NON-BANKING FINANCIAL

COMPANIES AND MICROFINANCE

FIN-T5-11 CREDIT 3
 COURSE OUTCOME INDICATORS
COI-1 COI-2 COI-3 COI-4 COI-5

Understanding Understanding
Understanding
the Sources of major NBFC Understanding
the history and
Understanding finance, operating in in detail about
classification of
the concept functions, legal India and the the Financial
NBFC and also
NBFC, Financial procedures, RBI procedure of Inclusion and
the concept of
Services and guidelines and application to Microfinance as
Fund based and
Systems different the RBI for a development
Fee based
products offered NBFC tool
activities
by NBFC registration
6 hrs. 9 hrs 9 hrs 7 hrs 14 hrs
Out of 100 -15 20 20 20 25
Out of 40- 6 8 8 8 10
 COURSE PLAN

MODULE 1
Financial Services

Indian Financial System

Formal Financial System and Informal Financial System

Financial Institutions

Banking Companies

Difference between Banks and NBFCs

 MODULE 2

History of Non-Banking Financial Companies

Classification of NBFC

Classification of activities of NBFC

Fund based activities

Fee based Activities

 MODULE 3

Sources of finance

Functions of finance

Investment policies of NBFC

Products offered and services provided

 MODULE 4

Major NBFC in India

Legal Framework

Procedure of application to the Reserve bank for NBFC

registration, section 45-IA of the RBI Act , 1934,
Companies Act section 3
 MODULE 5
Financial Inclusion

Micro Finance

Evolution of Micro Finance

Micro Finance delivery models and methodology

Legal and Regulatory framework

Impact of Micro Finance

Revenue and Ownership models of Micro Finance

 GRADING OR EVALUATION TOOLS OTHER
THAN EXAMINATIONS

• Assignment 1 (5 Marks)
• Class Test / Written Quizzes of each module

• Assignment 2 (5 marks)
• Answering of KTU previous year question
paper/Group Case Studies
COURSE PROJECT (15 MARKS)
CHOOSE A NBFC or MICROFINANCE OF YOUR
CHOICE AND PREPARE A REPORT

• Introduction of the company

• Classification of NBFC
2.1 Size of NBFC with respect to others (graphical
representation)
2.2 Kind of Activities performed
• Share of NBFC
3.1 Give trend analysis of share price over a month
• Requirement for the registration with RBI
• Performance of NBFC
5.1 Source of funding
5.2 Financial Ratios (Minimum 10 ratios to be done)
• Inference
• Conclusion
 GENERAL GUIDELINES FOR PROJECT

• Each one should choose different NBFC or

Microfinance
• Mode: Hardcopy
• Page Limit: 15 – 25 pages
• Grading Criteria: Timely submission (2) Content (6)
Presentation (4) Q&A (3)
 Evaluation COI- COI- COI- COI- COI-
Weightage Date
Component 1 2 3 4 5
15 20 20 20 25
6 8 8 8 10
Test -1 Max Marks - 3 4
7.5
Test -2 Max Marks - 3.75 3.75
7.5
Assignment 1 5 1 1 1 1 1

Assignment 2 5 24/1 1 2 2

Project and 15 22/1 1 3 3.25 1.25 6.5

Presentations

6 8 8 8 10
MODULE 1

FINANCIAL SERVICES
AND SYSTEM
WHAT ARE FINANCIAL SERVICES?

• Financial services refers to a broad range of more

specific activities such as banking, investing, and
insurance

• Financial services is limited to the activity of

financial services firms and their professionals while
financial products are the actual goods, accounts, or
investments they provide
• Financial services are the economic services
provided by the financial industry, which
encompasses a broad range of businesses that
manage money, including banks, credit card
companies, insurance companies, consumer
finance companies (microfinance), stock
brokers, investment funds, individual managers
and some Government sponsored enterprises etc
 IMPORTANCE OF FINANCIAL
SERVICES

• Facilitating transactions in the economy

• Mobilizing saving
• Allocating Capital Funds
• Transforming risk
• Make better investment
SCOPE OF FINANCIAL SERVICES
• Financial services are broadly classified as :

