Project Report on NBFC PDF

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PROJECT REPORT ON NON BANKING FINANCIAL COMPANIES BY: ANKIT JAIN REG. NO. 221109844/03/2011 1 INDEX S.NO. CONTENTS PAGE NO. 1 INTRODUCTION 5-6 2 HISTORICAL BACKGROUND 7-8 3 NON BANKING FINANCIAL COMPANY- MEANING 9 4 DEFINATION OF NBFC 10 5 FACTORS CONTRIBUTING TO THE GROWTH OF 11 NBFC 6 CLASSIFICATI...

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PROJECT REPORT ON NON BANKING FINANCIAL COMPANIES

BY: ANKIT JAIN REG. NO. 221109844/03/2011

1

INDEX S.NO.

CONTENTS

PAGE NO.

1

INTRODUCTION

5-6

2

HISTORICAL BACKGROUND

7-8

3

NON BANKING FINANCIAL COMPANY- MEANING

9

4

DEFINATION OF NBFC

10

5

FACTORS CONTRIBUTING TO THE GROWTH OF NBFC

11

6

CLASSIFICATION OF NBFC`S

12-18

7

ROLE OF NON BANKING FINANCE COMPANIES

19-20

8

FUNCTIONS OF NON BANKING COMPANIES

21

9

COMMERCIAL BANKS VERSUS NBFC

22

10

RBI GUIDELINES FOR ALM SYSTEM IN NBFC`S

11

ALM INFORMATION SYSTEM

25

12

LIQUIDITY RISK MANAGEMENT

26

13

FINANCIAL COMPANIES REGULATION BILL, 2009 AND SOME CLARIFICATIONS

27-36

14

NORMS FOR NBFC

37-43

15

SOME ADVERTISEMENT AND OTHERS

44-46

16

LIST OF NON BANKING FINANCIAL COMPANIES

47-48

17

CONCLUSION

49

18

BIBLIOGRAPHY

50

2

23-24

PREFACE

As a part of Company secretary E-MSOP training program and in order to gain the practical knowledge in the field of NBFC, I have made a project report on Non Banking Financial Companies. The Basic Objective behind this project is to get the knowledge on functioning of Non Banking Financial Companies. In this project report I have included various types of NBFC`s, their background etc. During this project report I had enhanced my knowledge of NBFC`s Justification can`t be done to whatever I had learnt in last so many weeks with few pages but I have still tried my best to cover as much as possible in this report.

(ANKIT JAIN)

3

ACKNOWLEDGEMENT

“There is no such thing as a self made man, we all are made up thousands of others”

I am indebted to my CS Institute for providing the students such a knowledgeable, inspirational, motivational session and to enlighten us on various different topics, which are necessary to be known before entering into the competitive corporate world, which will really work in our future.

Last but not the least I would like to extend my gratitude towards my parents for their unceasing help and timely guidance they helped my while I worked on this project.

4

INTRODUCTION: We studied about banks, apart from banks the Indian Financial System has a large number of privately owned, decentralized and small sized financial institutions known as Nonbanking financial companies. In recent times, the non-financial companies (NBFCs) have contributed to the Indian economic growth by providing deposit facilities and specialized credit to certain segments of the society such as unorganized sector and small borrowers. In the Indian Financial System, the NBFCs play a very important role in converting services and provide credit to the unorganized sector and small borrowers. NBFCs provide financial services like hire-purchase, leasing, loans, investments, chit-fund companies etc. NBFCs can be classified into deposit accepting companies and non-deposit accepting companies. NBFCs are small in size and are owned privately. The NBFCs have grown rapidly since 1990. They offer attractive rate of return. They are fund based as well as service oriented companies. Their main companies are banks and financial institutions. According to RBI Act 1934, it is compulsory to register the NBFCs with the Reserve Bank of India. The NBFCs in advanced countries have grown significantly and are now coming up in a very large way in developing countries like Brazil, India, and Malaysia etc. The nonbanking companies when compared with commercial and co-operative banks are a heterogeneous (varied) group of finance companies. NBFCs are heterogeneous group of finance companies means all NBFCs provide different types of financial services. Non-Banking Financial Companies constitute an important segment of the financial system. NBFCs are the intermediaries engaged in the business of accepting deposits and delivering credit. They play very crucial role in channelizing the scare financial resources to capital formation. NBFCs supplement the role of the banking sector in meeting the increasing financial need of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs have more flexible structure than banks. As compared to banks, they can take quick decisions, assume greater risks and tailor- make their services and charge according to the needs of the clients. Their flexible structure helps in broadening the market by providing the saver and investor a bundle of services on a competitive basis. 5

