A Report on NBFCs in India
A REPORT ON NBFCs IN INDIA
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A Report on NBFCs in India
TABLE OF CONTENTS
Executive Summary .............................................................................................. 3
Non-Banking Financial Institutions (NBFIs) .......................................................... 4
Non-Banking Financial Company (NBFC) ............................................................ 5
NBFCs: Why are they required? ........................................................................... 5
Re-classification of NBFCs ................................................................................... 6
NBFCs are different from Banks ........................................................................... 7
Residuary Non-Banking Companies (RNBCs) ...................................................... 8
Ceiling on RNBCs taking Deposits........................................................................ 8
Interest Payment on Deposits ............................................................................... 8
Eligibility Criteria for Starting NBFC ...................................................................... 9
Capital Requirement ........................................................................................... 10
Net Owned Fund ................................................................................................. 10
Classification of NBFCs according to RBI ........................................................... 10
Regulations on NBFCs taking Deposits .............................................................. 11
Ceiling on NBFC-D (Taking Public deposits) ...................................................... 12
Ongoing Regulations: NBFCs-D (Holding Public Deposits) ................................ 13
Other Regulations: NBFCs-ND (Not Holding Public Deposits) ........................... 13
Directions given to NBFCs and its Auditors by RBI............................................. 15
A Special Mention : FDI in NBFC sector ............................................................. 16
References ......................................................................................................... 17
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A Report on NBFCs in India
Executive Summary
India growth story is most talked about and why not? The country’s GDP is pegged to grow
at a rate of more than 7.5%. India’s Stock market has given the best returns in the last 6-8
months of more than 60%. The household savings continues to be as high as 35% inspite of
slowdown and recessionary pressures. Forex reserves have increased by more than 10billion
$ in the 1st quarter and the total reserves are up, to 262 billion $. Current Budget focuses on
reducing fiscal deficit by the measures of disinvestments and improving the infrastructure of
the country. Overall the country is all set to grow at a rapid pace and the government has
laid a strong foundation for this. Having realized this, one can strongly say that sufficient
liquidity has to be maintained in the system to enhance credit and economic growth.
NFBIs (Non Banking Financial Institutions) play an important role in realizing the economic
growth. They have access to larger markets and provide financing for almost all activities.
Think of buying an automobile, and one will find financing companies that provide EMIs at
the doorstep. Think of buying any electronics, one would be amazed the number of
financing companies that one can approach to make a deal. Thus the competitiveness of the
companies combined with fierce penetration across the length of the country enables NBFIs
to grow at a rapid pace.
In the following document, NBFIs in India are discussed with a focus on NBFCs. The total
assets managed by NBFCs amount to 95,727 crore as on June 2009. This accounts for
around 9.1 % of assets of the total financial system [1]. Hence the business carried out by
NBFCs is of great importance for overall development of the country. Thus RBI is
implementing various schemes and policies for maintaining enough liquidity for funding
requirements. Also various regulations are levied on NBFCs for making the overall system
robust.
[1]
.Source: RBI
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A Report on NBFCs in India
Non-Banking Financial Institutions (NBFIs)
Non-Banking Financial Institutions (NBFIs) play an important role in the Indian financial
system given their unique position of providing complimentary and competitiveness to
banks. They score over the traditional banks by providing enhanced equity and risk-based
products.
Fig1.The Hierarchy of NBFCs in India
NBFIs
Development Finance
Institutions (DFIs)
Investment
Company
Non-banking
financial companies
(NBFCs)
Hire
Purchase
Leasing
Insurance
companies
Equipment
Leasing
4
Primary
dealers
(PDs)
Loan Company
Mutual
Funds
A Report on NBFCs in India
Non-Banking Financial Company (NBFC)
Non-Banking Financial Company (NBFC) is a company registered under the Companies
Act, 1956. It is engaged in the business of loans, securities, insurance, chit funds etc
They also provide products/services that includes margin funding, leasing and hire purchase,
corporate loans, investment in non-convertible debentures, IPO funding, small ticket loans,
venture capital etc.
As in the diagram, NBFCs are classified into four categories
1. Hire- Purchase Leasing
2. Loan Company
3. Investment Company
4. Equipment Leasing Company
Some of the prominent NBFCs in India are

