(NBFC)

Presentation by Prof. Seema Hanchate 1

Presentation by Prof. Seema Hanchate 2
Indian Financial System:

The Non-Banking Financial Companies (NBFC’s) are gaining importance in the Indian
Financial System, accounting for about 9% of the total assets of the financial sector,
according to RBI statistics 2014

Deposit-Credit Gap:

NBFC’s are financial intermediaries who accept deposits and deliver credit by reaching
out to inaccessible areas for deposits and cater to the specialized credit requirements
of certain classes of borrowers.
Key Advantages:
NBFCs enjoy advantages of cost efficiency, refined product lines, better customer
services, niche segmentation, simplified procedures and a focused credit approach.
Financial Inclusion:

NBFC’s provide services to the unbanked population in rural/semi-urban and urban

areas which also include the micro, small and medium enterprises (MSMEs) segment.
NBFCs also provide of services such as hire purchase finance, equipment lease
finance, loans and investments.
Presentation by Prof. Seema Hanchate 3
Particulars Banks NBFC
NBFCs are companies carrying financial business;
Banking is acceptance of deposits withdrawable NBFCS cannot accept demand deposits.
1. Definition by cheque or demand Withdrawable by cheque.
2. Demand deposits Banks can accept demand deposits NBFCs cannot accept demand deposits.
3. Issue Cheques Banks can issue cheques drqwn on itself NBFCs cannot issue cheques drawn on itself.
4. Payment and Banks are a part of payment and settlement NBFCs are not a part of the payment and
settlememt system settlement system.
Deposit insurance facility of the Deposit Deposit insurance facility of the Deposit insurance
insurance and Credit Guarantee Corporation and Credit Guarantee Corporation (DICGC) is not
5. Deposit insurance (DICGC) is available for banks. available for NBFC depositors.
It is quite easy to form an NBFC. Acquisition of
6. Licensing Licensing requirements are quite stringent. NBFCs is procedurally regulated and subject to
Requirements Transfer of shareholding also controlled by RBI approval .
7. Major limitations
on business. Non-Banking activities cannot be carried. Cannot provide cheque facilities.
8. Foreign
Investment Upto 74% allowed to private sector banks. Upto 100% allowed (only 18 activities)
Banking Regulations Act and RBI Act lay down
9. Regulations stringent controls over banks Controls over NBFCs are relatively less stringent.
NBFCs have to maintain a cerain ratio of deposits
10. SLR/CRR in specified securities; no such requirement for non-
Requirements Banks are covered by SLR/CRR Requirements. deposit taking companies.
11. Priority Sector
Lending Certain minimum exposure to priority sector
Requirements required Priority sector norms are not applicable to NBFCs.
Presentation by Prof. Seema Hanchate 4
 • Is a company registered under the Companies Act, 1956 or
2013
NBFC

• 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,
NBFC leasing, hire-purchase, insurance business, etc.

• Does not include any institution whose principal business is

that of agricultural activity, industrial activity, purchase or sale
of any goods (other than securities) or providing any services
NBFC and sale/purchase/construction of immovable property

Presentation by Prof. Seema Hanchate 5

 RBI was entrusted with the regulation and supervision with the following
objectives:

To ensure healthy growth of the financial companies

To ensure that these companies function as a part of the financial

system within the policy framework, in such a manner that their
existence and functioning works properly

To sustain the quality of surveillance and supervision exercised by the bank

over the NBFCs by keeping pace with the developments that take place in
this sector of the financial system.

Presentation by Prof. Seema Hanchate 6

1) According to RBI Act, 1934 a non-banking financial company shall not
commence or carry on business of a non-banking financial institution without-

a) Obtaining a certificate of registration issued under Chapter III B of the

said Act:
b) Having the net owned fund of two hundred lakh rupees (as per RBI
Notification)

2) Certificate of Registration: An application is to be made to RBI in prescribed

form along with necessary documents for registration. The RBI issues
certificate of registration after satisfying itself that the conditions as
enumerated in Section 45-!A of the RBI Act, 1934 are satisfied.

