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Submitted By:

Abhishek Sachdeva UM10801
Arashdeep Singh UM10804
Class : IT(BE-MBA) 9
th
sem





Non Banking Finance
Company

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Table of Contents


CHAPTER 1
Introduction to NBFC ...................................................................................................... 4

CHAPTER 2
NBFCs Global Scenario ................................................................................................ 4

CHAPTER 3
NBFCs Indian Scenario .................................................................................................... 4

CHAPTER 4
Literature Review ........................................................................................................... 4



CHAPTER 5
Research Methodology ................................................................................................... 4

CHAPTER 6
Hypothesis...................................................................................................................... 4

CHAPTER 7
Analysis .......................................................................................................................... 4
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CHAPTER 8
Suggestions ................................................................................................................................. 4
References ............................................................................................................................ 1




















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Aim: To study the Non Banking Finance Companies

Chap
Introduction:
The Indian economy has been witnessing high rates of growth in the last few years. Financing
requirements have also risen commensurately and will continue to increase in order to support
and sustain the tremendous economic growth.
NBFCs have been playing a complementary role to the other financial institutions including
banks in meeting the funding needs of the economy. They help fill the gaps in the availability of
financial services that otherwise occur in bank-dominated financial systems. The gaps are in
regards the product as well customer and geographical segments.
NBFCs over the years have played a very vital role in the economy. They have been at the
forefront of catering to the financial needs and creating livelihood sources of the so-called
unbankable masses in the rural and semi-urban areas. Through strong linkage at the grassroots
level, they have created a medium of reach and communication and are very effectively serving
this segment. Thus, NBFCs have all the key characteristics to enable the government and
regulator to achieve the mission of financial inclusion in the given time.


Global Scenario:
Global credit crisis followed by increase in interest rates in October and November 2008 resulted
widespread crisis of confidence.Chain of events after the collapse of Lehman Brothers is still
fresh in the minds of investors. Non-Banking Finance Companies (NBFCs) worldwide were
severely impacted due to economic slowdown coupled with fall in demand for financing as
several businesses deferred their expansion plan. Stock prices of NBFCs crashed on the back of
rising non-performing assets and several companies closed their operations. International NBFCs
still continue to close down. The positive news however is that, this crisis has forced NBFCs to
improve their operations and strategies. Industry experts opine that they are much more mature
today than they were during the last decade.

The recent global financial crisis has however highlighted the importance of widening the
focus of NBFC regulations to take particular account of risks arising from regulatory gaps, from
arbitrage opportunities and from the inter-connectedness of various activities and entities
comprising the financial system. The regulatory regime for NBFCs is lighter and different in
many respects from that for the banks.
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The most drastic change that has been seen recently in the NBFC segment is that of the big
international companies setting shop in the NBFC sector. Till sometime back, no big company
would have even thought about investing and trading in this sector. We have Siemens,
Caterpillar, GE and many more industries taking steps towards establishing their foothold in
this market.


Indian Scenario:
What is a Non-Banking Financial Company (NBFC)?
A Non-Banking Financial Company (NBFC) is a company registered under the 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. 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).

Different types/categories of NBFCs registered with RBI
NBFCs are categorized
a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
b) non deposit taking NBFCs by their size into systemically important and other non-deposit
holding companies (NBFC-NDSI and NBFC-ND)
c) by the kind of activity they conduct. Within this broad categorization the different types of
NBFCs are as follows:
i. Asset Finance Company(AFC) : An AFC is a company which is a financial institution
carrying on as its principal business the 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. Principal business for this purpose is defined as aggregate of
financing real/physical assets supporting economic activity and income arising therefrom
is not less than 60% of its total assets and total income respectively.
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ii. Investment Company (IC) : IC means any company which is a financial institution
carrying on as its principal business the acquisition of securities,
iii. Loan Company (LC): LC means any company which is a financial institution carrying
on as its principal business the providing of finance whether by making loans or advances
or otherwise for any activity other than its own but does not include an Asset Finance
Company.
iv. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a)
which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a
minimum Net Owned Funds of Rs. 300 crore, c) has a minimum credit rating of A or
equivalent d) and a CRAR of 15%.
v. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an
NBFC carrying on the business of acquisition of shares and securities which satisfies the
following conditions:-

(a) it holds not less than 90% of its Total Assets in the form of investment in equity
shares, preference shares, debt or loans in group companies;

(b) its investments in the equity shares (including instruments compulsorily convertible
into equity shares within a period not exceeding 10 years from the date of issue) in group
companies constitutes not less than 60% of its Total Assets;

(c) it does not trade in its investments in shares, debt or loans in group companies except
through block sale for the purpose of dilution or disinvestment;

(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f)
of the RBI act, 1934 except investment in bank deposits, money market instruments,
government securities, loans to and investments in debt issuances of group companies or
guarantees issued on behalf of group companies.

