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Non Banking Financial Company

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  • 1. MIS Presentation Non Banking Financial Company (NBFC) 1 Non Banking Financial Company (NBFC) 9/9/2009
  • 2. GROUP AJAY K. DHAMIJA N-1 MANDEEP SINGH REKHI N-27 RAGHAV RAJ BUDHIRAJA N-39 RAVINDER SINGH N-41 TRIPAT PREET SINGH N-43 SNEHAL SONI N-47 KUNAL KAPUR N-69 2 Non Banking Financial Company (NBFC) 9/9/2009
  • 3. Financial System Flow of funds (savings) Suppliers of Seekers of funds Funds (Firms & Govt) (Households) Flow of financial services Income and claims 3 Non Banking Financial Company (NBFC) 9/9/2009
  • 4. Financial System Financial Financial Financial Financial Institution Markets Instruments Services Organized / Primary/ Regulatory Unorganized Secondary Intermediaries Primary (Banking & Short Term /Secondary Non-banking) Non- Capital Markets Medium Term intermediaries Others Money Markets Long Term 4 Non Banking Financial Company (NBFC) 9/9/2009
  • 5. What is an NBFC ? A Financial Institution is an NBFC …which has a principle business of receiving deposits under any scheme As per Sec. 45 I (f) of or an arrangement or lending RBI Act, 1934 ,1956 in any manner Approved by central Government and notified by official Gazette 5 Non Banking Financial Company (NBFC) 9/9/2009
  • 6. NBFC vs BANKS NBFCs are doing functions akin to that of banks, however there are a few differences: (i) a NBFC cannot accept demand deposits (ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers (iii) deposit insurance facility of DICGC ( Deposit Insurance and Credit Guarantee Corporation )is not available for NBFC depositors unlike in case of banks. 6 Non Banking Financial Company (NBFC) 9/9/2009
  • 7. Identification Parameters for an NBFC given by RBI In April, 1999, RBI further announced that identification of an company as an NBFC will depend on : On the assets The income pattern of the company From the last audited balance sheet, RBI will decide on the principle business of the company Factor Determining an NBFC Financial Assets of the company > 50 % Total Assets of the Company (Netted off against Tangible Assets) Income from Financial Assets > 50 % Gross Income … then the company will be treated as an NBFC 7 Non Banking Financial Company (NBFC) 9/9/2009
  • 8. Chronology of NBFC’s regulatory Provisions Chapters III-B, III-C & V of The Miscellaneous Non-Banking Reserve Bank of India Act, Companies (RBI) Directions 1934 1977 Housing Finance Residuary non-Banking Companies (NHB) Directions, Companies ( RBI) Directions, 1989 1987 Reserve Bank of India Non Banking Financial (Amendment) Act, Companies March 1997 ( RBI) Directions, 1998 8 Non Banking Financial Company (NBFC) 9/9/2009
  • 9. Right Mix for Growth Robust GDP Growth Increasing Per Capita Income Rising Savings Rate Young Population Low Penetration DEMAND FOR FINANCIAL PRODUCT AND SERVICES 60000 EXPONENTIAL GROWTH 50000 1981- 7063 40000 1985- 15358 30000 1990- 24009 20000 1995- 55995 10000 0 1981 1985 1990 1995 9 Non Banking Financial Company (NBFC) 9/9/2009
  • 10. GROWTH FACTORS Lesser degree of regulation over NBFC as compared to banking system Broadening the range of services Greater customer orientation and higher rate of interest as compared to banks Requirements of minimum stipulated NOF (Net owned funds) & CRAR (Capital to Weighed Risk Average Ratio) Multiple regulatory authorities RBI SEBI IRDA Chit Funds act NHB (National Housing Banks) 10 Non Banking Financial Company (NBFC) 9/9/2009
  • 11. Initial Regulatory Environment as per RBI Act, 1934 Entry barrier were low There were no capital adequacy Regulatory Norms Factors No prudential norms Little restriction on interest rates Offered to the depositors 11 Non Banking Financial Company (NBFC) 9/9/2009
  • 12. NBFCs Comprises following Business Organizations Hire Purchase Finance Equipment Leasing Investment Activities Activities NBFC Loan Granting Mutual Fund Finance Activities Housing Finance Insurance Business 12 Non Banking Financial Company (NBFC) 9/9/2009
  • 13. Classification based on purpose of acceptance of deposit by NBFC Directions 1998 Equipment Investment Loan Hire Purchase Companies Leasing Companies (HP) (LC) (EL) (IC) Re-Classification of NBFC’s on December 6, 2006 Investment Loan Asset Finance Companies Companies Companies (IC) (LC) (AFC) 13 Non Banking Financial Company (NBFC) 9/9/2009
  • 14. Further Classification of the NBFC’s (aftermath of Directions issued in January 1998) Regulation for Regulations Regulation for Deposits For NBFC’s Core NBFC’s Not accepting Investment Accepting Deposit Public Deposits Companies 14 Non Banking Financial Company (NBFC) 9/9/2009
  • 15. Regulation for NBFC’s Accepting Public Deposits The companies accepting public deposits are required to comply with all the prudential norms mentioned below….. Income Recognition Asset Classification Accounting Standard Prudential Norms Provision for Bad & Doubtful Debts Capital Adequacy Credit / Investment Concentration 15 Non Banking Financial Company (NBFC) 9/9/2009