7
Presentation by Prof. Seema Hanchate
Type of NBFC Regulated by

Housing Finance Companies National Housing Bank

Merchant Banking Companies SEBI

Stock Exchanges SEBI

Stock-Broking/Sub-Broking SEBI
Companies

Venture Capital Fund SEBI

Companies
Nidhi Companies Ministry of Corporate Affairs,
Government of India.

Insurance Companies IRDA

Chit Fund Companies Respective State Governments

Presentation by Prof. Seema Hanchate 8

 1. Asset Finance
Company

11. Residuary 2. Investment

NBFC Company

10. Non-Operative 3. Loan

Financial Holding Company
Company

4. Infrastructure
9. Mortgage Guarantee Finance Company
Companies

5. Core Investment
8. Factors Company

7. Micro Finance 6. Infrastructure Debt

Institution Fund
Presentation by Prof. Seema Hanchate 9
 •AFC means any 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
1. Asset Finance machines, generator sets, earth moving and material handling equipment,
Company (AFC) moving on own power and general purpose industrial machines.

•It means a company which is a financial institution carrying on as its main

business the acquisition of securities.
2. Investment
Company

•It means any company which is a financial institution carrying on its main
business the provision of finance whether by making loans or advances or
otherwise for any activity other than its own but does not include an Asset
3. Loan
Company
Finance Company.

Presentation by Prof. Seema Hanchate 10

 •An IFC is defines as non-deposit taking NBFC that fulfills the
criteria mentioned below-
•(i) a minimum of 75% of its total assets should be deployed in
infrastructure loans;
•(ii) has a net owned funds of ₹. 300 crore or above;

4. Infrastructure •(iii) has obtained a minimum credit rating „A‟ or equivalent of

CRISIL, FITCH, CARE, etc.
Finance Company •(iv) has a Capital to Risk Asset Ratio (CRAR) of 15% (with a
(IFC) minimum Tier I capital of 10%).

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 • (a) Core Investment Company (CIC)
• 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;
• Its investments in the equity shares in group companies constitutes
not less than 60%;
• It trades through block sale for the purpose of dilution or
disinvestment.
5. Core • It accepts public funds.
Investment • (b) Systematically Important Core Investment Companies (CIC-
ND-SI)
Companies • Core Investment Companies with total assets size of ₹. 100 Crores
(CIC) or more either individually or in aggregate along with other Core
Investment Companies in the groups that raises or holds public
funds will be regarded as Systematically Important Core Investment
Companies.
• These companies have to register themselves with Reserve Bank of
India.

Presentation by Prof. Seema Hanchate 12

 • Infrastructure Debt fund is an Infrastructure Finance Company that invests
only in Public Private Partnerships (PPP) and post commencement
operations date (COD) infrastructure projects which have completed at least
one year of satisfactory commercial operation and becomes a party to a
6. Infrastructure Debt Tripartite Agreement.
Fund- Non-Banking • IDF-NBFC facilitate the flow of long-term debt into infrastructure projects. The
Financial Company IDF-NBFC will be set up either as trust or as a company.
(IDF-NBFC)

• An NBFC-MFI is defined as a non-deposit taking NBFC (other than a

company licensed under Sec.25 of the Indian Companies Act, 1956 or
Section 8 of the Companies Act, 2013) which satisfy the following criteria:
7. Micro Finance • 1. Minimum Net Owned Funds of Rs.5 crore.
Institution (NBFC- • 2. Not less than 85% of its net Assets are in the nature of qualifying assets.
MFI)

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 • 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 50
percent of its total assets and its income derived form
8. Non-Banking
factoring business should bot be less than 50 percent of
Financial
its gross income.
Company- Factors

