This document provides an overview of non-banking financial companies (NBFCs) in India. It defines what an NBFC is, compares them to banks, and outlines the various types of NBFCs such as equipment leasing companies, hire purchase companies, and investment companies. The document also summarizes regulations for NBFCs regarding accepting public deposits, prudential norms, eligibility criteria, books and records, and the importance of NBFCs in channeling financial resources. Overall, the document presents the key characteristics of NBFCs operating in India and the regulatory framework that governs them.

1. AN APPROACH TONBFC….Sweta AgarwalNeha Singhi & Co.C/O Kreeti Technologies#330, SDF Building,Block-GP Salt Lake CitySector- V, Kolkata-700091Tel.:+91-9883116576.1

2. WHAT IS NBFC ?A Financial institute is NBFCAs per Sec 45 1(f) of RBI Act,1934….which has a principal business of receiving deposits under any scheme or an arrangement or lending in any mannerApproved by Central Government and notified by Official Gazette.2

3. NBFC VS BANKNBFC are doing functions similar to banks. However there are few differences.NBFC + I + II + III = BANKA NBFC cannot accept demand deposits.It is not a part of the payment and settlement system and as such cannot issue cheques to its customers; and Deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation) is not available for NBFC depositors unlike in case of banks. 3

4. Non Banking Financial Companies (RBI) Regulations 1998..Constitution of Audit Committee.Regulatory FactorsCapital Adequacy Required.Exposure to Capital Market.Loan Against NBFC’s own shares are prohibited.4

5. NBFC comprises following business organizationsHire PurchaseEquipment Leasing ActivitiesInvesting ActivitiesLoan Granting ActivitiesNBFCHousing FinanceMutual Fund FinanceInsurance Business5

6. Classification based on purpose of acceptance of deposits by NBFC Directions 2006 NBFCInvestment Companies (IC)Asset Finance Company (AFC)Loan Company (LC)6

7. Equipment Leasing CompanyEquipment Leasing Company means the company which is a financial institution carrying on the activity of leasing of equipments as its main business.7

8. Hire Purchase companyIt is a company which is a financial institution carrying on its main activity as hire purchase transactions or the financing of such transactions8

9. Investment CompanyIt means a company which is a financial institution carrying on as its main business of the acquisition of securities.9

10. Loan Company It means any company which is a financial institution carrying on as its main business by providing finance whether by making loans or advances.10

11. Asset Finance CompanyAFC would be defined as any company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive / economic activity.11

12. Regulation For NBFC’s Accepting Public DepositsThe company accepting public deposits are required to comply with all prudential norms mentioned belowIncomeRecognitionPrudential NormsAsset ClassificationAccounting StandardProvision For Bad &Doubtful DebtCapital AdequacyCredit/investment Concentration12

13. Eligibility criteria for accepting Public DepositsA NBFC having NOF of Rs 200 lakhs and above can accept public deposits.It has to obtain Minimum Stipulated Credit Rating from any one of approved Credit Rating Agencies once a year.There is a ceiling provided for the quantum of deposits accepted by NBFCCopy of Credit Rating should be sent to RBI along with the Return On Prudential Norms.13

14. Eligibility criteria for accepting Public Deposits cont…A NBFC should have acquired a credit rating of not less than AAA rating or its equivalent in the previous year.If the credit rating is either downgraded or upgraded, the NBFC is required to report RBI within 15 days from the date it receives such information.It is to be noted that the deposits taken by the NBFC’s are repayable on demand and maximum period for which public deposits can be accepted is not less than 12 months with a maximum period of 84 months.14

15. RBI Guidelines For Unrated NBFCAll EL/HP Finance Companies that do not haveThe minimum investment grade credit ratingand mobilizing public deposit upto 1.5 times of their NOF or 10 crore. ….whichever is lower, should not have CAR less than 15%.15

16. Regulation for NBFC’s not accepting public deposits.All regulations related to interest rate, period and ceilings on quantum of borrowing do not apply.However, to ensure the disclose of a true and fair picture of the financial health, these companies are subject to prudential norms.Investment companies are exempt from all the provisions of the directions except the statutory provision for registration and creation of reserve funds. 16

17. Mother of all rulesAccording to RBI Guidelines April 1999, all NBFC are required to maintain liquid assets of 15% of public deposits held on last working day of secondary preceding quarter.17

18. Books and records maintained by NBFCThe company accepting public deposits maintains the following Cash book & bank book.Interest registerBooks & records to be maintained by NBFCLoan ledgerDue date & renewal register.Depositories ledgerInvestment ledgerGeneral ledger18

19. Growth path for NBFC in future.Get the global expertise and products.Get innovative products, tie ups with global financial giants.Longer NBFC with critical mass Focus on returns & profitsMultiply in size, look to convert into bankIncreases Reach, Capital, BrandingConsolidate their position, identify various revenue streamsReduction in cost to funds.19

20. Systemically importance of NBFCNBFC plays an important role in channelizing the scarce financial resources to capital formation.NBFC provides assistance and guidance to their customers in matters relating to insurance.NBFC supplements the role of banking sector in meeting the increasing financial needs of the corporate sector ,delivering credit to the unorganized sector and to rural local borrowers.NBFC provides financial assistance to their borrowers in case of emergency need.20

21. General recommendationsEnhancing the credit delivering mechanism