- for the entire block of holding if the balance sheet of

1. the investee company is not available for the last two years

ii. Preference shares at lower of cost or face value

iii. Government securities at carrying cost

iv. Mutual Fund units at net asset value (NAV) for each scheme and

v. Commercial paper (CP) at its carrying cost

7) Asset Classification

All forms of credit (including receivables) to be classified into four

Categories -

Standard asset

Sub-standard asset

Doubtful asset

Loss asset

8) Provisioning for Non-PerformingAssetsLoans and Ad-

vances.

Standard assets - No provision Sub-standard assets- 10 per cent of outstanding

balance


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Doubtful assets - on unsecured portion 100 per cent and on secured portion 20, 30

and 50 per cent depending on the age of the doubtful assets Loss asset - 100 per

cent of the outstanding.

9) Provisioning for Non-PerformingAssetsEquipment

Lease andHire Purchase accounts.

Unsecured portion to be fully provided for

Further provisions on net book value (NBV) of EL/HP assets

Accelerated additional provisions against NPAsNPA for 12months or

more but less than 24 months 10 per cent ofNBVNPA for 24 months or

more but less than 36 months 40per cent of NBVNPA for 36 months or

more but less than 48months 70 per cent of NBVNPA for 48 months or

more 100per cent of NBVValue of any other security considered on-

lyagainst additional provisions.

Rescheduling in any manner willnot upgrade the asset up to 12 months of

satisfactoryperformance under the new terms. Repossessed assets to be-

treated in the same category of NPA or own assetsoptionlies with the

company.

10) RiskWeights and CreditConversion factors.

Risk - weights to be applied to all assets except intangibleassets.

Risk - weights to be applied after netting off the provisions held against

relative assets.

Risk - weights are 0, 20 and 100.


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Assets deducted from owned fund like exposure to subsidiariesor compa-

nies in the same group or intangibles to be assigned0 per cent risk -

weight.

Exposures to all-India financial institutions (AIFIs) at 20 percent risk -

weight and all other assets to attract 100 per centrisk - weights.

Off-balance sheet items to be factored at 50 or 100 and thenconverted for

risk - weight.

11) Disclosure requirements

1. Every NBFC is required to separately disclose in its balance1. Sheet the provisions made as outlined above without nettingthem

from the income or against the value of assets.

2. The provisions shall be distinctly indicated under separateheads of accounts as under:

i. provisions for bad and doubtful assets; and

ii. Provisions for depreciation in investments.

3. Such provisions shall not be appropriated from the generalprovisions and loss reserves

held, if any, by the NBFC.

4. Such provisions for each year shall be debited to the profitand loss account. The excess of

provisions, if any, held underthe heads general provisions and loss reserves may be writ-

ten back without making adjustment against them.

5. Nidhis and Chit Fundcompanies exempted.


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Guidelines of RBI to NBFC:

Priority Status:

Bank loans to all MFIs, including NBFCs working as MFIs on or after April 1,

2011, will be eligible for classification as priority sector loans under respective

category of indirect finance only if the prescribed percentage of their total assets

are in the nature of "qualifying assets" and they adhere to the "pricing of interest"

guidelines to be issued.

Priority Sector status for Bank Loans to other NBFCs

Bank loans to other NBFCs wouldnot be reckoned as priority sectorloans with effect

from April 1, 2011

Qualifying Assets

i. Loans disbursed by an MFI to a borrower with a rural householdannual income not

exceedingRs.60,000 or urban and semi urban household income not exceeding

Rs.1,20,000.

ii. Loan amount not to exceed Rs.35, 000in the first cycle andRs.50, 000in subsequent

cycles. Totalindebtedness of the borrower not to exceed Rs.50, 000.

iii. Tenure of loan not to be less than 24 months for loan amount inexcess ofRs.15,000

withoutprepayment penalty; loan to beextended without collateral


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iv. Aggregate amount of loan, given for income generation, not to be less than 75 per

cent of the total loans given by the MFIs.

v. Loan to be repayable by weekly, fortnightly or monthly installments at the choice of

the borrower.

Pricing of Interest:

Banks should ensure a margin cap of12 per cent and an interest rate cap of 26 per

cent for their lendingto be eligible to be classified aspriority sector loans.

Individual Lending Outside SHG/JLG:

Loans by MFIs can also beextended to individuals outsidethe self-help group

(SHG)/jointliability group (JLG) mechanism


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Swot analysis of NBFCStrengths:-

The core strengths of NBFCs lie in their strong customer relationships, good understanding of regional dynam-

ics, service orientation, and ability to reach out to customers who would otherwise have been ignored

by banks. Because of their niche strengths, local knowledge, and presence in remote topographies, these

NBFCs are able to appraise and service non-bankable customer profiles and ticket sizes. They

are thus able to service segments of the population whose only other source of funding would be money-

lenders, often charging usurious rates of interest.

