NBFI

Organization of the financial system

Financial Intermediaries Financial Markets Financial Assets/Instruments

Banks NBFCMutual Funds

Insurance Organization

Leasing Companies

Hire-Purchase/Consumer Finance Companies

Housing Finance Companies

Venture Capital Funds

Merchant Banking Organization

Credit Rating Agencies

Factoring and Forfeiting Org.,

Stock broking firms

Depositories

Money Market

Capital/Securities Market

Primary Market Secondary Market

Primary/Direct Indirect Derivatives

Equity

Preference

Debentures

Innovative debt instruments

Forward

Futures

OptionsConvertible Debentures

Non- Convertible Debentures

Secured Premium Notes

Warrants

Mutual Fund-units

Security Receipts

Pass Through Certificates

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 difference between banks & NBFCs ?

NBFCs are doing functions akin to that of banks, however there are a few differences:

(i) a NBFC cannot accept demand deposits; (ii) it is not a part of the payment and settlement system and as such cannot issue cheques to its customers

Is it necessary that every NBFC should be registered with RBI?

In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.

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Which is a NBFC?A company which carried on as its business or part of its

business the following activities:

- financing- acquisition of securities- hire purchase- insurance- chit fund - mutual benefit company

But does not include a company which carries on as its principal business:

- agricultural operations,- industrial activities- Sale and purchase of goods- providing of services- purchase, sale and construction of immovable

property

Definition of Principal Business

RBI Press Release Dt. April 8, 1999

- If 50% or more of a company’s total assets (netted off by intangible assets) are financial assets

and

- If 50% or more of a company’s gross income is from financial assets

then the Principal Business of the company is of a NBFC

Legal FrameworkAlways Remember NBFC per se is a licensed activity like

Banking, Stock Broking, Money Changing. Acceptance of Public Deposits is

irrelevant for NBFC test. Income earned & Deployment of Funds

are determining factors RBI Press Release No. 1999-2000/1042 dated 8.2.2000

Registration and Net Owned Fund (Sec 45- IA)

No NBFC shall commence or carry on business of NBFI without obtaining a Certificate of Registration & having minimum Net owned funds

•Registration with RBI is mandatory for all companies interested in carrying on non- banking finance activities.

• Minimum Net Owned funds of Rs.2 Crores.

Concerned AreasA large number of NBFCs are working without registration:

Companies working without registration and

Companies rejected by RBI still operating.

Penalties: Imprisonment 1 to 5 years and Fine of Rs. 1 lakh to 5 lakhs.

Change in control/management of a NBFCFor all NBFCs:- public notice 30 days before effecting the

sale or transfer,- in two newspapers one English and local

vernacular language,- jointly by NBFC, transferor and transferee,- within seven days of publication, intimation

to RBI.For Deposit Accepting NBFCs

- Prior approval of RBI- Obligation towards deposit holders

Classification of NBFCs

• Based on nature of business:

•Asset finance companies•Investment companies•Loan companies•Infrastructure finance companies

Classification of NBFCs

Based on acceptance of Public Deposits

- Deposit holding/accepting Company - Category ‘A’

- Non-Deposit holding/accepting Company - Category ‘B’

Based on investment pattern

- Investment company (Cat ‘A’ or Cat ‘B’)

- Core Investment company - Category ‘C’

NBFC Prudential Norms

Accounting policiesAccounting standardsRevenue recognition

NBFC Prudential Norms Schedule to the Balance Sheet

- to be appended to the Balance sheet prescribed under the Companies Act, 1956

- showing loans and advances and deposits outstanding and overdue

- borrower groupwise classification of all assets, lease, HP and Loans and advances

- Investor groupwise classification of all investment in shares and securities

- information on NPAs.

Monitoring by RBIOff-site surveillance

Returns Auditors’ Reports Market intelligence

On-site surveillance Inspections Special audits

Good Corporate Governance-Rotation of partners of statutory auditors

audit firm of companies with deposits of Rs. 50 Crores and more

-Rotation after every three years

-Companies may incorporate terms in the letter of appointment to ensure compliance

AUDIT OF NBFCs- Reporting Requirements

Under the Companies Act, 1956Report under Section 227(2)Report required by the Companies (Auditor’s

Report) Order, 2003Compliance of accounting standards.

AUDIT OF NBFCs- Reporting Requirements

Under the Income Tax Act, 1961

Tax Audit Report under section 44AB

Other Certificates to NBFCs-Yearly Certification of carrying of NBFC

business

- Certification attached to Annual Return and Half Yearly Returns

Top five NBFCs in India:• Housing Development Finance Corporation

Limited• Power Finance Corporation Limited• Rural Electrification Corporation Limited• National Bank of Agricultural and Rural

Development• Infrastructure Development Finance

Company Limited