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Financial environment 3


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Financial environment 3

  1. 1. Financial Environment 3 NBFCs & Banking
  2. 2. A Non-Banking Financial Company (NBFC) is acompany registered under the Companies Act, 1956and is engaged in the business of loans andadvances, acquisition ofshares/stock/bonds/debentures/ securities issued byGovernment or local authority or other securities oflike marketable nature, leasing, hire-purchase, insurance business, chit business.It does not include any institution whose principalbusiness is that of agriculture activity, industrialactivity, sale/purchase/construction of immovableproperty.
  3. 3. 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 is also a non-banking financial company (Residuary non-banking company).NBFCs are doing functions similar to banks. What is differencebetween banks & NBFCs ?
  4. 4. NBFCs are doing functions akin to that of banks, however there are a fewdifferences:(i) a NBFC cannot accept demand deposits; An account fromwhich deposited funds can be withdrawn at any time without any noticeto the depository institution.(ii) it is not a part of the payment and settlement system and as suchcannot issue cheques to its customers; and(iii) deposit insurance facility of DICGC is not available for NBFCdepositors unlike in case of banks.Is it necessary that every NBFC should be registered with RBI?
  5. 5. In terms of Section 45-IA of the RBI Act, 1934, itis mandatory that every NBFC should beregistered with RBI to commence or carry onany business of non-banking financialinstitution as defined in clause (a) of Section 45I of the RBI Act, 1934.
  6. 6. However, to obviate dual regulation, certain category of NBFCs which areregulated by other regulators are exempted from the requirement ofregistration with RBI viz. Venture Capital Fund/Merchant Bankingcompanies/Stock broking companies registered with SEBI, InsuranceCompany holding a valid Certificate of Registration issued by IRDA, Nidhicompanies (Nidhi company is a company registered under Companies Act and notified asa nidhi company by Central Government under Section 620-A of Companies Act. It is a non-banking finance company doing the business of lending and borrowing with its members orshareholders.) as notified under Section 620A of the Companies Act, 1956, Chitcompanies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 orHousing Finance Companies regulated by National Housing Bank. What are the different types of NBFCs registered with RBI?
  7. 7. 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 aboveNBFCs registered with RBI have beenreclassified as(i) Asset Finance Company (AFC)(ii) Investment Company (IC)(iii) Loan Company (LC)
  8. 8. AFC would be defined as any company which is a financial institutioncarrying on as its principal business the financing of physical assetssupporting productive / economic activity, such asautomobiles, tractors, lathe machines, generator sets, earth movingand material handling equipments, moving on own power andgeneral purpose industrial machines. Principal business for thispurpose is defined as aggregate of financing real/physical assetssupporting economic activity and income arising there from is notless than 60% of its total assets and total income respectively.The above type of companies may be further classified into thoseaccepting deposits or those not accepting deposits.Besides the above class of NBFCs the Residuary Non-BankingCompanies are also registered as NBFC with the Bank.What are the requirements for registration withRBI?
  9. 9. A company incorporated under the Companies Act, 1956and desirous of commencing business of non-bankingfinancial institution as defined under Section 45 I(a) of theRBI Act, 1934 should have a minimum net owned fund ofRs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). Thecompany is required to submit its application forregistration in the prescribed format alongwith necessarydocuments for Bank’s consideration. The Bank issuesCertificate of Registration after satisfying itself that theconditions as enumerated in Section 45-IA of the RBIAct, 1934 are satisfied.Where one can find list of Registered NBFCs and instructions issued toNBFCs?
  10. 10. The list of registered NBFCs is available on theweb site of Reserve Bank of India and can beviewed at The instructionsissued to NBFCs from time to time are alsohosted at the above site. Besides, instructionsare also issued through Official Gazettenotifications. Press Release is also issued todraw attention of the public/NBFCsCan all NBFCs accept deposits and what are therequirements for accepting Public Deposits?
  11. 11. All NBFCs are not entitled to accept publicdeposits. Only those NBFCs holding a validCertificate of Registration with authorisation toaccept Public Deposits can accept/hold publicdeposits. The NBFCs accepting public depositsshould have minimum stipulated Net OwnedFund and comply with the Directions issued bythe Bank.Is there any ceiling on acceptance of Public Deposits? What is the rate ofinterest and period of deposit which NBFCs can accept?
  12. 12. Yes, there is ceiling on acceptance of Public Deposits. A NBFC maintaining requiredNOF/CRAR and complying with the prudential norms can accept public deposits asfollows: Category of NBFC Ceiling on public deposits AFCs maintaining CRAR of 1.5 times of NOF (Net 15% without credit rating Owned Fund) or Rs 10 crore AFCs with CRAR of 12% and having whichever is less minimum investment grade credit rating 4 times of NOF LC/IC with CRAR of 15% 1.5 times of NOF and having minimum investment grade credit rating
  13. 13. Presently, the maximum rate of interest a NBFC can offer is 11%. Theinterest may be paid or compounded at rests not shorter thanmonthly rests.The NBFCs are allowed to accept/renew public deposits for aminimum period of 12 months and maximum period of 60 months.They cannot accept deposits repayable on demand.The RNBCs have different norms for acceptance of deposits whichare explained elsewhere in this booklet.What are the salient features of NBFCs regulations which the depositormay note at the times of investment?
