non banking financial corporations


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a presentation on non banking financial institutions and their working

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non banking financial corporations

  1. 1. NBFCs: Non-Banking Financial Company (The Core Concepts, working & RBI guidelines for NBFCs.) Presented By: Jaspreet Singh Rajpal 2012MB13
  2. 2. Contents • Introduction • NBFCs in Indian Context • Types of NBFCs • Supervision of NBFCs • Difference between Banks & NBFCs • An overview of regulation of NBFCs • Other facts related with NBFCs • Criticism • References ©Jaspreet_SMSMNNIT 2
  3. 3. Introduction • Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. • These institutions are not allowed to take deposits from the public. ©Jaspreet_SMSMNNIT 3
  4. 4. NBFCs in Indian Context • A Non-Banking Financial Company (NBFC) is a company registered under The Indian Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. ©Jaspreet_SMSMNNIT 4
  5. 5. Continued… • A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). • Non-Banking Financial Companies have to be registered with the RBI as mentioned in Chapter III B of the Reserve Bank of India Act, 1934. ©Jaspreet_SMSMNNIT 5
  6. 6. Types of Non-Banking Financial Company • Equipment leasing company (EL) • Hire purchase finance company (HP) • Investment company (IC) • Loan company (LC) • Residuary non-banking company (RNBC) ©Jaspreet_SMSMNNIT 6
  7. 7. Supervision of NBFCs • The RBI has instituted a strong and comprehensive supervisory mechanism for NBFCs. • The focus of the RBI is on prudential supervision so as to ensure that NBFCs function on sound and healthy lines and avoid excessive risk taking. • The RBI has put in place a four pronged supervisory framework based on: i. On-site inspection; ii. Off-site monitoring supported by state-of the art technology; iii. Market intelligence; and iv. Exception reports of statutory auditors of NBFCs. ©Jaspreet_SMSMNNIT 7
  8. 8. Difference between Banks & NBFCs?? Point of difference NBFCs Banks Demand Deposits Cannot accept. Can accept. Drawing a Cheque Cannot issue or draw a cheque on its own. Can issue cheque freely. Deposit Insurance facility Not available for NBFC depositors Is available for bankers. Act for regulation They are covered under Indian Companies Act, 1956. They are covered under The Banking Regulation Act,1949. ©Jaspreet_SMSMNNIT 8
  9. 9. An Overview of Regulation of NBFCs Mission: To ensure that • the financial companies function on healthy lines, • these companies function in consonance with the monetary policy framework, so that their functioning does not lead to systemic aberrations, the quality of surveillance and supervision exercised by the RBI over the NBFCs keeps pace with the developments in this sector. • comprehensive regulation and supervision of Asset liability and risk management system for NBFCs. ©Jaspreet_SMSMNNIT 9
  10. 10. Amendments to the Reserve Bank of India (RBI) Act, 1934 • Entry norms for NBFCs and prohibition of deposit acceptance (save to the extent permitted under the Act) by unincorporated bodies engaged in financial business, • Compulsory registration, maintenance of liquid assets and creation of reserve fund, Power of the RBI to issue directions to an NBFC or to the NBFCs in general or to a class of NBFCs. • Comprehensive regulation and Supervision of deposit taking NBFCs and limited supervision over those not accepting public deposits. ©Jaspreet_SMSMNNIT 10
  11. 11. Basic Structure of Regulatory and Supervisory Framework • Prescription of prudential norms akin to those applicable to banks, • Submission of periodical returns for the purpose of off-site surveillance, Supervisory framework comprising (a) on-site inspection (CAMELS pattern) (b) off-site monitoring through returns (c) market intelligence, and (d) exception reports by statutory auditors, • Co-ordination with State Governments to curb unauthorized and fraudulent activities, training programs for personnel of NBFCs, State Governments and Police officials. ©Jaspreet_SMSMNNIT 11
  12. 12. Other steps for protection of depositors’ interest • Publicity for depositors’ education and awareness, workshops / seminars for trade and industry organizations, depositors’ associations, chartered accountants, etc. ©Jaspreet_SMSMNNIT 12
  13. 13. Other Facts related to NBFCs • In terms of Section 45-IA of the RBI Act, 1934, • No Non-banking Financial company can commence or carry on business of a nonbanking financial institution without : a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of Rs. 25 lakhs (Rs two crore since April 1999). However, in terms of the powers given to the Bank. to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI. ©Jaspreet_SMSMNNIT 13
  14. 14. • Those other companies are: Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982, Housing Finance Companies regulated by National Housing Bank , Stock Exchange or a Mutual Benefit company. • Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed. ©Jaspreet_SMSMNNIT 14
  15. 15. Criticism • Recently, microfinance has come under fire in the state of Andhra Pradesh due to allegations of MFIs using coercive recollection practices and charging usurious interest rates. • These charges resulted in the state government's passing of the Andhra Pradesh Microfinance Ordinance on October 15, 2010. The Ordinance requires MFIs to register with the state government and gives the state government the power, suo moto, to shut down MFI activity. • A number of NBFCs have been affected by the ordinance, including sector heavyweight SKS Microfinance. ©Jaspreet_SMSMNNIT 15
  16. 16. The References • • • • • cial%3ASearch ©Jaspreet_SMSMNNIT 16
  17. 17. Muhammad Yunus "All human beings are born entrepreneurs. Some get a chance to unleash that capacity. Some never got the chance, never knew that he or she has that capacity." ©Jaspreet_SMSMNNIT 17