Infrastructure Development Finance Corporation (IDFC)

Rural Electric Corporation ( REC)

Industrial Finance corporation of India (IFCI )

GE Capital
Till March 2009 there were 12,739 NBFCs out of which 336 NBFCs were permitted to
accept public deposits [2]
[2]
Source: RBI Annual Report 2008-2009
NBFCs: Why are they required?
NBFCs are required as they have a greater reach to various markets and have great efficiency
in mobilizing funds. Generally banks to reduce their operational costs establish NBFC.
NBFC enjoys many liberal policies by RBI in comparison with the commercial banks.
However this scenario is changing. RBI now has strict measures for NBFCs also.
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A Report on NBFCs in India
Re-classification of NBFCs
From December 6, 2006 NBFCs registered with RBI have been reclassified as
1. Asset Finance Company (AFC)
2. Investment Company (IC)
3. Loan Company (LC)
Asset finance Companies (AFC)
AFC are financial institutions whose principal business is of financing physical assets such as
automobiles, tractors, construction equipments material handling equipments and other
machines.
Eg: Bajaj Auto Finance corp. , Fullerton India etc
Investment Companies (IC)
ICs generally are involved in the business of shares, stocks, bonds, debentures issued by
government or local authority that are marketable in nature
Eg: Stock Broking Companies, Gilt firms
Loan Companies (LC)
LCs are loan giving companies which operate in the business of providing loans. These can
be housing loans, gold loans etc
Eg: Mannapuram Gold Finance, HDFC
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A Report on NBFCs in India
NBFCs are different from Banks

NBFCs cannot accept demand deposits ( Demand deposits are funds deposited in
an institution, that are payable immediately on demand e.g.: Savings account,
Current account etc)

A NBFC cannot issue cheques, to their customers and is not a part of the payment
and settlement system

Deposit insurance facility of Deposit Insurance Credit Guarantee Corporation
(DICGC) is not available for NBFC depositors

They are allowed to accept/renew public deposits for a minimum period of 12
months and maximum period of 60 months.

They cannot offer interest rates higher than the ceiling rate prescribed by RBI from
time to time. (Currently the ceiling rate is 12.5%)

They cannot offer gifts/incentives or any other additional benefit to the
depositors.

They should have minimum investment grade credit rating, from the credit rating
agencies
Fig2:
Pulic Deposits in NBFCs & RNBCs
35000
INR (Crores)
30000
25000
Public Deposits
20000
15000
Expon. (Public
Deposits)
10000
5000
20
10
20
08
20
06
20
04
20
02
20
00
19
98
0
Year
Source:RBI, Note: The figures for 2009 & 2010 are estimated figures
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A Report on NBFCs in India
Residuary Non-Banking Companies (RNBCs)
They form a part of NBFCs however their functioning is different from the regular NBFCs
Residuary Non-Banking Company is a class of NBFC whose principal business is receiving
of deposits, under any scheme or arrangement. The deposits received do not involve
investment, asset financing, or loans.
These companies are required to maintain investments as per directions of RBI, in addition
to liquid assets. The functioning of these companies is different from those of NBFCs in
terms of method of mobilization of deposits and requirement of deployment of depositors'
funds

Sahara Mutual Fund was the first RNBC started in India.
Ceiling on RNBCs taking Deposits

There is no ceiling on raising of deposits by RNBCs but every RNBC has to ensure
that the amounts deposited and investments made by the company are not less that
the aggregate amount of liabilities to the depositors

To ensure the safely of public investments RNBCs are required to invest in a
portfolio comprising of highly liquid and secured instruments viz. Central/State
Government securities, fixed deposit of scheduled commercial banks (SCB),
Certificate of deposits of SCB/FIs, units of Mutual Funds, etc
Interest Payment on Deposits

The amount payable by way of interest, premium, bonus or other advantage, by a
RNBC in respect of deposits received shall not be less than 5% (to be compounded
annually) on the amount deposited in lump sum or at monthly or longer intervals;
and at the rate of 3.5% (to be compounded annually) on the amount deposited under
daily deposit scheme.