(e) Its asset size is Rs 100 crore or above and

(f) It accepts public funds
vi. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-
NBFC is a company registered as NBFC to facilitate the flow of long term debt into
infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar
denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies
(IFC) can sponsor IDF-NBFCs.
vii. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-
MFI is a non-deposit taking NBFC having not less than 85%of its assets in the nature of
qualifying assets which satisfy the following criteria:

a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income
not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs.
1,20,000;

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b. loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent
cycles;

c. total indebtedness of the borrower does not exceed Rs. 50,000;

d. tenure of the loan not to be less than 24 months for loan amount in excess of Rs.
15,000 with prepayment without penalty;

e. loan to be extended without collateral;

f. aggregate amount of loans, given for income generation, is not less than 75 per cent of
the total loans given by the MFIs;

g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the
borrower
viii. Non-Banking Financial Company Factors (NBFC-Factors): NBFC-Factor is a non-
deposit taking NBFC engaged in the principal business of factoring. The financial assets
in the factoring business should constitute at least 75 percent of its total assets and its
income derived from factoring business should not be less than 75 percent of its gross
income.


What is systemically important NBFC?
Size Based Classification

In 2006, non-deposit taking NBFCs with assets of Rs. 100 crore and above were labelled as
Systemically Important Non-Deposit taking NBFCs (NBFCs-ND-SI)

-depository companies, mean companies holding assets of Rs 100
crore or more as per last balance sheet
total assets




it as per last balance sheet? A 4thJuly 2009 circular makes a departure. Says as and when
NBFCs attain asset size of Rs 100 crore, they may start complying with the norms.

may be a profit on sale of an asset, which may be used to pay off liabilities. Asset size
does go up temporarily
obtained from the RBI.
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Economic role that the NBFCs fulfill?
NBFCs have been operating various businesses under sound economics. Many businesses
started by the sector have later been taken up by banks and become regular banking services.
For instance, car financing, which was started by NBFCs has now become one of the larger
revenue streams for banks. The NBFCs themselves have now moved on to financing second
hand cars. Other businesses, namely, infrastructure finance, asset finance, hire purchase and,
in the recent past, microfinance have been the major areas of operations for NBFCs.
Additionally, NBFCs play a supportive role in the economy and also in financial inclusion and
therefore need to be encouraged. Some of the economic roles played by NBFCs are:
2.2.1 Infrastructure financing
While the RBI doesnt have any specific sector exposure limits, it has asked the banks to
formulate internal policies for exposure to the infrastructure sector. The banking sectors
exposure to infrastructure was Rs. 5,50,178 crore as on May 2011, which was 15% of
total non-food bank credit of the banks. In comparison, the Infrastructure Finance NBFCs had an
outstanding infrastructure loan book size of Rs.1,96,158 crore. Banks
further exposure to infrastructure is constrained by prudential internal limits (which
typically are 12-15%) and asset liability mismatch due to long tenure of assets and short
tenure of liabilities.
Given the projected capital requirement for infrastructure sector in the 12th five-year plan,
NBFCs will play a part in supplying capital to the sector. However, proper credit rating,
accounting and financial norms have to be ushered in for greater transparency and
soundness of the sector as also operating in the NBFC sector.
2.2.2 Serving unbanked customer segments
NBFCs have traditionally focused on customer segments which were not served by
banks like micro, small and medium enterprises (MSMEs), funding of commercial
vehicles including old vehicles, farm equipments viz. tracking, harvesters, etc. loan
against shares, funding of plant and machinery; etc.
NBFCs typically are specialized vehicles both in terms of products and the geographies
in which they operate. This specialization provides them a unique framework to assess
the risk in the undertaken business. A much closer market awareness provides them the
ability to rate borrowers, monitor them, price the relative credit suitably and effect
recoveries from them.
NBFCs also provide credit for certain sectors which are not served by banks and
Financial Institutions because Banks/FIs do not have adequate market relationships and
infrastructure for the same. Some of these sectors are:
(a) Used Trucks
(b) Used passenger vehicles
(c) Consumer durable loans
(d) Personal Loans
(e) Funding to the Small & Medium Enterprises (SME Sector) which do not have access to
institutionalized funding, etc.
Traditionally, these sectors were financed entirely by the unorganized financiers at
exorbitant high interest rates. In the last 10 years, with their retail strength, NBFCs have
rendered significant service by extending credit to these sectors. Now banks and
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financial institutions are availing of the reach and expertise of NBFCs for employing
funds in these sectors through NBFCs. This has brought in lot of funds into these
sectors, thereby reducing interest rates.
2.2.3 Strong understanding of customer segments and ability to deliver customized
products
The ability of NBFCs to produce innovative products in consonance with needs of their
clients is well recognized. This, in addition to the proximity to the clients, makes the NBFCs
distinct from its banking sector counterparts. In a short period of time, NBFCs
have become market leaders in most of the retail finance segments like commercial
vehicles, car financing and personal loans. In the last decade or so, the Indian retail
finance markets have seen several new products being developed and introduced by
NBFCs. The following are some cases in point - Used vehicle financing, Small ticket
personal loans (ST-PL), Three-wheeler financing, Loan against shares, Promoter
funding, Public issue financing (IPO financing) and Finance for tyres and fuel.
NBFCs have a significant economic role, especially servicing the under-banked and unbanked
populace and geographies. Bringing the diverse set of NBFCs under regulation rather than
curtailing their operations, would help orderly growth of the sector.



