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Study on Non Banking Financial Companies in India

Non-Bank Financial Companies (NBFCs) are largely involved in serving those classes of

borrowers who are generally excluded from the formal banking sector. However,

progressively over the years, the exclusiveness between the banks and NBFCs has somewhat

blurred. More recently, NBFCs are competing with banks in providing financial services such

as infrastructure finance and housing finance among others.

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

Act, 1956 and 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

but does not include any institution whose principal business is that of agriculture activity,

industrial activity, sale/purchase/construction of immovable property. 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 is also a

non-banking financial company (Residuary non-banking company).

NBFCs, historically are involved in providing financial services such as offering of small

ticket personal loans, financing of two/three wheelers, truck financing, farm equipment

financing, loans for purchase of used commercial vehicles/machinery, secured/unsecured

working capital financing, etc. Further, NBFCs also often take lead role in providing

innovative financial services to Micro, Small, and Medium Enterprises (MSME) most

suitable to their business requirements.

NBFCs are doing functions akin to that of banks; however there are a few differences:

(i) NBFC cannot accept demand deposits;

(ii) NBFC is not a part of the payment and settlement system and as such an NBFC

cannot issue cheques drawn on it; and

(iii) Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation

is not available for NBFC depositors unlike in case of banks.

1. Introduction about Industry

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Study on Non Banking Financial Companies in India3

2. Investment Company(IC)

Investment Company is a company which is a financial i nstitution carrying on as it s

principal business the acquisition of securities.

1.3 Investment Companies are further divided into following sub-

categories

Core Investment Companies

The Reserve Bank of India vide its Notification No. DNBS(PD)CC.No.

197/03.10.001/2010-11 dated August 12, 2010, a new class of NBFCs by the name ofCore Investment Companies (CIC) was added

Core Investment Companies in terms of RBIs Notification mea ns

A non-banking financial company carrying on the business of acquisition of shares and

securities and which satisfies the following conditions as on the date of the last audited

balance sheet:-

(i) it holds not less than 90% of its net assets in the form of investment in equity shares,

preference shares, bonds, debentures, debt or loans in group companies;

(ii) its investments in the equity shares (including instruments compulsorily convertible

into equity shares within a period not exceeding 10 years from the date of issue) in group

companies constitutes not less than 60% of its net assets

Net assets, for the purpose of this proviso, would mean total assets excluding

1. Cash And Bank Balances;

2. Investment In Money Market Instruments And Money Market Mutual Funds

3. Advance Payments Of Taxes; And

4. Deferred Tax Payment

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(iii) it does not trade in its investments in shares, bonds, debentures, debt or loans in

group companies except through block sale for the purpose of dilution or

disinvestment;

(iv) it does not carry on any other financial activity referred to in Section 45 I (c) and

45 I (f) of the Reserve Bank of India Act, 1934 except:

a) investment in

i. bank deposits,

ii. money market instruments, including money market mutual funds,

iii. government securities, and iv. bonds or debentures issued by group companies;

b) granting of loans to group companies; and

c) issuing guarantees on behalf of group companies.

1.4 Other Companies

(i) Asset Finance Company (AFC)

AFC would be defined as any company which is a financial institution carrying on as its

principal business the financing of physical assets supporting productive / economic

activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and

material handling equipments, moving on own power and general purpose industrial

machines. Financing of physical assets may be by way of loans, lease or hire purchase

transactions.

Principal business for this purpose is defined as aggregate of financing real/physical

assets supporting economic activity and income arising therefrom is not less than 60% of

its total assets and total income respectively.

(ii) Mutual Benefit Financial Company (MBFC)

Mutual Benefit Financial Company means a company which is a financial institution

notified by The Central Government under section 620A of The Companies Act 1956.

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ii. Non-Systematically Important NBFCs-ND

A NBFC ND whose asset size does not exceed Rs.100 crore as per the last audited

balance sheet may be considered as Non-systemically important NBFCs ND (NBFCND-

SI).

NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund

companies etc. NBFCs can be classified into deposit accepting companies and non-deposit

accepting companies. NBFCs are small in size and are owned privately. The NBFCs have

grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as

service oriented companies. Their main companies are banks and financial institutions.

According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of

India.

The NBFCs in advanced countries have grown significantly and are now coming up in a very

large way in developing countries like Brazil, India, and Malaysia etc. The non-banking

companies when compared with commercial and co-operative banks are a heterogeneous

(varied) group of finance companies. NBFCs are heterogeneous group of finance companies

means all NBFCs provide different types of financial services. Non-Banking Financial Companies constitute an important segment of the financial system.

NBFCs are the intermediaries engaged in the business of accepting deposits and delivering

credit. They play very crucial role in channelizing the scare financial resources to capital

formation.

1.6 Size of the Sector

The share of NBFCs assets in GDP (at current market prices) increased steadily from just 8.4

per cent as on March 31, 2006 to 12.5 per cent as on March 31, 2013; while the share of bank

assets increased from 75.4 per cent to 95.5 per cent during the same period (Table 1).In fact,

if the assets of all the NBFCs below Rs.100 crore are reckoned, the share of NBFCs assets to

GDP would go further.

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Assets of NBFC and Banking (SCBs) Sectors

as a % to GDP Year

Ratio

2006 2007 2008 2009 2010 2011 2012 2013

NBFC Assets to GDP

(%)

8.4 9.1 10.1 10.3 10.8 10.9 11.9 12.5

Bank Assets to GDP (%) 75.4 80.6 86.8 93.0 93.0 92.2 92.7 95.5

Source: (i) Reports on Trend and Progress of Banking in India, 2006-2013; (ii) Hand Book of

Statistics on Indian Economy, 2012-13

In comparison to assets of the banking system (Scheduled Commercial Banks-SCBs), assetsize of NBFC sector was around 13 per cent; while deposits (including RNBCs) of the sector

were less than 0.15 per cent of bank deposits (SCBs) as on March 31, 2013 (Chart 2). Public

deposits held with the NBFC sector declined in line with RBI policy directions. The decline

in public deposits was largely on account of RNBCs. Due to concerted efforts of RBI, the

number of deposit taking NBFCs has come down from 428 in June 2006 to 254 in June 2013.

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1.8 Responsibilities

The NBFCs accepting public deposits should furnish to RBI

Audited balance sheet of each financial year and an audited profit and loss account in

respect of that year as passed in the annual general meeting together with a copy of

the report of the Board of Directors and a copy of the report and the notes on accounts

furnished by its Auditors;

Statutory Annual Return on deposits - NBS 1;

Certificate from the Auditors that the company is in a position to repay the deposits asand when the claims arise;

Quarterly Return on liquid assets;

Half-yearly Return on prudential norms;

Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and

above or with assets of Rs. 100 crore and above irrespective of the size of deposits ;

Monthly return on exposure to capital market by companies having public deposits of

Rs. 50 crore and above; and

A copy of the Credit Rating obtained once a year along with one of the Half-yearly

Returns on prudential norms as at (v) above.

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1https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp
https://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asphttps://www.dnb.co.in/BFSISectorInIndia/NonBankC2.asp

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