Further, an RNBC can accept deposits for a minimum period of 12 months and
maximum period of 84 months from the date of receipt of such deposit. They
cannot accept deposits repayable on demand.
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A Report on NBFCs in India
Eligibility Criteria for Starting NBFC
Initial Procedure

The Start up NBFC should be incorporated under the Companies Act, 1956

It should be registered with RBI, under Section 45-I of the RBI Act, 1934

The company is required to submit the application for registration in the prescribed
format along with necessary documents for RBI's consideration. RBI then issues
certificate of registration after satisfying itself that the conditions as enumerated in
Section 45-IA of the RBI Act, 1934 are satisfied

For registration with RBI, the company is required to fill the application, which can
be downloaded from www.rbi.org.in/scripts/BS/viewforms.aspx.

After downloading the EXCEL based application form, data should be keyed in, it
can be uploaded in the RBI's Secure website https://secweb.rbi.org.in. Once
uploaded, the company will get a CoR (Company Application Reference Number).
Subsequently, the company should take the hard copy of the same with the
supported documents and submit it to the concerned regional office.
NOTE: Certain category of NBFCs like Venture Capital Fund/Merchant Banking
Companies/Stock Broking Companies etc need not be registered with RBI they are
governed by SEBI. Insurance companies holding a valid certificate of registration are
regulated by IRDA, Housing finance companies regulated by National Housing Bank.
Nature of Business
The company should not have its principal business as
(a) Agricultural operations
(b) Industrial activity
(b) The purchase or sale of any goods (other than securities) or the providing of any services
(c) The purchase, construction or sale of immovable property, Moreover no portion of the
income should be derived from the financing of purchases, constructions or sales of
immovable property by other persons
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A Report on NBFCs in India
Capital Requirement
The start up company should have a minimum net owned fund (NOF) of Rs 25 lakh which
is raised to Rs 200 lakh from April 21, 1999.
Net Owned Fund
Paid-up capital and free reserves, minus accumulated losses, deferred revenue expenditure
and other intangible assets
Less,
(i) Investments in shares of subsidiaries/companies in the same group/ all other NBFCs
(ii) The book value of debentures/bonds/ outstanding loans and advances, including hire
purchase and lease finance made to, and deposits with, subsidiaries/ companies in the same
group, in excess of 10% of the owned funds.
Note: NBFCs that were in existence who had previously NOF of Rs25 Lakhs (before the
act) are given a time period of 3 years to attain a NOF of 200 Lakhs. However RBI can still
extend this time period for an additional 3 years subject to the condition that such NBFCs
should intimate the RBI about attaining the NOF within 3 months from the date of
attainment
Classification of NBFCs according to RBI
NBFCs are classified into two categories

(i)
NBFC accepting deposits from customers
(ii)
NBFC which does not take deposits from customers
NBFCs taking deposits from public are referred to as NBFC-D and those who dont
take public deposits are referred to as NBFC- ND

Those NBFCs NBFCs-ND with an asset size of Rs.100 crore and above (as per the
last audited balance sheet) are designated as systemically important NBFCs- ND
(NBFCs-ND-SI)