▫ Traditional Activities
 Capital Markets and Money Markets
 Fund Based and Fee Based
• Modern Activities
▫ Rendering project advisory services
▫ Guiding corporate customers in capital
restructuring
▫ Acting as trustees to the debenture holders
▫ Structuring the financial collaborations/joint
venture
▫ Rehabilitating and restructuring sick companies
▫ Undertaking risk management
INDIAN FINANCIAL SYSTEM

• A financial system is a set of institutions, such as

banks, insurance companies, and stock
exchanges, that permit the exchange of funds
• Financial systems exist on firm, regional, and
global levels
• Borrowers, lenders, and investors exchange
current funds to finance projects, either for
consumption or productive investments, and to
pursue a return on their financial assets.
• The financial system also includes sets of rules
and practices that borrowers and lenders use to
decide which projects get financed, who finances
projects, and terms of financial deals.
The financial system of a country is concerned with :

• Allocation and Mobilisation of savings

• Provision of funds
• Facilitating financial transactions
• Developing financial markets
• Provision of legal financial framework
• Provision of financial and advisory services
FEATURES OF FINANCIAL SYSTEM
• It plays a vital role in economic development of a
country
• It encourages both savings and investments
• It links savers and investors
• It helps in capital formation
• It helps in allocation of risk
• It facilitates expansion of financial markets
• It aids in Financial Deepening and Broadening
STRUCTURE/COMPONENT OF INDIAN
FINANCIAL SYSTEM
 FUNCTIONS OF INDIAN FINANCIAL
SYSTEM

• It bridges the gap between savings and investment

through efficient mobilisation and allocation of
surplus funds
• It helps a business in capital formation
• It helps in minimising risk and allocating risk
efficiently
• It helps a business to liquidate tied up funds
• It facilitates financial transactions through provision
of various financial instruments
• It facilitates trading of financial assets/instruments
by developing and regulating financial markets
IMPORTANCE OF INDIAN FINANCIAL SYSTEM

• It accelerates the rate and volume of savings

through provision of various financial instruments
and efficient mobilisation of savings
• It aids in increasing the national output of the
country by providing funds to corporate customers
to expand their respective business
• It protects the interests of investors and ensures
smooth financial transactions through regulatory
bodies such as RBI, SEBI etc.
• It helps economic development and raising the
standard of living of people
• It helps to promote the development of weaker
section of the society through rural development
banks and co-operative societies
• It helps corporate customers to make better
financial decisions by providing effective
financial as well as advisory services
• It aids in Financial Deepening and Broadening
 FINANCIAL INSTITUTIONS
• A financial institution (FI) is a company engaged in
the business of dealing with financial and monetary
transactions such as deposits, loans, investments,
and currency exchange
• Financial institutions encompass a broad range of
business operations within the financial services
sector including banks, trust companies, insurance
companies, brokerage firms, and investment dealers
 TYPES OF FINANCIAL INSTITUTIONS

• Commercial Banks
• Investment Banks
• Insurance Companies
• Brokerage Firms
 PROS AND CONS OF FINANCIAL
INSTITUTIONS
ADVANTAGES DISADVANTAGES

• Convenient access to • Time consuming and

your money expensive procedure for

the grant of loans
• Security
• Restrictions imposed by
• Saves Money
the power of the
• Earn interest
companies by institutions
• Building block of credit
 MEANING OF BANKING COMPANY
• A banking company is defined as a company which
transacts the business of banking in India.
• The Indian Banking Regulation Act defines the business
of banking by stating the essential functions of a banker.
• Section 5 of Banking Regulation Act defines banking as
“the accepting, for the purpose of lending or investment,
of deposit of money from the public repayable on
demand or otherwise and withdraw able by cheque,
draft, order or otherwise.
FEATURES OF BANKING COMPANY

• The borrowing, raising, or taking up of money.

