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  1. 1. 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
  2. 2. 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 ?
  3. 3. 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?
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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.
  9. 9. 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.
  10. 10. 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
  11. 11. Classification of NBFCs• Based on nature of business: •Asset finance companies •Investment companies •Loan companies •Infrastructure finance companies
  12. 12. 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’
  13. 13. NBFC Prudential NormsAccounting policiesAccounting standardsRevenue recognition
  14. 14. NBFC Prudential NormsSchedule 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.
  15. 15. Monitoring by RBIOff-site surveillance  Returns  Auditors’Reports  Market intelligenceOn-site surveillance  Inspections  Special audits
  16. 16. 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
  17. 17. 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.
  18. 18. AUDIT OF NBFCs- Reporting RequirementsUnder the Income Tax Act, 1961Tax Audit Report under section 44AB
  19. 19. Other Certificates to NBFCs-Yearly Certification of carrying of NBFC business- Certification attached to Annual Return and Half Yearly Returns
  20. 20. 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