Indian NBFCs Facts and Figures:
Mahindra Financial Services - one of Indias premier non-banking finance companies (NBFC)
- largest NBFC operating in rural India. We have offices in the areas we
- employ over 16,000 people


The number of NBFCs has decreased from 13,014 in FY06 to 12,409 in FY11 however the
sector has grown by 2.6 times between FY06 and FY11 at a CAGR of 21%.

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However, the total number of NBFCs registered with Reserve Bank of India declined to 12,385
as at end March, 2012 from 12,409 as at end March 2011.There was also a decline in NBFCs-D
in 2011-12.This decline was mainly for:
of NBFCs

-deposit taking companies

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Procedure for application to the Reserve Bank for Registration?
The applicant company is required to apply online and submit a physical copy of the application
along with the necessary documents to the Regional Office of the Reserve Bank of India. The
application can be submitted online by accessing RBIs secured website
https://cosmos.rbi.org.in . At this stage, the applicant company will not need to log on to the
COSMOS application and hence user ids are not required.. The company can click on CLICK
for Company Registration on the login page of the COSMOS Application. A window showing
the Excel application form available for download would be displayed. The company can then
download suitable application form (i.e. NBFC or SC/RC) from the above website, key in the
data and upload the application form. The company may note to indicate the correct name of the
Regional Office in the field C-8 of the Annex-Identification Particulars in the Excel
application form. The company would then get a Company Application Reference Number for
the CoR application filed on-line. Thereafter, the company has to submit the hard copy of the
application form (indicating the online Company Application Reference Number, along with the
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supporting documents, to the concerned Regional Office. The company can then check the status
of the application from the above mentioned secure address, by keying in the acknowledgement
number.
Can all NBFCs accept deposits?
All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had
given a specific authorisation are allowed to accept/hold public deposits.
deposit and public deposit:
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 by way of deposit or loan or
in any other form but does not include:
i. amount raised by way of share capital, or contributed as capital by partners of a firm;
ii. amount received from a scheduled bank, a co-operative bank, a banking company,
Development bank, State Financial Corporation, IDBI or any other institution specified
by RBI;
iii. amount received in ordinary course of business by way of security deposit, dealership
deposit, earnest money, advance against orders for goods, properties or services;
iv. amount received by a registered money lender other than a body corporate;
v. 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:
i. amount received from the Central/State Government or any other source where
repayment is guaranteed by Central/State Government or any amount received from local
authority or foreign government or any foreign citizen/authority/person;
ii. any amount received from financial institutions specified by RBI for this purpose;
iii. any amount received by a company from any other company;
iv. amount received by way of subscriptions to shares, stock, bonds or debentures pending
allotment or by way of calls in advance if such amount is not repayable to the members
under the articles of association of the company;
v. amount received from shareholders by private company;
vi. amount received from directors or relative of the director of an NBFC;
vii. amount raised by issue of bonds or debentures secured by mortgage of any immovable
property or other asset of the company subject to conditions;
viii. the amount brought in by the promoters by way of unsecured loan;
ix. amount received from a mutual fund;
x. any amount received as hybrid debt or subordinated debt;
xi. any amount received by issuance of Commercial Paper.
xii. any amount received by a systemically important non-deposit taking non-banking
financial company by issuance of perpetual debt instruments
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xiii. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance
Company
Thus, the directions exclude from the definition of public deposit, amount raised from certain set
of informed lenders who can make independent decision.
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 accept public
deposits. An exception is made in case of unrated AFC companies with CRAR of 15% which
can accept public deposit without having a credit rating up to a certain ceiling depending upon its
Net Owned Funds NBFC may get itself rated by any of the five rating agencies namely, CRISIL,
CARE, ICRA and FITCH, Ratings India Pvt. Ltd and Brickwork Ratings India Pvt. Ltd
Responsibilities of the NBFCs accepting/holding public deposits with regard to submission
of Returns:
The NBFCs accepting public deposits should furnish to RBI :
i. Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the annual general meeting together with a copy of the
report of the Board of Directors and a copy of the report and the notes on accounts
furnished by its Auditors;
ii. Statutory Quarterly Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the deposits as
and when the claims arise;
iv. Quarterly Return on prudential norms-NBS 2;
v. Quarterly Return on liquid assets-NBS 3;
vi. Annual return of critical parameters by a rejected company holding public deposits
NBS4
vii. Half-yearly ALM Returns by companies having public deposits of Rs. 20 crore and above
or asset size of Rs. 100 crore and above irrespective of the size of deposits holding
viii. Monthly return on exposure to capital market by deposit taking NBFC with total assets of
Rs 100 crore and aboveNBS6; and
ix. A copy of the Credit Rating obtained once a year