The lending or advancing of money either upon
or without security.
• The granting and issuing of letters of credit,
travellers cheques and circular notes.
• The buying and selling of foreign exchange
including foreign bank notes.
• Contracting for public and private loans
negotiating and issuing the same.
• Undertaking and executing trust.
• Carrying on and transacting every kind of
guarantee and indemnity business.
• The collecting and transmitting of money and
securities.
 PRODUCTS AND SERVICES
PRODUCTS SERVICES

• Current accounts • Individual Banking

• Savings accounts • Business Banking
• Debit cards • Digital Banking
• ATM cards • Loans
• Credit cards
• Traveller's cheques
• Mortgages
• Home equity loans
• Personal loans
• Certificates of deposit/Term
deposit etc.
 FORMS OF BUSINESS IN BANKING
COMPANIES

(a) the borrowing, raising, or taking up of money;

the lending or advancing of money either upon
or without security
(b) acting as agents for any government or local
authority or any other person or persons
(c) contracting for public and private loans and
negotiating and issuing the same;
d) the effecting, insuring, guaranteeing,
underwriting, participating in managing and
carrying out of any issue, public or private, of
State, municipal or other loans or of shares,
stock, debentures or debenture stock of any
company, corporation or association and the
lending of money for the purpose of any such
issue;
 LICENSING OF BANKING COMPANIES
• Licensing refers to the
process of getting
permission from a higher
authority.
• Here licensing of banking
companies refers to the
process of getting
permission from the
Reserve bank of India to
start banking companies
in India under the
banking regulation act
1949.
 BANKING COMPANIES IN INDIA IS GOVERNED
BY TWO MAIN LEGISLATIONS :

➢Banking Regulation Act 1949

➢The Reserve Bank of India Act 1934

 BANKING REGULATION ACT−1949
BANKING DEFINED :

“ Accepting for the purpose of lending or

investment ,of deposits of money from the
public ,repayable on demand or otherwise
,and withdrawal by cheque ,draft ,order or
otherwise “
 Main Objective of the Act

To ensure sound banking through

regulation covering the opening of
branches and maintenance of liquid asset .
Sec−6 Permitted business of Banks

• Banking for borrowing ,raising or taking up of

money ,selling ,collecting and dealing in bills
of exchange ,promissory notes.

• Dealing in shrares ,bonds,debentures.

• Acting as agents for government

• Contracting for public and private loans and

issuing the same.
• Managing ,selling and realizing any property
which may come into the possession of the
company .

• Undertaking and executing trusts

• Establishing and supporting or aiding in the

establishment and support of associations,funds
,trust.

• Dealing with Acquisition, construction and

maintenance of building
 Business prohibited for Banks

• No banking company shall directly or

indirectly deal in the buying and selling or
bartering of goods or engage in any kind of
trade or buy.
 SEC -19 RESTRICTION ON SUBSIDIARY
COMPANIES
Banking company shall not form any
subsidiary company

Exception :
1. With the permission in writing of RBI
2. Reserve bank may with prior approval of
the central government (To spread the
banking in India)
SEC −22 LICENSING OF BANKING COMPANIES
RBI issues license to a banking company after
inspecting the books of the banking company and
after being satisfied with the following conditions

▪ Company is in a position to settle all the

claims

▪ Company should not act against the interest

of the depositors
• The company should have adequate capital
structure and earning prospects
• Public interest should be saved
• To follow any other condition the bank has to
take prior permission of RBI.

• RBI would cancel the license if the

company ceases to carry out business in
India
 Sec−23 OPENING OF BRANCHES

• To obtain permission from the RBI for opening

up branches both in domestic and foreign

Exceptions
• A change of location within same city,town or
village
• A temporary business service offered by a
banking company
 Conditions for opening up branches :

• The general character of the management

• The financial position of the bank

• Maintenance of capital adequacy norms and

earning prospects of the bank

• Maintenance of public interest in opening up

new branches
 Sec−27 RETURNS

• Every banking company required to submit a

monthly statement in a prescribed format by
RBI showing its assets and liability position in
the last Friday of the month.
 Sec−35 INSPECTION

• RBI possess the right to call for an

inspection of any banking company and
its books and accounts

• To safeguard the interests of the

depositors or its shareholders
 Subsection (1)
• Empowers RBI to conduct scrutiny by any one
or more officials of RBI of the affairs of
banking company and its books and accounts

