An Overview on Nbfc Sector in India

Topics: Bank, Financial services, Central bank Pages: 23 (7648 words) Published: February 25, 2011
Non-Banking Financial Companies (NBFC) have rapidly emerged as an important segment of the Indian financial system. Moreover, NBFCs assume significance in the small business segment as they primarily cater to the credit requirements of the unorganised sector such as wholesale & retail traders, small-scale industries and small borrowers at the local level. NBFC is a heterogeneous group of financial institutions, performing a wide range of activities like hire-purchase finance, vehicle financing, equipment lease finance, personal loans, working capital loans, consumer loans, housing loans, loans against shares and investment, etc. NBFCs are broadly divided into three categories namely (i) NBFCs accepting deposits from banks (NBFC-D); (ii) NBFCs not accepting/holding public deposits (NBFC-ND); and (iii) core investment companies (i.e. those acquiring share/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) The segment has witnessed considerable growth in the last few years and is now being recognised as complementary to the banking sector due to implementation of innovative marketing strategies, introduction of tailor-made products, customer-oriented services, attractive rates of return on deposits and simplified procedures, etc. While the functions of NBFCs are just like banks, there are few differences between both the institutions. These are: (i) NBFC cannot accept demand deposits; (ii) NBFC is not part of the payment and settlement system as well as it cannot issue cheques drawn on itself and (iii) deposit insurance facility of Deposit Insurance & Credit Guarantee Corporation is not available for NBFC depositors unlike in the case of banks.

Regulatory Framework
The RBI Act was amended in 1997 to provide for comprehensive regulatory framework for NBFCs. As per the RBI (Amendment) Act 1997, the RBI can issue directions to NBFCs & its’ auditors, prohibit deposit acceptance and alienation of assets by NBFCs and initiate action for winding up of NBFCs. The new regulations provide: •Compulsory registration for all NBFCs, irrespective of their holding of public deposits, for commencing and carrying on business of a non-business financial institution •The amended act also classified NBFCs into three broad categories i) NBFCs accepting public deposits; ii) NBFCs not accepting/holding public deposits; and iii) core investment companies (i.e. those acquiring shares/securities of their group/holding/subsidiary companies to the extent of not less than 90% of total assets and which do not accept public deposits.) •Minimum entry point net-worth of Rs 2.5 million which was subsequently revised upwards to Rs 20 million •Deposit mobilisation linked to net-worth, business activities and credit rating •Maintenance of 12.5% of their deposits in liquid assets •Creation of a Reserve Fund and transfer of 20% of profit after tax but before dividend to the fund •Ceiling on maximum rate of interest that NBFCs can pay on their public deposits •NBFCs with an asset size of at least Rs 1 billion or a deposit base of at least Rs 200 million are required to have Asset-Liability Management systems and constitute an Asset-Liability Management Committee Further, in order to monitor the financial health and prudential functioning of NBFCs, the RBI issued directions regarding acceptance of deposits, prudential norms like capital adequacy, income recognition, asset classification, provisioning for bad and doubtful assets, exposure norms and other measures. For Instance, capital to risk-weighted assets ratio (CRAR) norms were made applicable to NBFCs in 1998. As per the CRAR norms, every deposit taking NBFC is required to maintain a minimum capital, consisting of Tier I and Tier II capital, of not less than 12% (15% in case of unrated deposit-taking loan investment companies) of its aggregate risk-weighted assets and of risk-adjusted value of...
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