Weakness:-With the onset of retail financing, NBFCs are losing ground to banks. Also the profitability of NBFCs has also

come under pressure due to the competitive dynamics in the Indian financial system. Under these circum-

stances, NBFCs have begun to look at high-yield segments such as personal loans of small ticket sizes,

home equity, loans against shares, and public issue (IPO) financing, to boost profitability. To benefit from access to

funding at lower costs, among other reasons, some leading NBFCs have also metamorphosed into banks :Ashok

Leyland Finance Ltd, for instance, merged into Indus Ind Bank Ltd, and Kotak Mahindra Finance Ltd converted

into Kotak Mahindra Bank Ltd.

Opportunity:-

Virgin business segments are likely to have NBFCs as innovators. The NBFCs willleveragetheir first mover ad-

vantage to make reasonable profits in these segments. NBFCs will play the role of innovators, going forward,

with some doubling up as partners to banks. As innovators, they will help identify new businesses, or new ways

of doing traditional businesses; they will build business models that will attain a measure of stabil-

ity over time, before the banks step in. When that happens, it will be difficult for some NBFCs to hold their own

against the competition, and some will move out; others will enter into partnerships with banks, resulting

in a win-win relationship for both. Partnerships with banks can take a variety of forms. Some NBFCs will become

originating agents working for a fee, like DSAs, but others are likely to have more substantial partnerships with

banks. Such a partnership could, for instance, involve the NBFC performing credit appraisals, and sharing credit


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risk on assets that it has originated and sold to its partner bank. The success of this business model will depend crit-

ically on the NBFCs ability to assess the risks involved in the exposures it originates.

Threats:-Factors such as ability to sustain good asset quality, provide prompt and customized services, enter into fran-

chises or tie up arrangements with manufacturers and dealers, and build large networks to reach out

to customers, are vital for success on the business front; so are strong collection and recovery capabilities.

NBFC lack such facilities. On the financial side, competitive cost of funds and the ability to capi-

talize at regular intervals, in line with growth requirements, are key requirements for maintaining

competitive positions. Slowly and steadily NBFC is losing ground to banks and it only way out is go for

partnership with big.


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Future requirements of NBFC

NBFC play an important role in the credit economy. For NBFCs to continue to lend and aid eco-

nomic growth in the long term, the sector needs wider sources of borrowings, particularly of

longer maturity.

NBFC is a Non-Bank Financial Company registered with and regulated by the Reserve Bank of

India. NBFCs typically provide

small ticket retail loans; microfinance; asset finance such as loans for new & old

commercial vehicles , construction equipment, farm equipment, passenger vehicles; con-

sumer loans; capital market related products such as promoter finance (loan against shares) and

infrastructure finance including equipment and project finance.

These products fulfill an important need in the economy by providing credit to under-banked

sections of the economy and other key focus areas such as infrastructure.

Some of these products are provided by banks as well. However, from an operations and regula-

tions point of view, some of these products are more efficiently delivered from an NBFC plat-

form than from a bank platform.

In fact, NBFCs have played a leading role in development of key areas such as housing, small-

ticket retail, infrastructure and equipment finance much before the banks entered these segments.

NBFCs are required to maintain a capital adequacy ratio of either 12% or 15% depending on

their classification as compared to 9% for banks.


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While NBFCs can raise term deposits from public, the cost of a deposit raising machinery is pro-

hibitive. However, NBFCs do benefit due to an overall lesser regulatory supervision, control,

disclosure, reserves and directed lending requirements as compared to that for banks.

NBFCs primarily depend on borrowings from banks, mutual funds and wholesale markets.

They access various facilities and instruments including, amongst others, bank lines of credit,

commercial paper, pass through certificates, non-convertible debentures etc.

These borrowings are primarily in the domestic debt market with limited overseas borrowings.

The loans given by the NBFCs typically tend to be a fixed duration whereas the borrowings are a

combination of short and long maturities leading to maturity mismatches.

During the liquidity crunch in the financial markets in the past couple of months, NBFCs faced a

shortage of credit at reasonable costs.

Most NBFCs have had to slow down their disbursements and instead focus on repaying their ma-

turing short term obligations.

The Regulators have made significant efforts to improve liquidity in the overall financial markets

and particularly for NBFCs.

Some of these measures include special liquidity support to banks for lending to NBFCs, allow-

ing specific NBFCs to issue perpetual debt instruments and to raise up to USD 10 MN through

short-term foreign currency loans up to a maturity of 3 years amongst other measures.

These measures have eased the availability of credit a bit.


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In order that NBFCs continue to lend profitably and thereby aid growth of the economy over the

long term, the sector now needs certain measures which can provide wider sources of borrow-

ings, particularly of longer maturity.

This requires measures to deepen the debt markets in India and increase the availability of long

term funds in general.