Non Banking Finance Companies (NBFCs) are a constituent of the institutional structure of the organized financial system in India. The Financial System of any country consists of financial Markets, financial intermediation and financial instruments or financial products. All these Items facilitate transfer of funds and are not always mutually exclusive. Interrelationships Between these are parts of the system e.g. Financial Institutions operate in financial markets and are, therefore, a part of such markets. NBFCs at present providing financial services partly fee based and partly fund based. Their fee based services include portfolio management, issue management, loan syndication, merger and acquisition, credit rating etc. their asset based activities include venture capital financing, housing finance, equipment leasing, hire purchase financing factoring etc. In short they are now providing variety of services. NBFCs differ widely in their ownership: Some are subsidiaries of large Manufacturers (e.g., T.V. Motors T.V. Finances and Services Ltd). Many others are owned by banks such as ICICI Banks, ICICI Securities Ltd, SBI Capital Market Ltd, Muthoot Bankers Muthoot Financial Services Ltd a key player in Kerala financial services. Other financial institutions are IFCIs IFCI Financial Services Ltd or IFCI Custodial Services Ltd (Devdas, 2005). Non-banking Financial Institutions carry out financing activities but their resources are not directly obtained from the savers as debt. Instead, these Institutions mobilize the public savings for rendering other financial services including investment. All such Institutions are financial intermediaries and when they lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions. The term “Finance” is often understood as being equivalent to “money”. However, final

exactly is not money; it is the source of providing funds for a particular activity. The word system, in the term financial system, implies a set of complex and closely connected or inter-linked Institutions, agents, practices, markets, transactions, claims, and liabilities in the Economy. The financial system is concerned about money, credit and finance. The three terms are intimately related yet are somewhat different from each other: •

•

Money refers to the current medium of exchange or means of payment. Credit or loans is a sum of money to be returned, normally with interest; it refers to a debt

•

Finance is monetary resources comprising debt and ownership funds of the state, company or person. 6

HISTORICAL BACKGROUND. The Reserve Bank of India Act, 1934 was amended on 1st December, 1964 by the Reserve Bank Amendment Act, 1963 to include provisions relating to non-banking institutions receiving deposits and financial institutions. It was observed that the existing legislative and regulatory framework required further refinement and improvement because of the rising number of defaulting NBFCs and the need for an efficient and quick system for Redressal of grievances of individual depositors. Given the need for continued existence and growth of NBFCs, the need to develop a framework of prudential legislations and a supervisory system was felt especially to encourage the growth of healthy NBFCs and weed out the inefficient ones. With a view to review the existing framework and address these shortcomings, various committees were formed and reports were submitted by them. Some of the committees and its recommendations are given hereunder:

1.

James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying the various money circulation schemes which were floated in the country during that time and taking into consideration the impact of such schemes on the economy, the Committee after extensive research and analysis had suggested for a ban on Prize chit and other schemes which were causing a great loss to the economy. Based on these suggestions, the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted.

2. Dr.A.C.Shah Committee (1992): The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee set out the agenda for reforms in the NBFC sector. This committee made wide ranging recommendations covering, inter-alia entry point norms, compulsory registration of large sized NBFCs, prescription of prudential norms for NBFCs on the lines of banks, stipulation of credit rating for acceptance of public deposits and more statutory powers to Reserve Bank for better regulation of NBFCs.

