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Financial Markets and Institutions

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Non Bank Financial Intermediaries

• NBFCs are privately owned, decentralized and relatively small-sized financial intermediaries. • Some are primarily engaged in fund-based activities and others provide financial services of diverse kinds. • The former are know as Non Banking Financial Companies (NBFCs) and the latter are known as Non Banking Financial Services Companies (NBFSCs).

• Two parts
1. 1995-96 2. 2002-03 • During 1995-96, NBFCs had undergone radical transformation. • The post 1995 overview is depicted with whatever information is available.

• There are thousands of NBFCs and only a small proportion of them report to the RBI. • The RBI (Amendment) Act, 1997 defines NBFC as an

“institution or company whose principal business is to accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner.” • As a result, a number of loan and investment companies registered under the Companies act by business houses for the purpose of investment in group companies are now included as NBFCs.

1. 2. 3. 4. 5. 6. 7. 8. Equipment Leasing Company (ELC) Hire-Purchase Finance Company (HPFC) Housing Finance Company (HFC) Investment Company (IC) Loan Company (LC) Mutual Benefit Financial Company (MBFC) Miscellaneous Non-Banking Company (MNBC) Residuary Non-Banking Company (RNBC)

• NBFCs perform a diverse range of functions and helps bridge the credit gaps. • They have served the households, farm, and small enterprise sector on a sustained basis. • A thriving, healthy and growing non-banking financial sector is necessary for promoting the growth of an efficient and competitive economy. • The difference between the banks and the NBFCs have blurred over the years.

Regulation of NBFC’s
• • • • In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution. The minimum net owned funds of Rs 25 lakh, 1997. The RBI has powers to cancel registration of NBFCs. They have to maintain 15% of their deposits in liquid assets effective from April 1, 1998. They have to create reserve fund and transfer not less than 20% of their net deposits to it every year. The RBI will direct them on issues of disclosures, prudential norms, credit , investment, etc. They have to achieve a minimum capital adequacy norm of 8% by march 31, 1996. They have to obtain a minimum credit rating from anyone of the three credit rating agencies.

• •
• •

• • • • •

• • •

Types of NBFCs registered with RBI 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)

• A ceiling of 15% interest rate on deposits has been prescribed for MBFCs or nidhis, effective from July 8, 1996. • A company will be treated as a nonbanking financial company if its financial assets are more than 50% of its total assets and income from financial assets is more than 50% of the gross income. • All NBFCs with an asset size of Rs. 100 crore and more as per the last audited balance sheet are now considered as systemically important NBFCs and are required to maintain CRAR of 10%. • The Maximum interest rate payable on public deposits by NBFCs are revised to 12.5 % per annum from April 24, 1997.

Some of the important regulations relating to acceptance of deposits by NBFCs are :
• The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand. • NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests. • NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. • NBFCs (except certain AFCs) should have minimum investment grade credit rating. • The deposits with NBFCs are not insured. • The repayment of deposits by NBFCs is not guaranteed by RBI.

Some of the important regulations relating to acceptance of deposits by NBFCs are : (contd.)
• Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits

 Investment Company:
 Involved in the business of shares, stocks, debentures, bonds issued by government or local authority that are marketable in nature.

Eg. Stock broking Companies, Gilt firms  Loan Company:
 Are loan giving companies which operate in the business of providing loans. These can be Housing loans, Gold loans, etc. Eg. Mannapuram Gold Finance, HDFC.

 Lease Finance
leases/ finances the purchase of tangible assets. E.g. Tata Capital, Pioneer Invest

Hire-Purchase Finance Company
is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions. Eg. Indus Finance, UV Boards

Housing Finance
the business of financing of acquisition or construction of houses, including acquisition or development of land in connection therewith. Eg. LIC Housing Finance, Sahara Housing.

 Mutual benefit Financial Company:
 company's profits are distributed to its participating customers each year in proportion to their individual exposures to the company.  policyholders have the right to receive portions of the company's profits, and often may elect the company's management.

 Residuary Non Banking Company:
 Principal business of receiving deposits under any scheme or arrangements or any other manner, or lending in any manner.  The deposit received do not involve installment, asset financing or loans.These are registered as NBFC with the RBI.

 Merchant banks  Financial advice and services, marketing of corporate securities, underwriting, loan syndication, project finance etc.

 Venture Capital Funds  Funds, Management and marketing expertise, capital gainstechnology and markets eg. VCF of IDBI, VCF of UTI  Factors  Collection, Three parties – Factor, client and customer, Fee, SBI Commercial and Factoring Services Ltd for exports  Credit Rating  Solvency of credit instruments, corporate credit rating, intrinsic and extrinsic factors, credence to banker and investor protection

• Depository and Custodial Services
– Trading, clearing, settlement, transfer, registration, record keeping – Counterparty risk, credit risk, bad deliveries, counterfeit scrips, forged certificates – Paperless trading, computer recording of transactions – E.g. SHCIL – National Clearance Depository System (NCDS), depositories act 1996

Thank You

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