• MGC are financial institutions for which at least 90% of the

business turnover is mortgage guarantee business or at
9. Mortgage least 90% of the gross income is from mortgage
Guarantee guarantee business and net owned fund is ₹. 100 crore.
Companies
(MGC)

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 • NOFHC is financial institution through which promoter/promoter
groups will be permitted to set up a new bank. It’s a wholly-owned
Non-Operative Financial Holding Company (NOFHC) which will
hold the bank as well as all other financial service companies
10. NBFC-Non-
regulated by RBI or other financial sector regulators.
Operative Financial
Holding Company
(NOFHC)

• RNBCS is a class of NBFC which is a company and has its

principal business the receiving of deposits under any scheme or
arrangement.
• It is not in any manner an Investment Co. , Asset Finance Co. or
11. Residuary Non- Loan Co.
Banking Financial • These companies are required to maintain investments as per
Institutions directions of RBI.
(RNBCS)

Presentation by Prof. Seema Hanchate 15

New Scheme of NBFC classification
AFC, IC and LC merged into ICC: To many categories only increase
compliance cost for the entire non-banking sector and monitoring cost
for the regulator. RBI has harmonized three different categories of
NBFCs into one, based on the principal of regulation by activity rather
than regulation by entity.

Accordingly the following and existing three categories of NBFCs viz.

Asset Finance Companies (AFC), Loan Companies (LCs) and
Investment Companies (ICs) have been merged into a new category
called NBFC- Investment and Credit Company (NBFC-ICC)

The objective of the harmonization is to allow greater operational

flexibility of NBFCs. Post the aforesaid harmonization, there should be
the same set of regulations for all the three categories of NBFCs.

Accordingly, the broad head of Deposit-taking NBFC now consists of

only three categories (i) NBFC-ICC (ii) Mutual Benefit Financial
Company (iii) NBFC- Factor

Presentation by Prof. Seema Hanchate 16

 • RBI has revised different facets of existing NBFC classification and regulation like
Capital Requirement, Government Standards, Prudential regulations, etc. based on
four layers that are defined based on their size, activity and perceived riskiness.
Scale Based
Regulation • Details of NBFCs populating the various layers is mentioned below:

• The Base layer shall comprise of (a) NBFC-ND below the asset size of ₹ 1,000 and
• (b) NBFCs undertaking the following activities: (i) Peer to Peer lending (NBFC-P2P)
(ii) Account Aggregator (NBFC-AA) (iii) Non-Operative Financial Holding Company
Base Layer (NOFHC) (IV) NBFCs not availing public funds and not having any customer interface.

• The Middle Layer shall consist of (a) all deposit taking NBFCs (NBFCs-D) irrespective
of asset size,
• (b) NBFCs undertaking the following activities- (i) Standalone Primary Dealers (SPD).
Middle Layer (ii) IDF_NBFC (iii) HFCs (iv) NBFC-IFCs

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 • The top ten eligible NBFCs in terms of their asset size shall always
reside in the upper layer, irrespective of any other factor.
Upper Layer

• The top layer will ideally remain empty. This layer can get populated if the
Reserve Bank is of the opinion that there is a substantial increase in the
potential systemic risk from specific NBFCs in the Upper Layer. Such
Top Layer NBFCs shall move to the Top Layer from the Upper Layer.

• The remaining NBFCs, viz., Investment and Credit Companies (NBFC-ICC), Micro
Finance Institution (NBFC-MFI), NBFC-Factors and Mortgage Guarantee
Companies (NBFC-MGC) could lie in any of the layers of the regulatory structure
depending on the parameters of the scale based regulatory framework.
Remaining • The Govt. owned NBFCs shall be placed in the Base Layer or Middle Layer, as the
case may be. They will not be placed in the Upper layer till further notice.
NBFCs

Presentation by Prof. Seema Hanchate 18

 Amount: On registration of NBFC with RBI, all
NBFCs have to comply with certain
requirements like maintenance of the
minimum Net Owned Fund (NOF), creation of
reserve fund, compulsory transfer of certain
percentage of net profit etc. NOF requirement
for new companies applying for grant of
Certificate of Registration to commence
business of an NBFC is stipulated at ₹200
lakh. In the case of an Infrastructure Finance
Company the minimum NOF is ₹300 crores.

