Non Banking Financial Corporations
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- The document discusses non-banking financial corporations (NBFCs) in India and how they compare to banks. It notes that NBFCs play an important role in sectors like transport and infrastructure as well as employment and wealth creation. - NBFCs are regulated by the Reserve Bank of India but have more flexible regulations than banks. For example, it is easier to start an NBFC and they can engage in non-financial activities. However, they do not have the same legal powers as banks for recovery. - While NBFCs have grown significantly and cater to more customers, banks still dominate the financial sector in India, having more stringent rules around deposits and priority lending. Overall, NBFCs provide
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Non Banking Financial Corporations
- 1. Please don’t move the chairs
- 2. Evening Presentation MBA ‘16 31- 08 2016
- 3. Prelude
- 4. Indian Banking •Indian banking system consists of: •26 public sector banks •25 private sector banks •43 foreign banks •56 regional rural banks •1,589 urban cooperative banks •93,550 rural cooperative banks
- 5. How big is Indian banking industry? •Indian Banking Industry stats: •11,75,149 employees. •1,09,811 branches in India. •171 branches abroad. •manages an aggregate deposit of ₹67,504.54 billion •bank credit of ₹52,604.59 billion. •The net profit of the banks operating in India was ₹1,027.51 billion.
- 6. Non Banking Financial Corporations (NBFC) A challenge to Indian Banking Sector? Presented by SOP A10 Simi | Sruthi | Subin | Theertha | Tinku SOP Mentor: Prof.Dr. Kuppachi Sreenivas
- 7. Contents •Introduction •NBFC Regulations Role of NBFC Importance of NBFC •Indian Banks •NBFC v/s Banks •Conclusion
- 8. Non Banking Financial Corporations •Registered under the Companies Act. •Registration with RBI is mandatory. •Are not entitled to accept public deposits. •Can accept public deposit for a minimum period of 12 months and maximum of 60 months. •Cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time.
- 9. Indian Banks •The basic function of a bank is to accept deposits from public for the purpose of lending. •Directed under the RBI guidelines. •26 nationalized bank in India. •16 old private sector banks. •15 new age private sector banks.
- 10. What is NBFC? •Financial intermediaries engaged primarily in the business of Loans and advances, acquisition of shares/ stock/ bonds/ debentures/ securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business. •They cannot accept deposits repayable on demand
- 11. •NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors •NBFCs (except certain AFCs) should have minimum investment grade credit rating. •The deposits with NBFCs are not insured. •The repayment of deposits by NBFCs is not guaranteed by RBI.
- 12. Regulations •RBI Regulation •Certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI. •Should have minimum net owned fund of ₹ 200 lakh. •NBFC have to maintain 10 and 15 per cent of their deposits in liquid assets.
- 13. •All NBFCs are not entitled to accept public deposits. •Maintain reserve fund and transfer not less than 20 per cent of their net deposits to it every year. •Allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
- 14. •Cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. •They have to obtain a minimum credit rating from anyone of the three credit rating agencies. •NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
- 15. Role of NBFCs •Development of sectors like Transport & Infrastructure •Substantial employment generation •Help & increase wealth creation •Major thrust on semi-urban, rural areas & first time buyers / user. •To finance economically weaker sections
- 16. Importance of NBFC •Very difficult to cater need of society by Banks alone. •The role of NBFCs as effective financial intermediaries has been well recognised as they have inherent ability: to take quicker decisions assume greater risks customise their services charges more according to the needs of the clients.
- 17. Indian Banks: •The basic function of a bank is to accept deposits from public for the purpose of lending. •Directed under the RBI guidelines. •Around 26 nationalized bank in India. •16 old private sector banks. •15 new age private sector banks. •Around 44 foreign banks.
- 18. BANKS Vs. NBFC’s Banks •banking is acceptance of deposits withdrawable by cheque or demand •Scope of business for banks is limited by sec 6 (1) of the BR Act NBFC •NBFCs are companies carrying financial business. •There is no bar on NBFCs carrying activities other than financial activities.
- 19. Banks •Licensing requirements are quite stringent. Transfer of shareholding also controlled by RBI •No non-banking activities can be carried NBFC •It is quite easy to form an NBFC. Acquisition of NBFCs is procedurally regulated but not approval required •Cannot provide cheque facilities.
- 20. Banking •Can exercise powers of recovery under SARFAESI and DRT law •FDI Upto 74% allowed to private sector banks •BR Act and RBI Act lay down stringent controls over banks NBFC •Do not have powers under SARFAESI or DRT law. • FDI Upto 100% allowed. •Controls over NBFCs are relatively much lesser.
- 21. Banking •Banks are covered by SLR/ CRR requirements •Certain minimum exposure to priority sector required NBFC •NBFCs have to maintain a certain ratio of deposits in specified securities; no such requirement for non depository companies •Priority sector norms are not applicable to banks
- 22. Conclusion •Size of sector: •The NBFC sector has grown considerably •As of March 2013, it accounted for 12.5% of the country’s Gross Domestic Product . • Growth: •it grew 22% every year. •Promoting inclusive growth: •NBFCs cater to a wide variety of customers – both in urban and rural areas.