NBFCs-ND-SI are advised to attain minimum CRAR of 12 per cent by March 31,
2010 and 15 per cent by March 31, 2011
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A Report on NBFCs in India
Regulations on NBFCs taking Deposits
1. All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a
valid certificate of registration with authorization to accept public deposits can
accept/hold public deposits
2. New NBFCs are not allowed to raise public deposits for period of two years from
the date of registration. After completion of two years, detailed review is taken of the
company by the regulator
3. 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
4. NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI
from time to time. The present ceiling is 12.5 per cent per annum. The interest may
be paid or compounded at rests not shorter than monthly rests.
5. NBFCs cannot accept deposits from NRI except deposits by debit to NRO account
of NRI provided such amount do not represent inward remittance or transfer from
NRE/FCNR account.
6. NBFCs with net owned fund (NOF) of less than Rs. 25 lakhs (with or without credit
rating) are not entitled to accept public deposits
7. Evaluation of the quality of management in respect of the promoters/directors is
taken into consideration while giving allowance for taking public deposits
Minimum Investment Level Credit Rating:
The symbols of minimum investment grade rating of the Credit rating agencies are:
Name of rating agencies
Level of minimum investment grade credit
rating (MIGR)
CRISIL
FA- (FA MINUS)
ICRA
MA- (MA MINUS)
CARE
CARE BBB (FD)
FITCH Ratings India Pvt. Ltd
tA-(ind)(FD)
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A Report on NBFCs in India
Ceiling on NBFC-D (Taking Public deposits)
(i) NBFCs having Net Owned Fund (NOF) of more than 200 Lakhs
Category of NBFC
Ceiling on public deposits
AFCs maintaining CRAR of 15% without
1.5 times of NOF or Rs 10 crore
credit rating
whichever is less
AFCs with CRAR of 12% and having
4 times of NOF
minimum investment grade credit rating
LC/IC with CRAR of 15% and having
1.5 times of NOF
minimum investment grade credit rating
AFC= Asset Finance Company
LC/IC= Loan Company/ Investment Company
(ii) NBFCs having NOF more than 25 lakhs but less than 200 Lakhs
Category of NBFC
Ceiling on public deposits
AFCs maintaining CRAR of 15% without
credit rating
AFCs with CRAR of 12% and having
Equal to NOF (1xNOF)
1.5 times of NOF
minimum investment grade credit rating
LC/IC with CRAR of 15% and having
Equal to NOF( 1xNOF)
minimum investment grade credit rating
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A Report on NBFCs in India
Ongoing Regulations: NBFCs-D (Holding Public Deposits)
.
The NBFCs accepting public deposits should furnish to RBI:

Audited balance sheet of each financial year and an audited profit and loss account in
respect of that year as passed in the general meeting together with a copy of the
report of the Board of Directors and a copy of the report and the notes on accounts
furnished by its Auditors

Statutory Annual Return on deposits - NBS 1

Certificate from the Auditors that the company is in a position to repay the deposits
as and when the claims arise

Quarterly Return on liquid assets

Half-yearly Return on prudential norms

Half-yearly ALM (Asset Liability Management) Returns by companies having public
deposits of Rs 20 crore and above or with assets of Rs 100 crore and above
irrespective of the size of deposits

Monthly return on exposure to capital market by companies having public deposits
of Rs 50 crore and above

A copy of the Credit Rating obtained once a year along with one of the Half-yearly
returns on prudential norms
Other Regulations: NBFCs-ND (Not Holding Public Deposits)

The NBFCs-ND having assets size of Rs 100 crore are required to submit a Monthly
Return on important financial parameters of the company

