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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.
www.professoraugustin.com
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