Non banking financial companies


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Non banking financial companies

  2. 2. What is a Non-Banking Financial Company (NBFC)?
  3. 3. A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged 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. It does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.
  4. 4. •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. •The deposits received do not involve investment, asset financing, or loans. •Besides the above class of NBFCs the Residuary Non- Banking Companies are also registered as NBFC with the Reserve Bank of India. RESIDUARY NON-BANKING COMPANY .
  5. 5. DIFFERENCE BETWEEN NBFC’S AND BANK’S (i) a NBFC cannot accept demand deposits (demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.) (ii) it is not a part of the payment and settlement system and as such cannot issue cheque to its customers drawn to itself; and (iii)deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation ) is not available for NBFC depositors unlike in case of banks.
  6. 6. The NBFCs that are registered with RBI are: (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company. With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC) (ii) Investment Company (IC) (iii) Loan Company (LC)
  7. 7.  Asset finance Companies (AFC) AFC are financial institutions whose principal business is of financing physical assets such as automobiles, tractors, construction equipments material handling equipments and other machines. ex: Bajaj Auto Finance corp. , Fullerton India etc  Investment Companies (IC) ICs generally are involved in the business of shares, stocks, bonds, debentures issued by government or local authority that are marketable in nature ex: Stock Broking Companies, Gilt firms  Loan Companies (LC) LCs are loan giving companies which operate in the business of providing loans. These can be housing loans, gold loans etc ex: Mannapuram Gold Finance, HDFC TYPES OF NBFC
  8. 8. NBFCS : OVERVIEW  13000+ players registered under RBI : A & B categories  Spread all across the country  Approx. 570 NBFCs authorized to accept public deposits (Catg. A)  Assets worth Rs. 15000 Crore financed annually & growing steadily  Asset financing  Commercial vehicles  Passenger cars  Multi-utility & multi-purpose vehicles  Two-wheelers & Three-wheelers  Construction equipments  Consumer durables
  9. 9. ROLE OF NBFCS  As recognized by RBI & Expert Committees / Taskforce  Development of sectors like Transport & Infrastructure  Substantial employment generation  Help & increase wealth creation  Broad base economic development  Irreplaceable supplement to bank credit in rural segments  major thrust on semi-urban, rural areas & first time buyers / users  To finance economically weaker sections  Huge contribution to the State exchequer
  10. 10. ROLE OF NBFCS (CONTD..)  70-80% of Commercial Vehicles are finance driven  Indian economy is more dependent on roads  Heavy Govt. outlay for mega road projects  Heavy replacement demand anticipated – 30 lacs commercial vehicles by the year 2007  Another Rs.6000 Crores required for phasing out old commercial vehicles  CRISIL in its study has placed commercial vehicle financing under “low risk” category  Each commercial vehicle manufactured, sold and financed gives employment to minimum 20 persons (direct and indirect)
  11. 11. CUSTOMER SERVICE  The key factor for our survival & growth  NBFCs provide prompt, tailor made service with least hassles. This more than compensates for the higher lending rates of NBFCs as compared to Banks & FIs  All customers get direct and easy access to and individual attention of the top management  NBFCs cater to a class of borrowers who :- - Do not necessarily have a high income - But have adequate net worth - Are honest and sincere (gauged by the personal touch maintained with them).
  12. 12. A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format along with necessary documents for Bank’s consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied. REGISTRATION
  13. 13. In case a NBFC defaults in repayment of deposit what course of action can be taken by depositors? 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
  14. 14. Category of NBFC Ceiling on public deposits AFCs maintaining CRAR of 15% without credit rating AFCs with CRAR of 12% and having minimum investment grade credit rating 1.5 times of NOF or Rs 10 crore whichever is less 4 times of NOF LC/IC with CRAR of 15% and having minimum investment grade credit rating 1.5 times of NOF CEILING ON PUBLIC DEPOSITS
  15. 15. The symbols of minimum investment grade rating of the Credit rating agencies are: Name of rating agencies Level of minimum investment grade credit rating (MIGR) CRISIL FA- (FA MINUS) ICRA MA- (MA MINUS) CARE CARE BBB (FD) FITCH Ratings India Pvt. Ltd tA-(ind)(FD) SYMBOLS OF MINIMUM INVESTMENT GRADE RATING
  16. 16. Regulations on NBFC : i) 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. ii) 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. The interest may be paid or compounded at rests not shorter than monthly rests. iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors. iv) NBFCs (except certain AFCs) should have minimum investment grade credit rating.
  17. 17. v) The deposits with NBFCs are not insured. vi) The repayment of deposits by NBFCs is not guaranteed by RBI. vii) There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits.
  19. 19. Cost of Funding - Shot up during the crisis due to short tenure borrowings, stabilized now & expected to be less volatile due to larger proportion of long term Funding •Many NBFCs took advantage of the lower interest rate regime at the shorter end of the yield curve by borrowing short term funds (3months – 1 year) at lower rates and lending for maturities ranging from 3-4 years at higher rates. •Average borrowings costs increased from around 9.5-10.0% in FY08 to 11.5-12.0% in FY09. This shows the severity of the impact as financial crisis affected funding costs in the second half of FY09 •The response by NBFCs was to gradually replace short term funding with long term sources.
  20. 20. Asset Quality – Deteriorated more due to unsecured loans which is now virtually stopped by most players, provisioning has improved & asset quality expected not to worsen further. •Aggregate Gross NPA (The net non-performing assets to loans )ratio trended from around 1.1% for FY08 to around 2.1% in FY09. •Unsecured lending has virtually stopped for many NBFCs and underwriting norms have also been tightened in general for other asset classes
  21. 21. The systemically important non-deposit taking non-banking financial companies (NBFCs-ND-SI) were permitted to raise short-term foreign currency borrowings.  Allowed banks to avail liquidity support under the LAF for the purpose of meeting the funding requirements of NBFCs through relaxation in the maintenance of SLR up to 1.5 per cent of their NDTL.  Risk weights on banks’ exposures to claims on NBFCs-NDSI were reduced to 100 per cent from 150 per cent.  Deferring the higher CAR norms for NBFCs-ND-SI by 1 year. MEASURES TO OVERCOME THE CRISIS
  22. 22. Overall positive outlook on the sector due to •The better ALM position, • Focus on relatively safer asset classes and •The demonstrated acceptance of the sector as systemically important by the regulator. •Mergers with profitable companies •Short term foreign buying allowed. •Portfolio diversification ― Including asset management companies ― House finance companies ― Ventured into insurance sector. OUTLOOK
  23. 23. •RBI has been taking efforts to tighten control over NBFCs, which are more loosely regulated than banks. •Any takeover or merger involving deposit-taking NBFCs now requires the prior approval of RBI. In addition, the management of the merged entity must comply with the ‘fit and proper’ criteria of RBI. •RBI also chided NBFCs involved in micro-finance for charging high rates while accessing cheaper funds from banks. RBI’S REGULATION REVISION OF NBFC’S IN IT’S ANNUAL REPORT(AUGUST25TH2010)
  24. 24. •The end-borrowers do not get the benefit of low interest rates, as NBFCs are assigned the responsibility of managing the loans. Consequently, the borrower continues to pay the same rate of interest, which is as high as 23.6-30 per cent. •According to the banking regulator, there are 12 systematically important non-deposit NBFCs that are lenders with an asset size of at least Rs 100 crore engaged in micro-finance lending. •“The main sources of funds for these NBFCs are borrowings from banks and financial institutions. Most of them have received large amounts as foreign direct investment and many of them are now largely foreign-owned,”