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 Minimum Liquid Assets: In terms of Section 45-IB of the RBI Act,
1934 the minimum level of liquid asset to be maintained by
NBFCs is 15% of public deposits outstanding as on the last
working day of the second preceding quarter.
 Form: Of the 15%, NBFCs are required to invest not less than
10% in approved securities and the remaining 5% can be in
unencumbered (not tied to any collateral security, i.e burdenless)
term deposits with any scheduled commercial bank.
 Approved Securities in Demat: The investment in government
securities should be in dematerialized form which can be
maintained in Constituents‟ Subsidiary General Ledger(CSGL)
Account with a scheduled commercial Bank (SCB)/ Stock Holding
Corporation of India Limited (SHICL). However in case there are
Government Bonds which are in Physical form the same may be
kept in safe custody of SCBs/SHCIL.

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 Categories of NBFCs for Prudential Norms:
In order to ensure that NBFCs function on sound and healthy lines
and make adequate disclosures in their financial reports, the
Reserve Bank has issued prudential norms for all the Non-Banking
Financial Companies. One of the main objectives of prudential
regulations is to address systemic risks.
NBFCs are categorized into following three groups for the
purpose of administering prudential regulations:
1) Non-deposit taking NBFC (NBFC-ND) (those with assets of
less than ₹ 500 crore)
2) Non-deposit taking systematically important NBFC (NBFC-
ND-SI) (those with assets of ₹ 500 crore and above); and
3) Deposits taking NBFC (NBFC-D).

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 The provisions of “Non-Banking Financial
Company-Non-Systematically Important Non-
Deposit taking Company(Reserve Bank) Directions,
2016” shall apply to every-
1) NBFC not accepting/holding public deposits
which is not systemically important;
2) NBFC-Factor having an asset size of below ₹500
crore;
3) NBFC-Micro Finance Institution (NBFC-MFI)
having an asset size of below ₹ 500 crore.
4) NBFC-Infrastructure Finance Company (NBFC-IFC)
having an asset size below ₹ 500 crore.

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 The provisions of “Non-Banking Financial Company-Systemically
Important Non-Deposit taking Company and Deposit taking
Company (Reserve Bank) Directions, 2016” shall apply to every-
1) NBFC Non-Deposit-taking Systemically Important with an asset
size of ₹ 500 crore and above (NBFC-ND-SI);
2) NBFC-taking Deposit (NBFC-D);
3) NBFC-Factor (NBFC-F) having an asset size of ₹ 500 crore and
above;
4) NBFC-Infrastructure Debt Fund (NBFC-IDF);
5) NBFC-Micro Finance Institutions (NBFC-MFIs) having an asset
size of ₹ 500 crore and above;
6) NBFC-Infrastructure Finance Company (NBFC-IFC) having an
asset size of ₹ 500 crore and above.

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 The current prudential regulation mainly
comprises the following elements:
 Basic Prudential Norms
 Norms relating to Income Recognition
 Norms relating to Asset Classification
 Norms relating to Provisioning

Presentation by Prof. Seema Hanchate 26

 • Income including interest/discount or any other charges on NPA shall be
recognized only when it is actually realized. Any such income recognized
before the asset became non-performing and remaining unrealized shall
NPA be reversed.

• In respect of Hire purchase assets, where installments are overdue for more than 12
months (3 months in case of NBFC-D and NBFC-SI), income shall be recognized
only when hire charges are actually received. Any such income taken to the credit of
Hire Purchase profit and loss account before the asset became non-performing and remaining
unrealized, shall be reversed.

