Organization of the financial systemFinancial Intermediaries Financial Markets Financial Assets/InstrumentsBanks NBFC Mutual Insurance Money Capital/Securities Funds OrganizationMarket MarketLeasing Companies Primary Market SecondaryHire-Purchase/Consumer Finance MarketCompaniesHousing Finance Companies Primary/Direct Indirect DerivativesVenture Capital Funds Mutual Fund- ForwardMerchant Banking Organization Equity Innovative debt units Futures instruments Security ReceiptsCredit Rating Agencies Preference Options Pass Through Convertible DebenturesFactoring and Forfeiting Org., Debenture Certificates Non- Convertible s DebenturesStock broking firms Secured Premium NotesDepositories Warrants
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 are doing functions similar to banks. What is differencebetween banks & NBFCs ?
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 settlementsystem and as such cannot issue cheques to itscustomersIs it necessary that every NBFC should be registered with RBI?
In terms of Section 45-IA of the RBIAct, 1934, it is mandatory that everyNBFC should be registered with RBIto commence or carry on anybusiness of non-banking financialinstitution as defined in clause (a) ofSection 45 I of the RBI Act, 1934. www.professoraugustin.com
Which is a NBFC?A company which carried on as its business or part of its business the following activities: - financing - acquisition of securities - hire purchase - insurance - chit fund - mutual benefit companyBut does not include a company which carries on as its principal business: - agricultural operations, - industrial activities - Sale and purchase of goods - providing of services - purchase, sale and construction of immovable property
Definition of Principal BusinessRBI Press Release Dt. April 8, 1999 - If 50% or more of a company’s total assets (netted off by intangible assets) are financial assets and - If 50% or more of a company’s gross income is from financial assetsthen the Principal Business of the company is of a NBFC
Legal FrameworkAlways Remember NBFC per se is a licensed activity like Banking, Stock Broking, Money Changing. Acceptance of Public Deposits is irrelevant for NBFC test. Income earned & Deployment of Funds are determining factorsRBI Press Release No.1999-2000/1042 dated 8.2.2000
Registration and Net Owned Fund (Sec 45- IA) No NBFC shall commence or carry onbusiness of NBFI without obtaining a Certificateof Registration & having minimum Net ownedfunds•Registration with RBI is mandatory for all companiesinterested in carrying on non- banking finance activities.• Minimum Net Owned funds of Rs.2 Crores.
Concerned Areas A large number of NBFCs are working without registration: Companies working without registration and Companies rejected by RBI still operating. Penalties: Imprisonment 1 to 5 years and Fine of Rs. 1 lakh to 5 lakhs.
Change in control/management of a NBFCFor all NBFCs:- public notice 30 days before effecting the sale or transfer,- in two newspapers one English and local vernacular language,- jointly by NBFC, transferor and transferee,- within seven days of publication, intimation to RBI.For Deposit Accepting NBFCs - Prior approval of RBI - Obligation towards deposit holders
Classification of NBFCs• Based on nature of business: •Asset finance companies •Investment companies •Loan companies •Infrastructure finance companies
Classification of NBFCsBased on acceptance of Public Deposits - Deposit holding/accepting Company - Category ‘A’ - Non-Deposit holding/accepting Company - Category ‘B’Based on investment pattern - Investment company (Cat ‘A’ or Cat ‘B’) - Core Investment company - Category ‘C’
NBFC Prudential NormsSchedule to the Balance Sheet - to be appended to the Balance sheet prescribed under the Companies Act, 1956 - showing loans and advances and deposits outstanding and overdue - borrower groupwise classification of all assets, lease, HP and Loans and advances - Investor groupwise classification of all investment in shares and securities - information on NPAs.
Monitoring by RBIOff-site surveillance Returns Auditors’Reports Market intelligenceOn-site surveillance Inspections Special audits
Good Corporate Governance-Rotation of partners of statutory auditors audit firm of companies with deposits of Rs. 50 Crores and more-Rotation after every three years-Companies may incorporate terms in the letter of appointment to ensure compliance
AUDIT OF NBFCs- Reporting Requirements Under the Companies Act, 1956 Report under Section 227(2) Report required by the Companies (Auditor’s Report) Order, 2003 Compliance of accounting standards.
AUDIT OF NBFCs- Reporting RequirementsUnder the Income Tax Act, 1961Tax Audit Report under section 44AB
Other Certificates to NBFCs-Yearly Certification of carrying of NBFC business- Certification attached to Annual Return and Half Yearly Returns
Top five NBFCs in India:• Housing Development Finance Corporation Limited• Power Finance Corporation Limited• Rural Electrification Corporation Limited• National Bank of Agricultural and Rural Development• Infrastructure Development Finance Company Limited