NBFC 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 marketable nature, leasing, hire-purchase, insurance business, chit business; but it does not include any institution whose principal business is that of agriculture activity, industrial activity, sale / purchase / construction of immovable property.
NBFC 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 NBFC (Residuary non-banking company). Doing functions akin to that of banks; what is the difference then?
Role of the NBFCs. NBFCs perform a very importanf financial intermediation role contributing to the economic development of the country. They supplement the role of banking sector.
RBI Act and Framework The RBI regulates different types of NBFCs under the provisions of chapter III – B and Chapter III of the RBI Act, 1934. It was amended in 1997 incorporating (i) amendment of the existing sections – 45I,45 MA & 58 B (ii) insertion of new schemes – 45 A/B/C etc… (iii) substitution by new section (45 S)
Registration and Net Owned Fund:- With effect from Jan 1997, in order to commence new Company / carry on (existing company) the business of a Non banking Financial Institution , an NBFC must obtain a certificate of Registration from the RBI. Moreover its Net Owned Funds must be Rs. 200 lakhw.e.f April 21, 1999. Maintenance of Assets: NBFC are required to invest, in unencumbered approved Indian Securities, at least 5 percent or more of their outstanding deposits at the close of business on the last working day of the second preceding quarter as specified by the RBI from time to time. Reserve Fund: Every NBFC must create a reserve fund to which at least 20% of its net profits must be transferred before the declaration of any dividend.
NBFC are classified into…
Asset Finance Company : means any company carrying on as its principal business the financing of physical assets supporting productions/economic activity. Investment Company : a company that is a financial institution carrying on , as its principal business, the acquisition of securities. Loan Company : any company that is a financial institution whose principle business is providing finance, whether by making loans or advances or otherwise for any activity other than its own, but does not include an AFC. Infrastructure finance Company: is a financial institution whose principal business is financing of infrastructure activities.
Restrictions on NBFC - Minimum Credit Rating NBFC’s that have Net owned Funds of Rs.200 lakh can accept public deposits, provided they have minimum investment grade or other specified credit rating for their fixed deposits from one of the approved rating agencies, at least once a year.
Ceiling on Public deposits AFCs maintaining CRAR of 15% without credit rating. AFCs with CRAR of 12% and having minimum investment grade credit rating. LC/IC with CRAR of 15% and having minimum investment grade credit rating. 1.5 times of NOF or Rs.10 crore whichever is less. 4 times of NOF. 1.5 times of NOF.
RBI NON BANKING FINANCIAL(Deposit Accepting/ Holding Companies PRUDENTIAL NORMS DIRECTIONS, 2007 Pursuant to the recommendations of the Narasimham Committee and Shah Committee prescribed prudential norms for all types of financial companies with NOF’s of Rs.50 lakh and above, which had to be compulsorily registered with it. These are in conformity with the standards and disclosure norms applicable to the banks and Public Financial Institution.
RBI Issued directions with effect from Jan 31,1998 which relates to :- Income Recognition: -> based on record recognized accounting principles -> NPA – Assets, Term Loans, Bills, Other Current Assets, Lease rentals/Hire purchase, Loans, Advances Accounting Standards: -> All accounting standards and guidance notes issued by the institute of Charted Accountants of India(ICAI) must be followed. Asset Classification: ->NBFC’s are required to classify their loans & advances, lease/hire purchase assets and any other forms of credit into four groups ->Standard Assets -> Sub Standard Assets ->Doubtful Assets -> Loss Assets
Provisioning for Loans and Services: Capital Adequacy: -> All NBFC’s are required to maintain minimum capital ratio if Tier I and Tier II equivalent to 12% Concentration of Credit /Investments
Asset – Liability Management ALM System provides a comprehensive and dynamic framework for measuring, monitoring and managing liquidity and interest rates risks The ALM Process rests on Three Pillars:- ALM Information System
Management Information System
Information availability, accuracy, adequacy and expediency
Structure and responsibilities
Level of Top Management Involvement
Risk policies and tolerance levels.
Guidelines on Fair Practices Code for NBFC’s Applications form for Loans and their Processing Loan Appraisal and Terms/Conditions Disbursement of Loans including changes in Terms and Conditions.