• In respect of lease assets, where lease rentals are overdue for more than 12 months
(3 months in case of NBFC-D and NBFC-SI), the income shall be recognized only
when lease rentals are actually received. The net lease rentals taken to the credit of
profit and loss account before the asset became non-performing and remaining
Lease unrealized, shall be reversed.

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 • Income from dividend on shares of corporate bodies and units of mutual
funds shall be taken into account on cash basis or on accrual basis
(earned but not recorded) when such dividend has been declared by the
Dividend corporate body in its annual general meeting and the applicable NBFCs
right to receive payment is established.

• Income from bonds and debentures of corporate bodies and from

Government securities/bonds shall be taken into account on accrual basis;
provided that the interest rate on these instruments is pre-determined and
Bonds interest is serviced regularly and is not in arrears.

• Income on securities of corporate bodies or public sector undertakings,

the payment of interest and repayment of principal of which have been
guaranteed by Central Government or a State Government shall be taken
Securities into account on accrual basis.

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 Every NBFC shall classify its lease/Hire purchase assets, loans and advances and any other forms of credit into
the following classes namely- (1) Standard assets; (2) Sub-standard assets; (3) Doubtful assets and (4) Loss
assets.
1) Standard Asset- Standard asset means an asset in respect of which, no default in repayment of principal or
payment of interest is pending and which does not disclose any problem nor carry more than normal risk attached to
the business.
2) Sub-Standard Asset- This asset means:
 a) in case of NBFC-SI an asset which has been classified as non-performing asset for a period not exceeding 12
months for the financial year 31st March, 2018 and thereafter.
 b) in case of NBFC-NSI-ND an asset which has been classified as non-performing asset for a period not
exceeding 18 months.
3) Doubtful Asset- Doubtful asset means a term loan, or a lease asset, or a hire purchase
asset set, or any other asset, which remains a sub-standard asset for a period
exceeding-
a) in case of NBFC-SI 12 months.
b) in case of NBFC-NSI-ND 18 months.
4) Loss Asset: Loss asset means-
a) an asset which has been identified as loss asset by NBFC or its internal or
external auditor or by the Reserve Bank during the inspection of the NBFC, to the extent
it is not written off by the NBFC; and
b) an asset which is adversely affected by a potential threat of non-recoverability due to
either erosion in the value of security or non-availability of security or due to any
fraudulent act or omission on the part of the borrower.

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An asset in respect of which, interest has remained overdue for a
period of 3 months or more

A term loan inclusive of unpaid interest, when the installment is

overdue for a period of 3 months or more or on which interest
amount remained overdue for a period of 3 months or more;

A demand or call loan, which remained overdue for a period of 3

months or more from the date of demand or on which interest
amount remained overdue for a period of 3 months or more;

A bill which remains overdue for a period of 3 months or more.

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 • An unrated NBFC cannot accept public deposits. NBFC may get itself rated by any of the 5 rating
agencies namely, CRISIL, CARE, ICRA, FITCH Ratings India Pvt. Ltd, Brickwork Ratings India Pvt.
Ltd. If rating of an NBFC is downgrade to below minimum investment grade rating, it has to stop
Rating of accepting public deposits, report the position within 15 working days to the RBI and bring within 3
years from the date of such downgrading of credit rating, the amount of public deposit to nil.
NBFCs

• If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or
Defaults in Consumer Forum or file a civil suit in a court of law to recover the deposits.
Repayments

• The Bank has issued detailed directions on prudential norms, which prescribe guidelines
on income recognition, asset classification and provisioning requirements applicable to
Prudential NBFCs, exposure norms, constitution of audit committee, disclosures in the balance sheet,
Regulations
Applicable to requirements of capital adequacy, etc.
NBFCs

Presentation by Prof. Seema Hanchate 35

 • As per RBI Directions, overdue interest is payable to the depositors
in case the company has delayed the repayment of mature deposits,
Interest on the and such interest is payable from the date of receipt of such claim by
Overdue the company or the date of maturity of the deposits whichever is
Matured later, till the date of actual payment.
Deposits

• An NBFC accepts deposits under a mutual contract with its depositors. In case a depositor requests
for pre-mature payment, RBI has prescribed Regulations for such an eventuality in the NBFC
Acceptance of Public Deposits (Reserve Bank) Directions, 1998 wherein it is specified that NBFCs
Pre-payment cannot grant any loan against public deposit within a period of 3 months (lock in period) fro the date
of Public of its acceptance. However, in the event of death of the depositor, has to make repayment of the
Deposits deposit at the request of the joint holders.