- 23. •Profitability: •NBFCs are more profitable than the banking sector because of lower costs. •Credit grew an average 24.3% per year for NBFCs as against 21.4% for banks. •Infrastructure Lending: •NBFCs lent over one third or 35.8% of their total assets to infrastructure sector as of March 2013. •In contrast, banks lent only 7.6%.
- 24. •Only 34% of Indian individuals have access to banks. •Banks have a lot of constraints in lending. •Proximity of financial services. •Size of loans. •Higher risk taking ability. •Innovative business model.
- 25. •Relationship with customers. •Single product and dedicated business. •For collecting the dues they use human resources and pay them lower than what banks pay. Banks lack here. •In truck financing majority of the truck drivers don’t have proper papers to get the loans.
- 26. References • www.rbi.org.in • http://www.crisil.com • www.blonline.com
- 27. Q & A
- 28. Open Forum
- 29. Thank You
Editor's Notes
- Bank credit is the aggregate amount of credit available to a person or business from a banking institution
- DEFINITION of 'Interest Rate Ceiling' The maximum interest rate that a financial institution can charge a borrower for an adjustable rate mortgage or loan according to the contractual terms of the mortgage or loan. This interest rate is expressed as an absolute percentage.
- What is a 'Demand Deposit‘ / deposits repayable on demand? A demand deposit consists of funds held in an account from which deposited funds can be withdrawn at any time from the depository institution, such as a checking or savings account, accessible by a teller, ATM or online banking. In contrast, a term deposit is a type of account that cannot be accessed for a predetermined period of time.
- AFC - Asset Finanace Company An Asset Finance Company is a company which is a financial institution engaged in the principal business of financing of physical assets supporting productive / economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. What is an 'Investment Grade' An investment grade is a rating that indicates that a municipal or corporate bond has a relatively low risk of default. Bond rating firms, such as Standard & Poor's and Moody's, use different designations consisting of upper- and lower-case letters 'A' and 'B' to identify a bond's credit quality rating. 'AAA' and 'AA' (high credit quality) and 'A' and 'BBB' (medium credit quality) are considered investment grade. Credit ratings for bonds below these designations ('BB', 'B', 'CCC', etc.) are considered low credit quality, and are commonly referred to as "junk bonds". There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits. If a NBFC defaults in repayment of deposit, the depositor can approach. Company Law Board or Consumer Forum or file a civil suit to recover the deposits.
- In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution. However, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, IRDA. Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh wef April 21, 1999). NBFC have to maintain 10 and 15 per cent of their deposits in liquid assets effectively from January 1 and April 1,1998, respectively. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits. Liquid Assets: An asset that can be converted into cash in a short time, with little or no loss in value. Liquid assets include items such as accounts receivable, demand and time deposits, gilt edged securities. In some countries, precious metals (usually gold and silver) are also considered liquid assets.
- They have to create reserve fund and transfer not less than 20 per cent of their net deposits to it every year. The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months. They cannot accept deposits repayable on demand.
- NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 11 per cent per annum. They have to obtain a minimum credit rating from anyone of the three credit rating agencies. CRISIL | ICRA | CARE NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
- “broad-based”: meaning that all sectors or firms tend to be getting more productive There is still a very limited access to rural Indians to banks
- In the present economic environment it is very difficult to cater need of society by Banks alone so role of Non Banking Finance Companies and Micro Finance Companies become indispensable. The role of NBFCs as effective financial intermediaries has been well recognised as they have inherent ability to take quicker decisions, assume greater risks, and customise their services and charges more according to the needs of the clients.
- Size of sector: The NBFC sector has grown considerably in the last few years despite the slowdown in the economy. As of March 2013, it accounted for 12.5% of the country’s Gross Domestic Product (GDP) – a measure of the size of the economy. This is up from 8.4% in March 2006. However, this only counts NBFCs with assets more than Rs 100 crore. “If the assets of all the NBFCs below Rs 100 crore are reckoned, the share of NBFCs’ assets to GDP would go further,” Bhaskar said in his speech. Growth: In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. Even when the country’s GDP growth slowed to 6.3% in 2011-12 from 10.5% in 2010-11, the NBFC sector clocked a growth of 25.7%. This shows, it is contributing more to the economy every year. Profitability: NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth – the increase in the amount of money being lent to customers – is higher than that of the banking sector. Credit grew an average 24.3% per year for NBFCs as against 21.4% for banks. This shows that more customers are opting for NBFCs. Infrastructure Lending: NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. But they require large amount of funds, and earn profits only over a longer time-frame. As a result, these are riskier projects. This deters a lot of banks from lending to infrastructure projects. In the last few years, NBFCs have contributed more to infrastructure lending than banks. NBFCs lent over one third or 35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks lent only 7.6%. Promoting inclusive growth: NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.
- Profitability: NBFCs are more profitable than the banking sector because of lower costs. Credit grew an average 24.3% per year for NBFCs as against 21.4% for banks. This shows that more customers are opting for NBFCs. Infrastructure Lending: NBFCs lent over one third or 35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks lent only 7.6%.