Non-Banking Financial Companies

Introduction
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Non-Banking Financial Companies are very important. NBFCs are financial intermediaries engaged primarily in the business of accepting deposits delivering credit. They play an important role in channelising the scarce financial resources to capital information. NBFCs supplement the role of banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector & to

NBFCs - Definition

NBFCs are defined as, Non-Banking financial company (NBFC), which is a loan company or an investment company or a hire purchase company or an equipment leasing company or a mutual benefit finance company.

What are functions of NBFC?

A non-banking financial company (NBFC) is a company registered under the Companies Act, 1956 and 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, leasing, hire-purchase, insurance business, chit business, but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable

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.

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)

RBI Guidelines
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Guidelines for new deposits : Customer identification: 'Know Your Customer' (KYC) should be the key guiding principle for identification of an individual / corporate customer (depositor or borrower). Procedures for existing customers : In respect of existing customers, NBFCs should ensure that gaps and missing information in compliance of KYC guidelines on customer identification procedure is filled up and completed before June 30, 2004.

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Ceiling and monitoring of cash transactions : NBFCs would normally not have large cash withdrawals and deposits. Such information should be made available to regulatory and investigating authorities, when demanded. Guidelines and monitoring procedures : The board of directors of NBFCs should formulate policies and procedures to operationalise the guidelines and put in place an effective monitoring system to

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Internal control systems : Duties and responsibilities should be explicitly allocated among the staff for ensuring that policies and procedures are managed effectively and that there is full commitment and compliance to an effective KYC programme in respect of both existing and prospective customers/clients.

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Internal audit/inspection : Internal auditors must specifically scrutinise and comment on the effectiveness of the measures taken by

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Record keeping : NBFCs should prepare and maintain proper documentation on their customer relationships and cash transactions of Rs 10 lakh and above. Training of staff and management : It is important that all the operating and management staff is made fully aware of the implications and understand the need for strict adherence to KYC norms. These guidelines have been issued under Sections 45K and 45L of the RBI Act, 1934 and any contravention of the same will

The different rates in monetary policy used by RBI

Repo (Repurchase) Rate : Repo rate is the rate at which banks borrow funds from the RBI to meet the gap between the demand they are facing for money (loans) and how much they have on hand to lend. If the RBI wants to make it more expensive for the banks to borrow money, it increases the repo rate; similarly, if it wants to make it cheaper for banks to borrow money, it reduces the repo rate.

Reverse Repo Rate : This is the exact opposite of repo rate. The rate at which RBI borrows money from the banks (or banks lend money to the RBI) is termed the reverse repo rate. The RBI uses this tool when it feels there is too much money floating in the banking system If the reverse repo rate is increased, it means the RBI will borrow money from the bank and offer them a lucrative rate of interest. As a result, banks would

Bank Rate : This is the rate at which RBI lends money to other banks (or financial institutions). The bank rate signals the central banks long-term outlook on interest rates. If the bank rate moves up, long-term interest rates also tend to move up, and viceversa.

Call Rate : Call rate is the interest rate paid by the banks for lending and borrowing for daily fund requirement. Since banks need funds on a daily basis, they lend to and borrow from other banks according to their daily or short-term requirements on a regular basis.

CRR : Also called the cash reserve ratio, refers to a portion of deposits (as cash) which banks have to keep/maintain with the RBI. This serves two purposes. It ensures that a portion of bank deposits is totally risk-free and secondly it enables that RBI control liquidity in the system, and thereby, inflation by tying their hands in lending money.

SLR : Besides the CRR, banks are required to invest a portion of their deposits in government securities as a part of their statutory liquidity ratio (SLR) requirements. What SLR does is again restrict the banks leverage in pumping more money into the economy.

Repo rate as the benchmarks rate in the short term-Floating : Floating rate funds vary from conventional fixed rate investments mainly on the basis of coupon rate i.e. the coupon is revised at regular intervals (means floating) with respect to change in the benchmark rate. Crude prices have risen and so has the inflation. The Reserve Bank of India (RBI) raised the repo rate by 25 basis points (bps) to 6.75% recently. With the volatility in government securities/bond prices over the last few weeks, investors are seeking a safe haven for their investments in floating rate.

LIBOR : LIBOR(London Interbank Offer Rate) is the average interbank interest rate at which a selection of banks on the London money market are prepared to lend to one another. LIBOR comes in 15 maturities (from overnight to 12 months) and in 10 different currencies. The official LIBOR interest rates are announced once per working day at around 11:45 a.m. (London time) by the British Bankers' Association (BBA). LIBOR is watched closely by both professionals and private individuals because the LIBOR interest rate is used as a base rate (benchmark) by banks and

MIBID Means : The interest rate that a bank participating in the Indian interbank market would be willing to pay to attract a deposit from another participant bank. The MIBID(Mumbai Inter-bank Bid Rate) is calculated everyday by the National Stock Exchange of India (NSEIL) asa weighted average ofinterest rates of a group of banks, on funds deposited by first-class depositors.

MIBID/MIBOR : The Committee for the Development of the Debt Market that had studied and recommended the modalities for the development for a benchmark rate for the call money market. Accordingly, NSE had developed and launched the NSE Mumbai Inter-bank Bid Rate (MIBID) and NSE Mumbai Inter-bank Offer Rate (MIBOR) for the overnight money market on June 15, 1998. The success of the Overnight NSE MIBID MIBOR encouraged the Exchange to develop a benchmark rate for the term money market. NSE launched the 14-day NSE MIBID MIBOR

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Further, the exchange introduced a 3 Day FIMMDA-NSE MIBID-MIBOR on all Fridays with effect from June 6, 2008 in addition to existing overnight rate. The MIBID/MIBOR rate is used as a bench mark rate for majority of deals struck for Interest Rate Swaps, Forward Rate Agreements, Floating Rate Debentures and Term Deposits.

Thought :
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Do you want to know who you are? Don't ask. Act! Action will delineate and define you.

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Thank You

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