  14. 14. Some of the important regulations relating to acceptance of deposits byNBFCs are as under: 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. 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.
  15. 15. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’includes and shall be deemed always to have included any receipt of money byway of deposit or loan or in any other form but does not include:amount raised by way of share capital, or contributed as capital bypartners of a firm;amount received from scheduled bank, co-operative bank, abanking company, State Financial Corporation, IDBI or any otherinstitution specified by RBI;amount received by a registered money lender other than a bodycorporate;
  16. 16. amount received in ordinary course of business by way of securitydeposit, dealership deposit, earnest money, advance against orders forgoods, properties or services;amount received by way of subscriptions in respect of a ‘Chit’. Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:
  17. 17. amount received from the Central/State Government or any other sourcewhere repayment is guaranteed by Central/State Government or anyamount received from local authority or foreign government or any foreigncitizen/authority/person;any amount received from financial institutions;any amount received from other company as inter-corporate deposit;amount received by way of subscriptions to shares, stock, bonds ordebentures pending allotment or by way of calls in advance if such amountis not repayable to the members under the articles of association of thecompany;amount received from shareholders by private company;amount received from directors or relative of the director of a NBFC;amount raised by issue of bonds or debentures secured by mortgage ofany immovable property or other asset of the company subject to conditions
  18. 18. the amount brought in by the promoters by way of unsecured loan;amount received from a mutual fund;any amount received as hybrid debt or subordinated debt;any amount received by issuance of Commercial Paper. Thus, the directions have sought to exclude from the definition of public deposit amount raised from certain set of informed lenders who can make independent decision. Are Secured debentures treated as Public Deposit? If not who regulates them?
  19. 19. Debentures secured by the mortgage of any immovable property or other assetof the company if the amount raised does not exceed the market value of thesaid immovable property or other asset are excluded from the definition of ‘PublicDeposit’ in terms of Non-Banking Financial Companies Acceptance of PublicDeposits (Reserve Bank) Directions, 1998. Secured debentures are debtinstruments and are regulated by Securities & Exchange Board of India.
  20. 20. What else should a depositor bear in mind while depositing money with NBFCs?While making deposits with a NBFC, the following aspects should beborne in mind:(i) Public deposits are unsecured.(ii) A proper deposit receipt which should, besides the name of thedepositor/s state the date of deposit, the amount in words andfigures, rate of interest payable and the date of maturity should beinsisted. The receipt shall be duly signed by an officer authorised bythe company in that behalf.(iii) The Reserve Bank of India does not accept any responsibility orguarantee about the present position as to the financial soundness ofthe company or for the correctness of any of the statements orrepresentations made or opinions expressed by the company and forrepayment of deposits/discharge of the liabilities by the company.
  21. 21. It is said that rating of NBFCs is necessary before it accepts deposit? Is it true?Who rates them?An unrated NBFC, except certain Asset Finance companies (AFC), cannot acceptpublic deposits. An exception is made in case of unrated AFC companies withCRAR of 15% which can accept public deposit up to 1.5 times of the NOF or Rs10 crore whichever is lower without having a credit rating. A NBFC may get itselfrated by any of the four rating agencies namely, CRISIL, CARE, ICRA and FITCHRatings India Pvt. Ltd.
  22. 22. What are the symbols of minimum investment grade rating of different companies?The symbols of minimum investment grade rating of the Credit rating agencies are: Name of rating Level of minimum agencies investment grade credit rating (MIGR) CRISIL FA- (FA MINUS) ICRA MA- (MA MINUS) CARE CARE BBB (FD) FITCH Ratings India Pvt. tA-(ind)(FD) Ltd
  23. 23. When a company’s rating is downgraded, does it have to bringdown its level of public deposits immediately or over a period oftime? If rating of a NBFC is downgraded to below minimum investment grade rating, it has to stop accepting public deposit, report the position within fifteen working days to the RBI and reduce within three years from the date of such downgrading of credit rating, the amount of excess public deposit to nil or to the appropriate extent permissible under paragraph 4(4) of Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998; however such NBFC can renew the matured public deposits subject to repayment stipulations specified above and compliance with other conditions for acceptance of deposits.