• If the inspection is carried out at the instance

of Central Government ,then the report is to
be sent to Central Government
 If Central Government is in the opinion that
the banking business is being conducted
detrimental to the interests of depositors then
it may instruct to:

➢Prohibit the banking company from receiving

deposits

➢Direct the Reserve Bank to apply under

Section 38 for the winding up of the banking
company
Sec−20 RESTRICTION ON LOANS &ADVANCES

• No banking company shall:−

• Grant loans and advances on the security of its
own shares ,or
• Enterinto any commitment for granting any
loan/advance to or on behalf of—
i) Any of its directors
ii) Directors interested as
partner,manager,employee or guarantor
iii) Any individual in respect of whom any of its
directors is a partnerƒguarantor
Sec−21 POWER OF RESERVE BANK TO CONTROL
ADVANCES BY BANKING COMPANIES

• Act gives RBI enough power to issue directives

to the banking companies to regulate
advances
• RBI may determine the policy to check
speculation and rising prices which the
banking companies shall bound to follow to
disburse loans
• RBI may indicate the following in that
directives:−

a) The purpose for which advances may or may

not be made

b) Margins to be maintained in respect of

secured advances

c) The max. amount of advances or other

financial accomodation
d)Maximum amount up to which ,guarantees
may be given by a banking company on behalf
of any one company,firm,association of
persons or individual

e)The rate of interest and other terms and

conditions on which advances may be
madeƒguarantees may be given
 Sec−10 MANAGEMENT OF BANKING
COMPANIES
•51% of directors in every board of directors of
banking companies shall satisfy the following:
•shall have knowledge/practical experience
in respect of one or more of the following
matters namely− accountancy, banking,
agriculture & rural economy, co−operation,
law, finance
 Sec 10B APPOINTMENT OF
CHAIRMAN

• Every banking company must have a Chairman

• Chairman must be in whole time

employment of the banking company

• His period in office cannot exceed more than 5

years though he can be reappointed

A person will be disqualified as a chairman if he:
a) Is a director of any company other than a
company referred to in the proviso to
subsection(2)

b) Is a partner of any firm which carries on

any trade ,business or industry or

c) Has substantial interest in any other company

or firm

d) Is directed in any other business or vocation

• Directors/chairman appointed under sec−10A
and 10B by RBI can hold office of more than
one banking company
 FINANCIAL INTERMEDIARIES
• A financial intermediary is an institution or
individual that serves as a middleman among
diverse parties in order to facilitate financial
transactions.
• Common types include commercial banks,
investment banks, stockbrokers, pooled
investment funds, and stock exchanges
 FORMAL AND INFORMAL FINANCIAL
SYSTEM
• Formal Financial System is characterized by
presence of an organized, institutional and regulated
system which caters the financial needs of the
modern spheres of the economy.
• Informal Financial System is an unorganized, non-
institutional and non-regularized system dealing
with the traditional and rural spheres of the
economy.
REGULATORS AND COMPONENTS OF FORMAL
FINANCIAL SYSTEM
Regulators –
SEBI,RBI,IRDA

Formal
Components-
Institution, market,
instrument, service

Indian Financial
System Individual Money
Lenders

Informal Partnership firms

Group of person
operating as fund
PROS AND CONS OF INFORMAL FINANCIAL
SYSTEM

Advantages
◦ Low transaction cost
◦ Minimum default risk
◦ Transparency of procedures

Disadvantages
◦ Wide range of interest rates
◦ Higher rates of interest
◦ Unregulated
 COMPARISON OF INFORMAL AND FORMAL
FINANCIAL SECTOR

1. The informal financial sector provides savings and

credit facilities for small farmers in rural areas, and for
lower- income households and small-scale enterprises in
urban areas.
Formal financial institutions ignore small farmers, lower-
income households, and small- scale enterprises in favour
of a larger-scale, well-off, and literate clientele which can
satisfy their stringent loan conditions.
2. The procedures of informal schemes are
usually simple and straightforward; as they
emanate from local cultures and customs, they
are easily understood by the population.

