MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

MEANING:

1. NBFC is a Company registered Under the Companies Act 1956. 2. NBFC is engaged in the business of loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by Government or local bodies or other securities of like marketable nature, leasing, hire-purchase, insurance business , chit business 3. It does not included Any institute whose principal business is that of agriculture activity, industrial activity, sale, purchase, construction of immoveable property. 4. Registration with RBI mandatory : 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. 5. Exemptions to Registration : However, to obviate dual regulation, certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. venture capital fund/ merchant banking companies/ stock broking companies registered with Sebi, insurance company holding a valid certificate of registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982 or housing finance companies regulated by National Housing Bank.

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

HIRE PURCHASES FINANCE EQUIPMENT LEASING ACTIVITIES INVESTMENT ACTIVITIES

LOAN GUARNTING ACTIVITIES

NBFC

MUTAUL FUND FINANCE

HOUSING FINANCE

INSURANCE BUSNESS

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)

Remember: 1. Section 45 I (f) of RBI Act.1934 2. Companies Act, 1956

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

Difference between Bank and NBFC (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 cheques to its customers; and (iii) deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks.

Types of NBFC registered with RBI The NBFCs that are registered with RBI are: (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company.

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

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)
Re classification

AFC would be defined as 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 machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively. The above type of companies may be further classified into those accepting deposits or those not accepting deposits. Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank.

ACCEPTANCE OF DEPOSITS BY NBFC All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid certificate of registration with authorisation to accept public deposits can accept/hold public deposits. 1. The NBFCs accepting public deposits should have minimum stipulated net owned fund ( net owned fund of Rs. 200 lacs and above)and comply with the directions issued by the bank 2. . It has to obtain Minimum stipulated Credit Rating from any of the approved Credit rating Agencies at least once in a year.

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

3. Copy of the credit rating should be sent to the RBI with the Return on prudential norms. 4. The NBFC should have acquired a credit rating of not less than AAA rating or its equivalent in the previous years.

Some of the important regulations relating to acceptance of deposits by NBFCs are as under: 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

MOTHER OF ALL RULES ACCORDING TO RBI GUIDELINES ISSUED ON APRIL 1,1999 ALL NBFCS ARE REQUIRED TO MAINTAIN LIQUID ASSETS OF 15% OF PUBLIC DEPOSITS HELD ON LAST WORKING DAY OF THE SECONDARY PRECEDING QUARTER

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

Books to be maintained by NBFCs. 1.Cash book and Bank Book 2. Due date and renewal registers 3.Interest Register 4. Depositor ledger 5. Loan ledger 6. Investment ledger

Prudential Norms to be complied with by NBFC

The companies accepting public deposits are required to comply with the Prudential Norms mentioned below 5. Income Recognition 6. Asset Classification 7. Accounting Standards 8. Provision for Bad and Doubtful Debts 9. Capital Adequacy Norms 10. Credit/Investment Concentration The provisions are on par with those of commercial bank.

CEILING ON ACCEPTANCE OF PUBLIC DEPOSITS There is ceiling on acceptance of public deposits. An NBFC maintaining required NOF/CRAR and complying with the prudential norms can accept public deposits as follows: Category of NBFC Ceiling on public deposits AFCs maintaining CRAR of 15% without credit rating

MBA FINANCIAL SERVICES DISA(ICA)

PREPARED BY CA. AMITA BISSA (B.COM ,ACA,

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 Presently, the maximum rate of interest a NBFC can offer is 11%. The interest may be paid or compounded at rests not shorter than monthly rests. 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. The RNBCs have different norms for acceptance of deposits which are explained elsewhere in this booklet.