7

3. Khan Committee (1995) This Group was set up with the objective of designing a comprehensive and effective supervisory framework for the non-banking companies segment of the financial system. The important recommendations of this committee are as follows:

i.

Introduction of a supervisory rating system for the registered NBFCs. The ratings assigned to NBFCs would primarily be the tool for triggering on-site inspections at various intervals.

ii.

Supervisory attention and focus of the Reserve Bank to be directed in a comprehensive manner only to those NBFCs having net owned funds of Rs.100 laths and above.

iii.

Supervision over unregistered NBFCs to be exercised through the off-site surveillance mechanism and their on-site inspection to be conducted selectively as deemed necessary depending on circumstances.

iv.

Need to devise a suitable system for co-coordinating the on-site inspection of the NBFCs by the Reserve Bank in tandem with other regulatory authorities so that they were subjected to one-shot examination by different regulatory authorities.

v.

Some of the non-banking non-financial companies like industrial/manufacturing units were also undertaking financial activities including acceptance of deposits, investment operations, leasing etc to a great extent. The committee stressed the need for identifying an appropriate authority to regulate the activities of these companies, including plantation and animal husbandry companies not falling under the regulatory control of Either Department of Company Affairs or the Reserve Bank, as far as their mobilization of public deposit was concerned.

vi.

Introduction of a system whereby the names of the NBFCs which had not complied with the regulatory framework / directions of the Bank or had failed to submit the prescribed returns consecutively for two years could be published in regional newspapers.

4. Narasimhan Committee (1991) This committee was formed to examine all aspects relating to the structure, organization & functioning of the financial system. These were the committee’s which founded non- banking financial companies. 8

Functions of Non- Banking Financial Companies: (1)

Receiving benefits:

The primary function of nbfcs is receive deposits from the public in various ways such as issue of debentures, savings certificates, subscription, unit certification, etc. thus, the deposits of nbfcs are made up of money received from public by way of deposit or loan or investment or any other form.

(2)

Lending money: Another important function of nbfcs is lending money to public. Non- banking financial

companies provide financial assistance through. (a) Hire purchase finance:

Hire purchase finance is given by nbfcs to help small important operators, professionals, and middle income group people to buy the equipment on the basis on Hire purchase. After the last installment of Hire purchase paid by the buyer, the ownership of the equipment passes to the buyer. (b) Leasing Finance:

In leasing finance, the borrower of the capital equipment is allowed to use it, as a hire, against the payment of a monthly rent. The borrower need not purchase the capital equipment but he buys the right to use it. (c) Housing Finance:

NBFC’s provide housing finance to the public, they finance for construction of

houses, development of plots, land, etc. (d) Other types of finance provided by NBFCs include:

Consumption finance, finance for religious ceremonies, marriages, social activities, paying off old debts, etc. NBFCs provide easy and timely finance and generally those customers which are not able to get finance by banks approach these companies. (e) Investment of surplus money:

NBFCs invest their surplus money in various profitable areas.

21

Commercial Bank versus (v/s) Non-banking Financial Companies While commercial banks and non-banking financial companies are both financial intermediaries (middleman) receiving deposits from public and lending them. Commercial bank is called as “Big brother” while the “NBFC” is called as the “Small brother. But there

are some important differences between both of them, they are as follows: No.

Commercial Banks.

1

Issue of cheques:

Non Bank Financial companies.

In case of NBFC’s there is no

In case of commercial banks, a

facility to issue cheques against bank

cheque can be issued against bank

deposits.

deposits. 2

Rate of interest:

Commercial bank offer lesser rate of interest on deposits and charge less rate

of interest on loans as compared to

deposits and charge higher rate of interest on loans as compared to Commercial

banks.