External commercial borrowings (ECB) are possibly one source of long maturity funds, notwith-

standing the current liquidity shortage in global credit markets.

The Regulators can consider broad-basing the end-use of ECB to include domestic asset finance

on a selective basis linked to overall creditworthiness of the NBFC based on parameters like

long-term average NPA, CAR, overall corporate governance etc.

Mutual Funds are emerging as an important source of finance for the NBFCs. Regulations which

aid Mutual Funds to mobilize long term funds will enable them to lend long.

The current crisis has been one of confidence and not on credit quality. NBFCs have been

viewed with suspicion and during financial crisis NBFCs tend to get relatively more affected

than most other participants.

Historically NBFCs have been subject to lesser regulatory supervision and control as compared

to the banks. This has been used by the NBFC to their advantage. However, this probably is also

the cause of lack of confidence amongst investors.

A greater supervision & control by the regulator coupled with better disclosure may actually en-

hance confidence in the sector.


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Banks are now playing a lead role in the product segments which hitherto were the mainstay of

NBFCs. In this context, it is imperative for NBFCs to innovate and create niches to meet credit

needs of unique sections in the economy and thereby become partners to banks rather than com-

petitors.

NBFCs with a strong business proposition, pedigree and corporate governance may also consid-

er transforming themselves on to a banking platform if availability of long term finance contin-

ues to be a challenge.

Current Status of NBFC:

Recent years have witnessed significant increase in financial intermediation by the NBFCs.

But as far as the current status of the NBFCs is concerned, these are trapped in a cycle of high

costs of funds leading to high rate of interest for borrowers.

In order to meet with the fund requirements, NBFCs borrow from the markets directly at much

higher rates than the banks. Consequently, the rates at which they lend are also higher. As a re-

sult, higher interest outgo caps margins of the borrowers from the NBFCs and also deters their

growth.

NBFCs mostly lend to sectors like infrastructure equipment, farm equipment and commercial

vehicles since these areas do not get loans from the banks.

Conversion of some of these NBFCs into full-fledged banking structure would enable these in-

frastructure companies to raise loans at a cheaper rate. Low cost of fund raising will enable these

infra companies to maintain the competitive spirit of the industry.

Budget expectations


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Give private banking licenses - The NBFCs wants private banking license because they borrow

from the markets directly at much higher rates than the banks.

Consequently, the rates at which they lend are also higher. As a result, a higher interest outgo

caps margin of the borrowers from the NBFCs deters their growth.

NBFCs mostly lend to sectors like infrastructure equipment, farm equipment and commercial

vehicles since these areas do not get loans from the banks.

Halt monetary tightening - Another demand of the industry is that it wants the finance ministry

to urge Reserve Bank of India (RBI) on the issue of monetary tightening because though control-

ling inflation is of utmost importance, further monetary tightening measures will further boost

the refinancing rates for NBFCs.

This will result in higher lending and hence decline in overall volume of business. as well be-

cause of increase in borrowing rates and tight liquidity conditions will hamper borrowing and

lending conditions.

Restore the status of priority sector lending against gold loan - Since the RBI has said that

advances given by banks to NBFCs for loans that are provided to farmers against gold jewelry,

will not be treated as priority sector lending, the NBFCs now dont get priority sector loans and

hence the interest rates on the loans they take from banks have been increased because regular

loans are costlier than priority sector ones. Hence, the industry wants the status of priority sector

lending against gold loan to be restored so that fund raising plans of the industry will not be im-

pacted

Outlook

NBFC sector faced significant stresses on asset quality, liquidity and funding costs due to the

global economic slowdown & its impact on the domestic economy.

While all the NBFCs were affected, the impact varied according to the structural features of each

NBFC. However, with Indian economy recovering rapidly over the last few quarters, demand

side of NBFCs has improved and challenges to asset quality have also come down.


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As such, the sector is now more robust due to the lessons learned from this crisis. Though, prof-

itability is expected to be lower than historical levels due to conservative ALM (asset-liability

management), higher provisioning and avoidance of high yielding unsecured loan segments.

However, profits are at the same time expected to be much more stable & less susceptible to li-

quidity related pressures going forward.

A robust banking and financial sector is crucial for facilitating higher economic growth and fi-

nancial intermediaries like NBFCs have a definite and very important role in the financial sector,

particularly in a developing economy like ours.

NBFCs provide a vital link among various building blocks in a financial system. Hence, NBFCs

in India are expected to flourish in the medium-long term since they serve a strong source of fi-

nance to infra and auto segments which will be the key sectors for the countrys economic

growth in the coming years.

After the expected approval of banking license in this budget, these NBFCs will be able to avail

deposits from the public which will be the cheapest and best source of fund and will enable these

NBFCs to expand their operations in an aggressive manner.

Date post:	14-Apr-2018
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