  24. 24. Banking• A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities like Central Bank, Commercial Banks, Savings Bank
  25. 25. • Liquidity – Liquidity for a bank means the ability to meet its financial obligations as they come due. Bank lending finances investments in relatively illiquid assets, but it funds its loans with mostly short term liabilities. Thus one of the main challenges to a bank is ensuring its own liquidity under all reasonable conditions. Banks are expected to hold voluntarily a part of their deposits in the form of ready cash which is known as cash reserves• Creation of Money• Scheduled Banks – Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The banks included in this schedule list should fulfil two conditions. 1. The paid capital and collected funds of bank should not be less than Rs. 5 lac. 2.Any activity of the bank will not adversely affect the interests of depositors. Every Scheduled bank enjoys the following facilitiess. 1. Such bank becomes eligible for debts/loans on bank rate from the RBI 2. Such bank automatically acquire the membership of clearing house. – Example in Public Sector: SBI, SBI associates, Bank of Baroda, BOM, Canara Bank – Examples in Private Sector: Axis, ICICI, HDFC, American Express, Deutsche Bank AG
  26. 26. • Regional Rural Banks – Regional Rural Banks were established under the provisions of an Ordinance promulgated on the 26th September 1975 and the RRB Act, 1976 with an objective to ensure sufficient institutional credit for agriculture and other rural sectors. The RRBs mobilize financial resources from rural / semi-urban areas and grant loans and advances mostly to small and marginal farmers, agricultural laborers and rural artisans. The area of operation of RRBs is limited to the area as notified by GoI covering one or more districts in the State. 5.02 RRBs are jointly owned by GoI, the concerned State Government and Sponsor Banks (27 scheduled commercial banks and one State Cooperative Bank); Capital share being 50% by the central government, 15% by the state government and 35% by the scheduled bank. Examples: Ka Bank Nogkyndong Ri Khasi- Jaintia, Arunachal Pradesh Rural Bank, Meghalaya Rural Bank
  27. 27. • Branch Banking – Engaging in banking activities such as accepting deposits or making loans at facilities away from a banks home office. Branch banking has gone through significant changes since the 1980s in response to a more competitive nationwide financial services market. Financial innovation such as internet banking will greatly influence the future of branch banking by potentially reducing the need to maintain extensive branch networks to service consumers.
  28. 28. Privatization of Banks
  29. 29. Components of a Bank Balance sheetLiabilities Assets1. Capital 1. Cash & Balances with2. Reserve & Surplus RBI3. Deposits 2. Bal. With Banks &4. Borrowings Money at Call and Short Notices5. Other Liabilities 3. Investments 4. Advances 5. Fixed Assets 6. Other Assets Contingent Liabilities
  30. 30. Components of Liabilities1. Capital: Capital represents owner’s contribution/stake in the bank.- It serves as a cushion for depositors and creditors.- It is considered to be a long term sources for the bank.
  31. 31. Components of Liabilities2. Reserves & SurplusComponents under this head includes:I. Statutory ReservesII. Capital ReservesIII. Investment Fluctuation ReserveIV. Revenue and Other ReservesV. Balance in Profit and Loss Account
  32. 32. Components of Liabilities3. Deposits This is the main source of bank’s funds. The deposits are classified as deposits payable on ‘demand’ and ‘time’. They are reflected in balance sheet as under:I. Demand DepositsII. Savings Bank DepositsIII. Term Deposits
  33. 33. Components of Liabilities4. Borrowings (Borrowings include Refinance / Borrowings from RBI, Inter-bank & other institutions)I. Borrowings in India i) Reserve Bank of India ii) Other Banks iii) Other Institutions & AgenciesII. Borrowings outside India
  34. 34. Components of Liabilities5. Other Liabilities & Provisions It is grouped as under:I. Bills PayableII. Inter Office Adjustments (Net)III. Interest AccruedIV. Unsecured Redeemable Bonds (Subordinated Debt for Tier-II Capital)V. Others(including provisions)
  35. 35. Components of Assets1. Cash & Bank Balances with RBII. Cash in hand (including foreign currency notes)II. Balances with Reserve Bank of India In Current Accounts In Other Accounts
  36. 36. Components of Assets2. BALANCES WITH BANKS AND MONEY AT CALL & SHORT NOTICEI. In India i) Balances with Banks a) In Current Accounts b) In Other Deposit Accounts ii) Money at Call and Short Notice a) With Banks b) With Other InstitutionsII. Outside India a) In Current Accounts b) In Other Deposit Accounts c) Money at Call & Short Notice
  37. 37. Components of Assets3. Investments A major asset item in the bank’s balance sheet. Reflected under 6 buckets as under:I. Investments in India in : * i) Government Securities ii) Other approved Securities iii) Shares iv) Debentures and Bonds v) Subsidiaries and Sponsored Institutions vi) Others (UTI Shares , Commercial Papers, COD & Mutual Fund Units etc.)II. Investments outside India in ** Subsidiaries and/or Associates abroad
  38. 38. Components of Assets4. AdvancesThe most important assets for a bank.A. i) Bills Purchased and Discounted ii) Cash Credits, Overdrafts & Loans repayable on demand iii) Term LoansB. Particulars of Advances : i) Secured by tangible assets (including advances against Book Debts) ii) Covered by Bank/ Government Guarantees iii) Unsecured
  39. 39. Components of Assets5. Fixed Asset I. Premises II. Other Fixed Assets (Including furniture and fixtures)6. Other Assets I. Interest accrued II. Tax paid in advance/tax deducted at source (Net of Provisions) III. Stationery and Stamps IV. Non-banking assets acquired in satisfaction of claims V. Deferred Tax Asset (Net) VI. Others