NBFC’s. 3

NBFC’s offer higher rate of interest on

Facilities provided by them:Commercial

banks can enjoy the benefit of certain

NBFC’s are not given such facilities.

facilities like deposit insurance cover

facilities, refinancing facilities, etc. 4

NBFC’s are regulated by different

Law which governs them: Commercial banks are regulated by

regulation such as SEBI, Companies Act,

Banking Regulation Act 1949 and RBI

National Housing Bank, Unit Fund Act and RBI.

5

NBFC’s specialize in one types of asset. Types of assets: commercial banks hold a variety of assets For e.g.: Hire purchase companies specialize in the form of loans, cash credit, bill of in consumer loans while Housing Finance

exchange, overdraft etc.

Companies specialize in housing Finance only. 22

RBI Guidelines for Asset-Liability Management (ALM) system in NBFCs. This note lays down broad guidelines in respect of interest rate and liquidity risks management systems in NBFCs which form part of the Asset Liability Management (ALM) function. This is applicable to all NBFCs and Residuary non-banking companies meeting the criteria of asset base of Rs.100 crores, whether accepting deposits or not, or holding public deposits of Rs.20 crores or more. Sl.No. Description / Compliance requirement Comments. As we are aware, the guidelines for introduction of ALM system by banks and all India financial intuitions have already been issued by Reserve Bank of India and the system has become operational. Since the operations of financial companies also give rise to Asset Liability mismatches and interest rate risk exposures, it has been decided to introduce an ALM system for the NON- Banking Financial Companies (NBFCs) as well, as part of their overall system for effective risk management in their various portfolios. A copy of the guidelines for Asset Liability Management (ALM) system in NBFCs is enclosed. Is there an Asset Liability

Committee

(ALCO) consisting of the company’s senior

management to decide the business strategy of the NBFC.

1.

In the normal course, NBFC'S are exposed to credit and market risks in view of the asset-liability transportation. With liberalization in Indian financial markets over the last few years and growing integration of domestic with external markets and entry of MNC's for meeting the credit needs of not only the corporate but also the retail segments, the risks associated with NBFC's operations have become complex and large, requiring strategic management. NBFC’s are now operating in a fairly deregulated environment and are required to determine on their own, interest rates on deposits, subject to the ceiling of maximum rate of interest on deposits they can offer on deposits prescribed by the Bank; and advances on a dynamic basis. The interest rates on investments of NBFC's in Government and other securities are also now market related. Intense pressure on the management of NBFC's to maintain a good balance among spreads, profitability and long-term viability. Imprudent liquidity management can put NBFC's earnings and reputation at great risk. 23

Current Status: Structural Linkages between Banks and NBFCs:

Banks and NBFCs operating in the country are owned and established by entities in the private sector (both domestic and foreign), and the public sector. Some of the NBFCs are subsidiaries/ associates/ joint ventures of banks – including foreign banks, which may or may not have a physical operational presence in the country. There has been increasing interest in the recent past in setting up NBFCs in general and by banks, in particular. Investment by a bank in a financial services company should not exceed 10 per cent of the bank’s paid-up share capital and reserves and the investments in all such companies,

financial institutions, stock and other exchanges put together should not exceed 20 per cent of the bank’s paid-up share capital and reserves.

Banks in India are required to obtain the prior approval of the concerned regulatory department of the Reserve Bank before being granted Certificate of Registration for establishing an NBFC and for making a strategic investment in an NBFC in India. However, foreign entities, including the head offices of foreign banks having branches in India may, under the automatic route for FDI, commence the business of NBFI after obtaining a Certificate of Registration from the Reserve Bank. NBFCs can undertake activities that are not permitted to be undertaken by banks or which the banks are permitted to undertake in a restricted manner, for example, financing of acquisitions and mergers, capital market activities, etc. The differences in the level of regulation of the banks and NBFCs, which are undertaking some similar activities, gives rise to considerable scope for regulatory arbitrage. Hence, routing of transactions through NBFCs would tantamount to undermining banking regulation. This is partially addressed in the case of NBFCs that are a part of banking group...