Companies which are NBFCs, but are exempted from registration:
Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies
engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi
Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been
exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject
to certain conditions.
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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,
Government of India.
It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-
Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934.
Multi-Level Marketing companies, Direct Selling Companies, Online Selling Companies dont
fall under the purview of RBI. Activities of these companies fall under the
regulatory/administrative domain of respective state government.
A list of such companies and their regulators are as follows:

Impact of Recession on Indian NBFCs
NonBanking Finance Companies (NBFCs) in India were severely impacted due to economic
slowdown coupled with fall in demand for financing as several businesses deferred their
expansion plan. Stock prices of NBFCs crashed on the back of rising non-performing assets and
several companies closed their operations. International NBFCs still continue to close down or
sell their back end operations in India.

Recovery by Indian NBFCs:
Timely intervention of RBI helped reduce the negative effect of credit crunch on banks and
NBFCs. Infact,aggressive strategies helped LIC Housing Finance to grab new customers (including
customers of other banks) and increase its market share in national mortgage market. Surprisingly it
was able to maintain its profitability in 2009 (around 37%).
HDFC, the largest NBFC in India,however experienced a slowdown in customer growth due to stiff
competition, especially from LIC Housing Finance and tight monetary conditions.
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Literature Review(s):
This section includes the views held by various industrialists and key figures in the industry and
research organisations about NBFCs.
According to Hemal Shah, Partner-Advisory Services, E&Y, "NBFC industry per se has
undergone a huge change both quantitatively and qualitatively, especially in the way the sector
players have managed to differentiate their functional specialisation."
According to Mr Pratap Paode, CEO, Shriram Equipment Finance, "The NBFC sector is
dominated by the construction, equipment and the commercial vehicle market and the other
assets included under this. This industry has been growing consistently at a rate of 20-25%
barring the negative fall in the year 2008, which was due to the global scenario. However, the
industry has revived very quickly and has crossed volumes of more than that of 2007. The
expected growth of return from this sector in the near future looks to be about 30-35%".
According to Mr Pradeep C Bandivadekar, COO, Tata Capital Ltd said, "The general
growth rate to be expected is more than 15-20% in the next quarter, which includes banks and
other NBFCs. There is more than three and half lakh crore non-deposits taking place in the
NBFC sector and around 85,000 crore deposits taking place."
"NBFCs have traditionally been the secondary borrowing institutes and their main source of
borrowing has been the banks, mainly the public sector banks. This is the main reason why the
borrowing rate in the NBFC sector is a few percent higher than the public sector banks. In terms
of business establishment and rate on return (RoI), NBFC have a neat 2% RoI as compared to the
1.2 - 1.4% of a public sector bank," Mr Bandivadekar.

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Proposed Regulatory Changes

India Ratings believes that the draft guidelines proposed by the RBI in December 2012, if
implemented, will be positive for the NBFC sector in the long-term even though some of the
clauses can impact profitability in the early stages of implementation.






Analysis:

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Suggestions:



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Conclusion:
Sustainable growth is possible only with the right dynamics which suit the market demand and
requirement. Many experts feel that the bad economic phase which shadowed the world, has
taught a few valuable lessons to the players in the NBFC sector. As in the case of any sector, the
recession made it apparent that it is difficult to maintain a consistent growth pattern if the growth
is not planned.
The NBFC sector is showing great resilience for survival, sticking to the three thumb rules which
are: Getting in to the rural markets (read: the bottom of the pyramid) and tapping the wide
customer potential there. Avoid getting in direct competition with public and private sector
banks. And lastly, ticking to one particular topic/segment of expertise.

Future growth and development of NBFCs
Given the important role played by NBFCs as innovators, serving unbanked and under-banked
geographies and customer segments and services not provided by banks, it is imperative that
the growth and development of the sector be accorded some degree of priority. With adequate
regulatory oversight of systemically important NBFCs, implementation of prudential norms,
regular reporting and monitoring, etc., NBFCs may be looked at playing a larger part in the
financial services sector.

References:
http://rise.mahindrafinance.com
http://timesofindia.indiatimes.com/business/india-business/RBI-curbs-NBFC-loans-against-
shares/articleshow/40641560.cms
http://www.nbfcsoft.com/web_design/about-nbfc.html
http://www.researchand markets.com