Formal financial system has a Complex

administrative procedures are beyond the
understanding of the rural masses and small
savers .
3. The informal sector mobilizes rural savings
and small savings from low-income urban
households .
Formal financial institutions do not mobilize
rural savings or small-scale deposits.
Commercial banks could contribute to rural and
small savings mobilization if they had adequate
branch networks and if they adopted the
relevant procedures.
4. Informal groups operate at times and on days
which are convenient for their members.
The working days and opening hours of formal
financial institutions do not take rural work
schedules into account; banks are open at times
when farmers are at work in their fields.
5. Informal sector associations accept any amount of
regular savings, even the most modest sums which
a saver can afford to set aside. The financial
techniques on which such informal groups are based
lend themselves to the management of a large
number of small accounts.
Formal sector institutions are selective regarding
clientele. Their financial technology is not suited to
the management of modest sums from a large
number of savers.
6. Access to credit is simple, non-bureaucratic,
and little based on written documents. Literacy
is not a requisite.
Loan application procedures are complex and
require reading and writing skills so that a file
on the borrower may be established.
7. The simple and direct processing of loan requests
allows for their prompt approval and a minimum
delay in disbursement. Rejections are rare; but the
level of risk is reflected in the interest rate charged.

Processing of loan requests is complex, resulting in

long delays before final approval or rejection. Even
when approval is obtained, loan delivery is slow.
8. Transaction costs are low
Transaction costs are high

9. Repayment rates are high

Repayment rates are low.
10. Within the informal sector, information is widely
diffused. The regular meetings of informal savings
and credit associations serve as a forum for
dissemination of information.

Formal sector institutions do not have a good

network for dissemination of information. In
addition, they are out of touch with the rural masses
and make little to seek ways of reaching them.
12. The interest paid on deposits in the informal
sector compares favorably with that paid in the
formal sector, thus providing an incentive for
rural and small urban households to save.

Some institutions of the formal sector do not

even offer savings facilities. Others apply low –
or sometimes even negative - real interest rates,
thus putting off many a potential saver.
13. The volume and availability of loanable funds
are subject to seasonal fluctuations.

The formal sector regularly has loanable funds

available.
14. The informal sector is not subsidised by the
government, nor does it receive grants or other
forms of support from donor agencies.

Formal sector institutions are subsidised by the

government and may also receive grants and
other support from donor agencies.
 WHAT IS NBFC?

• A Non-Banking Financial Company 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 etc.
 IMPORTANCE OF NBFC

• Mobilization of Resources - It converts

savings into investments
• Capital Formation - Aids to increase capital
stock of a company
• Provision of Long-term Credit and
specialised Credit
• Aid in Employment Generation
• Help in development of Financial Markets
• Helps in Attracting Foreign Grants
• Helps in Breaking Vicious Circle of Poverty by
serving as government's instrument
MAJOR DIFFERENCE OF NBFC FROM BANK

NBFCs lend and make investments and hence their

activities are akin to that of banks; however there are
a few differences as given below:

i. NBFC cannot accept demand deposits

(a deposit of money that can be withdrawn without
prior notice, e.g. in a current account)
ii. NBFCs do not form part of the payment and
settlement system and cannot issue cheques
drawn on itself;

iii. Deposit insurance facility of Deposit Insurance

and Credit Guarantee Corporation is not available
to depositors of NBFCs, unlike in case of banks
 NBFC & BANK

• An NBFC is a company that provides banking

services to people without holding a bank
license.
• Bank is a government authorized financial
intermediary that aims at providing banking
services to the general public
• Incorporated
Under Companies Act 1956
Banking Regulation Act, 1949

• Demand Deposit
Not Accepted
Accepted

• Foreign Investment
Allowed up to 100%
Allowed up to 74% for private sector banks
• Payment and Settlement system
Not a part of system.
Integral part of the system.
• Maintenance of Reserve Ratios
Not required
Compulsory
• Deposit insurance facility
Not available
Available
• Credit creation
NBFC do not create credit
Banks create credit

• Transaction services
Not provided by NBFC
Provided by banks