Board resolution to be passed to the effect that the company have neither accepted
public deposit nor would accept any public deposit during the year
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A Report on NBFCs in India
General Norms: RBI
Maintenance of Liquid Assets:
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 .Of the 15%,
NBFCs are required to invest not less than 10% in approved securities and the remaining
5% can be in unencumbered term deposits with any scheduled commercial bank.. Thus,
the liquid assets may consist of government securities, government guaranteed bonds
and term deposits with any scheduled commercial bank.
Creation and Maintenance of Reserve fund:
All NBFCs are required to create a reserve fund and transfer not less than 20% of their
net profit (before declaration of dividend) to the fund
Submission of Certificate:
All NBFCs should submit a certificate from their Statutory Auditors every year to the
effect that they continue to undertake the business of NBFI requiring holding of CoR
(Company Application Reference Number) under Section 45-IA of the RBI Act, 1934.
Information Exchange:
NBFCs are required to furnish the information in respect of any change in the
composition of its board of directors, address of the company and its directors and the
name/s and official designations of its principal officers and the name and office address
of its auditors.
Prudential Norms
NBFCs should comply with RBIs policies and directions regarding prudential norms and
Deployment of funds
o Income Reconition
o Accounting Standards
o Classification of Assets
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A Report on NBFCs in India
o Provision for NPA (Non Performing assets)
o Capital Adequacy
o Declaration of Purpose, Quantum & Advances of Loan
Directions given to NBFCs and its Auditors by RBI

RBI is empowered to give directions to NBFCs and their auditors in matters related
to
1) Profit and Loss account
2) Balance Sheet
3) Books of Accounts
4) Disclosure of liabilities
5) Any other matters or queries

Special Audits can be done by the RBI of any NBFC and also appoint auditors for
the same

RBI can prohibit any NBFC for taking public deposit for violation of any provisions
of RBI act

Nomination facility for deposits held by a NBFC is introduced. It is on the lines of
bank deposits

If an NBFC is downgraded to below minimum investment grade rating, it has to
stop accepting public deposit, report the position within fifteen working days to the
RBI.

Once downgraded, within 3 years It has to reduce the amount of excess public
deposit to nil or to the appropriate extent permissible under paragraph 4(4) of NonBanking Financial Companies Acceptance of Public Deposits (Reserve Bank)
Directions, 1998
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A Report on NBFCs in India
A Special Mention : FDI in NBFC sector
FDI/NRI investments allowed in the following 19 NBFC activities shall be as per levels
indicated below:
Merchant banking
Credit Reference Agencies
Underwriting
Credit rating Agencies
Portfolio Management Services
Leasing & Finance
Investment Advisory Services
Housing Finance
Financial Consultancy
Forex Broking
Stock Broking
Credit card business
Asset Management
Money changing Business
Venture Capital
Micro Credit
Custodial Services
Rural Credit
Factoring
Regulations for FDI in NBFCs
Minimum Capitalization Norms for Fund based NBFCs:

For FDI up to 51% - US$ 0.5 million should be brought upfront

For FDI above 51% and up to 75% - US $ 5 million should be brought upfront

For FDI above 75% and up to 100% - US $ 50 million out of which US $ 7.5 million
should be brought upfront and the balance in 24 months
Minimum capitalization norms for Non-fund based activities:

Minimum capitalization norm of US $ 0.5 million is applicable in respect of all
permitted non- fund based NBFCs with foreign investment

Foreign investors to set up 100% operating subsidiaries without the condition to
disinvest a minimum of 25% of its equity to Indian entities, subject to bringing in
US$ 50 million as per minimum capitalization norms above (without any restriction
on number of operating subsidiaries without bringing in additional capital)
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A Report on NBFCs in India

Joint Venture operating NBFC’s which have 75% or less than 75% foreign
investment will also be allowed to set up subsidiaries for undertaking other NBFC
activities, subject to the subsidiaries also complying with the applicable minimum
capital inflow

FDI in the NBFC sector is put on automatic route subject to compliance with
guidelines of the Reserve Bank of India.
References
Web References

www.rbi.org.in, accessed from 19th April to 23rd April 2010

nbfc.rbi.org.in, accessed from 19th April to 23rd April 2010

www.economywatch.com, accessed from 19th April to 23rd April 2010
Publications

Statutory guide for Non Banking Financial Companies- Taxmann’s Publications
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