  • 16. Eligibility criteria for accepting Public Deposits An NBFC having NOF of Rs 200 lakhs and above can accept public Deposit. It has to obtain Minimum Stipulated Credit Rating from any one of the approved Credit Rating Agencies at least once in a year Copy of the Credit Rating should be sent to the RBI along with the Return on Prudential Norms. The NBFC should have acquired a credit rating of not less than AAA rating or its equivalent in the previous year. 16 Non Banking Financial Company (NBFC) 9/9/2009
  • 17. Eligibility criteria for accepting Public Deposits If the credit Rating is either down graded or upgraded, the NBFC is required to report to RBI within 15 Days from the date it receives such Information. It is to be noted that the deposits taken by the NBFC’s are repayable on demand and the Minimum period for which Public Deposits can be accepted is not less than 12 months with a maximum period of 84 Months. Months. There is a ceiling provided for the quantum of deposits accepted by NBFC’s 17 Non Banking Financial Company (NBFC) 9/9/2009
  • 18. Eligibility criteria for accepting Public Deposits The CRAR has been fixed 12 % and above. ( Rated NBFCs) and 15 % above (Un-Rated NBFCs) (Un- The Credit and the Investment Concentration norms has been fixed at 15 % / 25% …Depending upon whether • The Total Loan and the exposure is to a Single Investments have a ceiling of Borrower 25 % & 40 % of the owned or a Group of Borrowers funds, respectively … depending on whether the exposure is to a single party or to an industry groups 18 Non Banking Financial Company (NBFC) 9/9/2009
  • 19. RBI Guidelines for Un-Rated NBFC’s Un- All EL/HP Finance Companies that do not have: The minimum investment grade credit rating & mobilizing public deposits up to 1.5 times of their NOF or Rs 10 crore …whichever is lower, should not have a CAR less than 15 % 19 Non Banking Financial Company (NBFC) 9/9/2009
  • 20. Regulations for NBFC’s not Accepting Public Deposits All regulations related to Interest rates, period and ceilings on quantum of borrowing do not apply. However, to ensure the disclosure of a true and fair picture of their financial health, these companies are subjected to prudential Norms . Investment companies are exempted from all the provisions of the directions except the statutory provisions for registration and creation of reserve funds. 20 Non Banking Financial Company (NBFC) 9/9/2009
  • 21. Mother-of-All- Mother-of-All-Rules “ According to RBI guidelines issued on April 1,1999, All NBFC’s are required to maintain liquid assets of 15% of public deposits held on the last working day of the secondary preceding quarter. ” 21 Non Banking Financial Company (NBFC) 9/9/2009
  • 22. Books and Records maintained by NBFC’s The companies accepting public deposits are required to comply with all the prudential norms mentioned below….. Cash Book & Bank Book Due Date & Renewal Register Interest Register Books & Records Depositor’s Ledger Maintained by an NBFC Loan Ledger Investment Ledger General Ledger 22 Non Banking Financial Company (NBFC) 9/9/2009
  • 23. 23 Non Banking Financial Company (NBFC) 9/9/2009
  • 24. 24 Non Banking Financial Company (NBFC) 9/9/2009
  • 25. 25 Non Banking Financial Company (NBFC) 9/9/2009
  • 26. 26 Non Banking Financial Company (NBFC) 9/9/2009
  • 27. General Recommendations Integrate domestic financial market by making NBFCs – channel partners to larger banks Reduction in Interest Cost and hence benefits the Ultimate consumer Enhancing the credit delivery Mechanisms General recommend. Reversing the Inverse relationship between The size of borrowing and the cost of borrowing Strengthening the professionalism of the NBFC Sector through education and training 27 Non Banking Financial Company (NBFC) 9/9/2009
  • 28. Sector for present study : Equity in Cash/derivative Finding market inefficiencies of the market and then using the leverage to generate the profit Hedging Arbitrage High Leverage 28 Non Banking Financial Company (NBFC) 9/9/2009
  • 29. Key Performance Parameters Financials (Leverage , Profitability etc.) Return on Investment (ROI) Optimum Fund Utilization Aggregate Level Individual Level Growth Ratio - The rate of growth a company can attain without changing its profit margin, assets-to-sales ratio, debt-to-equity ratio, or dividend payout ratio, or without assets-to- debt-to- excessive borrowing or issuing new stock. Security Transaction Tax (at different rates on the value of the “taxable securities transaction” ) 29 Non Banking Financial Company (NBFC) 9/9/2009
  • 30. Contd.. Margin violation (warning at 80% utilization of effective deposits of CM with clearing corporation & at 100% level Clearing / trading facility is withdrawn) Clearing member Trading member Exposure limit Violation (the exposure limit of a Clearing Member exceeds his liquid net worth anytime including trading hours) Trading Member violation (open position of TM exceeds the Trading Member- Member- wise Position anytime including trading hours) Client Limit violation (open position of any client exceeds the Client-wide Client- Position limit) Market Limit violation (open position exceeds the Market-wide Position at Market- any time including during trading hours) Violation of Exercised Positions (When option contracts are exercised by a CM, where no open long positions for such CM/ TM and/ or constituent exist at the end of the day) 30 Non Banking Financial Company (NBFC) 9/9/2009
