NON-BANKING FINANCIAL COMPANIES

Udit Khandelwal
What is a Non-Banking Financial Company (NBFC)?
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.
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
.
DIFFERENCE BETWEEN NBFCS AND BANKS
(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.
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)

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
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
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

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)

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).
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 Banks
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
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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

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
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
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.

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.
WORKING AND CURRENT POSITION
OF NBFCS
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.

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
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
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
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.
RBIS REGULATION REVISION OF NBFCS IN ITS
ANNUAL REPORT(AUGUST25TH2010)
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,