Non Banking Finance Companies (As per Government of India specifications) Rahul Guhathakurta & Zardar Badami Indian Institute of Planning & Management Ahmedabad Cover Story Mutual Funds
As per Sec. 45 I (f) of RBI Act, 1934 A financial institution is an NBFC… … which has a principle business of receiving deposits under any scheme or an arrangement or lending in any manner, Approved by Central Government and Notified by Official Gazette What is an NBFC?
In April 1999, RBI further announced that identification of a 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 principal business of the company
Identification Parameters for an NBFC given by RBI Factors Determining an NBFC Financial Assets of the Company Total Assets of the Company (Netted off against Tangible Assets ) 50% > Income from Financial Assets Gross Income 50% > … then the company will be treated as an NBFC
Chronology of the NBFC’s Regulatory Provisions Chapter III-B, III-C & V of Reserve Bank of India Act, 1934 The Miscellaneous Non-Banking Companies (RBI) Directions, 1977 Residuary Non-Banking Companies (RBI) Directions, 1987 Housing Finance Companies (NHB) Directions, 1989 Non Banking Financial Companies (RBI) Directions, 1998 Reserve Bank of India (Amendment) Act, March 1997
Initial Regulatory Environment as per RBI Act,1934 Entry barriers were low There were no capital adequacy Norms. No prudential norms Little restrictions on Interest rates Offered to the depositors Regulatory Factors
Call for an amendment in the Act & other Provisions
1. The regulations that existed seemed to be inadequate to protect the depositor’s interest.
2. Incidents of depositors loosing there money due to mismanagement or due to fraud were cropping up.
Consequently, three new sets of directions were issued by the RBI for governing the operations of NBFC's Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions 1998 Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 1998
Further Classification of the NBFCs (aftermath of Directions issued in January 1998) Regulations for Deposits NBFCs Accepting Public Regulations for NBFCs Not Accepting Public Deposits Regulations for Core Investment Companies
Regulations for NBFCs Accepting Public Deposits Income Recognition Asset Classification Accounting Standards Provision for Bad & Doubtful debts Capital Adequacy Credit/Investment Concentration Prudential Norms The companies accepting public deposits are required to comply with all the Prudential Norms mentioned below… Note: The provision norms are on par with those of Commercial Banks
Eligibility Criteria for Accepting Public Deposit
An NBFC having Net Owned Funds of Rs. 200.00 lakhs and above only can accept Public Deposits
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
Eligibility Criteria for Accepting Public Deposit
If the Credit Rating is either down graded or upgraded, the NBFC is required to report this fact to the RBI within 15 days from the date when it receives such information.
It is to be noted that the deposits taken by the NBFCs 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.
There is a ceiling provided for the quantum of deposits accepted by NBFCs.
Eligibility Criteria for Accepting Public Deposits
The CRAR has been fixed 12% and above.
(Rated NBFCs) and 15% & above
The Credit norms has been fixed at 15%
and The Investment Concentration norms
has been fixed at 25%
The Total Loan and Investments
have a ceiling of 25% & 40% of the
owned funds, respectively.
… depending on whether the exposure is To a single party or to an Industry group. … depending on whether the exposure is to a Single borrower or a Group of borrowers.
& 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%.
NBFC’s comprise following Business Organizations Equipment Leasing Activities Loan Granting Activities Housing Finance Insurance Business Mutual Fund Finance Investment Activities Hire Purchase Finance NBFC’s Comprise Following Business Organizations
Classification based on purpose of acceptance of deposits by NBFC Directions 1998 Equipment Leasing (EL) Hire Purchase (HP) Investment Companies (IC) Loan Companies (LC) Source: Re Classification of NBFCs December 6 2006 ~ RBI / 2006-07/200 DNBS.PD. CC No. 85 / 03.02.089 /2006-07 Re-classification of NBFCs on December 6 , 2006 Asset Finance Companies (AFC) Investment Companies (IC) Loan Companies (LC)
Regulations for NBFCs not Accepting Public Deposits
As these companies do not accept Public Deposits, all regulations related to interest rates, period and ceilings on quantum of borrowing do not applied.
However, to ensure the disclosure of a true and fair picture of their financial health, these companies are subjected to Prudential Norms.
… excepting the CAR and Credit Concentration Norms
“ According to RBI guidelines issued on April 1, 1999, All NBFCs are required to maintain liquid assets of 15% of public deposits held on the last working day of the secondary preceding quarter .”
Books and Records maintained by NBFCs Books & Records Maintained by an NBFC Cash Book & Bank Book Depositor’s Ledger Due Date & Renewal Register Interest Register Loan Ledger Investment Ledger General Ledger
General Recommendations General Recommend. 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 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
Introduction : Mutual Funds Mutual Funds A “ Pooling Concept” Portfolio of Stocks Portfolio of Bonds Portfolio of Other Investment Instruments All Mutual Funds aim at achieving one or more of the following:
Providing steady flow of income
Providing high capital appreciation
Providing capital appreciation with income
Providing income or capital appreciation with tax benefits
Sponsor Company Establishes MF as a Trust Registers MF with SEBI Holds unit-holder’s fund in MF Ensures compliance to SEBI Enters into agreement with AMC Floats MF Funds Manages fund as per SEBI Guidelines &AMC agreements Provides necessary custodian services Provide Banking Services Mutual Fund Asset Management Company Custodian Bankers Registrar & Transfer Agents Managed by Board of Trustees Provide Registrar services and Act as an Transfer Agents Structure of Indian Mutual Funds
Categories of Mutual Funds Money Market Funds Lilliput Funds Index Funds Sector Funds Balanced Funds Bond Funds Income Funds Growth and Income Funds Asset Allocation Funds Growth Funds Aggressive Growth Fund Overseas Funds Guaranteed Funds Fund of Funds Venture Capital Funds
Funds Rating in India Ratings of mutual funds has not yet been institutionalized in India, however some attempts are being made. The following agencies involved in rating process are as follows: CRISIL : Credit Rating and Investment Services Ltd [Est. – 1987] Duff & Phelps Credit Rating India Ltd [Est. 1996] – (Now Fitch IBCA) CARE: Credit Analysis and Research Ltd [Est. – 1993] ICRA : Investment Information and Credit Rating Agency of India [Est. – 1991] Credence (Mumbai) Value Research (New Delhi) Indian Mutual Fund Research Agencies