•In terms of Section 45-IB of the RBI Act, 1934, the minimum level of liquid
Liquid Assets assets to be maintained by NBFCs is 15 % of Public Deposits outstanding as
Requirement
for the Deposit on the last working day of the second preceding quarter.
taking
Companies

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 •Every NBFC shall, separately disclose in its balance sheet the provisions
made as per requirements without netting them from the income or
against the value of assets. The provisions shall be distinctly indicated
under separate heads of accounts as (i) provisions for bad and doubtful
PROVISIONS debts and (ii) provisions for depreciation in investments.

•Every NBFC-ND-SI shall disclose the following particulars in its balance

sheet:
•(a) Capital to Risk Assets Ratio (CRAR)
•(b) Exposure to real estate sector, both direct and indirect; and
DISCLOSURES •(c ) Maturity pattern of assets and liabilities

Presentation by Prof. Seema Hanchate 39

 Every non-banking financial company shall prepare its balance sheet and
profit and loss account as on March 31 every year. Whenever a non-
banking financial company intends to extend the date of its balance
sheet as per provisions of the Companies Act, it should take prior
approval of the Reserve Bank of India before approaching the Registrar
of Companies for this purpose.
 NBFCs having net worth of ₹500 crore or more and it should be a
holding, subsidiary, joint venture or associate companies shall
comply with the Indian Accounting Standards (Ind AS) for accounting
periods beginning on or after the 1st April, 2018, with comparatives
for the periods ending on 31st March, 2018, or thereafter
 NBFCs whose equity or debt securities are listed or in the process of
listing on any stock exchange and having net worth less than ₹500
crores or NBFCs having net worth between ₹ 250 crores to ₹500
crores and which are holding, subsidiary, joint venture or associate
companies shall comply with the (Ind AS) for accountin periods
beginning on or after the 1st April, 2019, with comparatives for the
periods ending on 31st March,2019 or thereafter

Presentation by Prof. Seema Hanchate 40

 Capital Risk-weighted Asset Ratio (CRAR):

Every NBFC-D and NBFC_ND_SI shall maintain a minimum capital ratio consisting
of Tier I and Tier II capital which shall not be less than15% of its aggregate risk
weighted assets on balance sheet and of risk adjusted value of off balance sheet
items.

 a) Tier I Capital –means owned fund as reduced by investment in shares of

other non-banking financial companies and in shares, debentures, bonds,
outstanding loans and advances including hire purchase and lease finance
made to and deposits with subsidiaries and companies in the same group
exceeding, in aggregate, 10% of the owned fund.

 b) Tier II Capital – shall not exceed 100% of Tier I Capital. It includes preference
shares other than those which are compulsorily convertible into equity,
revaluation reserves at discounted rate of 50%, general provisions and loss
reserves, hybrid debt capital instruments, subordinated debt and perpetual
debt instruments issued by NBFC-ND-SI.

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Asset Liability Management tool that helps a
bank/NBFC to manage its liquidity risk and interest
rate risk. This is a powerful tool that helps
banks/NBFCs plan long term financial, funding,
and capital strategy using present value analysis.
With ALM a bank/NBFC can model interest income
and expenses for analysis and re-price assets and
liabilities. Based on ALM position banks/NBFCs can
also model effect of competitive pricing to create
innovative and imaginative new banking products.

Presentation by Prof. Seema Hanchate 43