  • 31. Best in class organization Reliance Capital Ltd is a part of the Reliance - Anil Dhirubhai Ambani Group. Reliance Capital is one of India’s leading and fastest growing private sector financial services companies, and ranks among the top 3 private sector financial services and banking companies, in terms of net worth. Reliance Capital has interests in asset management and mutual funds, life and general insurance, private equity and proprietary investments, stock broking and other activities in financial services. 31 Non Banking Financial Company (NBFC) 9/9/2009
  • 32. WHY? Financial Highlights for the year ended March 31, 2007 Consolidated Total Income of Rs 2158 cr (increase of 128%) Consolidated Net Profit of Rs 703 cr (increase of 23% ) Total Income of Rs 884 cr (increase of 36%) Net Profit of Rs 646 cr (an increase of 20% ) EPS of Rs 30.73 (increase of 17%) Total Assets Rs. 6,769 cr 32 Non Banking Financial Company (NBFC) 9/9/2009
  • 33. Contd. Largest AUM (excess of Rs. 650 Billion.) Largest customer base (3.4 million customers) India’s most trusted - ET 2 years in running Largest new fund offering over Rs. 57 billion from over 900,00 investors. Only 100% owned Indian private sector mutual fund 29 schemes- equity, fixed income and money market schemes- Distribution reach across 300 towns/ cities in India 33 Non Banking Financial Company (NBFC) 9/9/2009
  • 34. An organization in the industry IKM Investors Services Limited Services :- •Trading in Equities in the cash and derivatives segment (Future and Options) of National Stock Exchange (NSE) and Bombay Stock Exchange. (BSE) •Trading in Commodities on Multi-Commodity Exchange (MCX) and National Commodity Exchange Of India (NCDEX). •Providing Demat Services on NSDL and CTCL 34 Non Banking Financial Company (NBFC) 9/9/2009
  • 35. An organization in the industry IKM Investors Services Limited Technologies :- •NEAT (NSE Trading Platform) •Client/Server (Stratus server at exchange and client SW on PC communicate via V- SAT/Leased lines) •At the server end, all trading information is stored in an in-memory database to achieve minimum response time and maximum system availability for users. •BOLT (Bombay On Line Trading system) •ODIN™ Integrated Application: - Multi-Exchange, Multi-Segment Front Office Trading System •CTCL (computer to computer Link) trading technology; 35 Non Banking Financial Company (NBFC) 9/9/2009
  • 36. An organization in the industry IKM Investors Services Limited Technologies :- • privilege of trading across 5 different markets (NSE-Equity, NSE-Derivatives, BSE- Equity, MCX & NCDEX) on a single screen. •ODIN™ supports heterogeneous networks - networks that use a mix of TCP and UDP traffic •Real Time Providers of Data / News •For getting Real Time Data/reports of the various Exchanges spread across the globe • Bloomberg •News Wire 18 •E-signal •All Excel sheet compatibles 36 Non Banking Financial Company (NBFC) 9/9/2009
  • 37. An organization in the industry IKM Investors Services Limited Technologies :- • DDE (Dynamic Data Exchange) (though newer ones are OLE,COM etc.) •a technology for communication between multiple applications under Microsoft windows and OS/2 •To share and link the Excel sheet of dealer with the Excel running at server. •HW •P IV systems , VSAT IDU , star topology between departments (Arbitrage , Demat ,Back office , Client Area) •X.25 connectivity ( Packet switched WAN using leased/phone/ISDN) •Trading servers (SMP servers) 37 Non Banking Financial Company (NBFC) 9/9/2009
  • 38. An organization in the industry IKM Investors Services Limited Need for further Development :- • Real time data from these Bloomberg/news wire are linked with customized excel based spread sheets for real time basis analysis based on the pre-programmed logic for arbitrage calculation. Results are then displayed to our dealers for further execution through trading terminals. The execution of the trades is done manually by the dealers. •Need for automation of this intelligence coupled with mathematical models of the market for an equity, in which the equity's price is a stochastic process •Binomial Options Pricing Model •Black–Scholes model •Put-call parity •Monte Carlo Options Model • Subject matter of Stochastic Calculus 38 Non Banking Financial Company (NBFC) 9/9/2009
  • 39. An organization in the industry IKM Investors Services Limited Need for further Development :- • Black–Scholes model •Price of a Call option with exercise price K on a stock currently trading at price S, i.e., the right to buy a share of the stock at price K after T years. The constant interest rate is r, and the constant stock volatility is σ. Where Φ is the standard Normal CDF •Price of Put option 39 Non Banking Financial Company (NBFC) 9/9/2009

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