Non Banking Financial Companies

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Manual on Financial and Banking Statistics

6. NON-BANKING FINANCIAL COMPANIES
The importance of NBFCs in delivering credit to the
unorganised sector and to small borrowers at the
local level in response to local requirements is well
recognised. The rising importance of this segment
calls for increased regulatory attention and focused
supervisory scrutiny in the interests of financial
stability and depositor protection (Box 6.1).

The activities of non-banking financial companies
(NBFCs) in India have undergone qualitative
changes over the years through functional
specialisation. The role of NBFCs as effective
financial intermediaries has been well recognised
as they have inherent ability to take quicker
decisions, assume greater risks, and customise
their services and charges more according to the
needs of the clients. While these features, as
compared to the banks, have contributed to the
proliferation of NBFCs, their flexible structures
allow them to unbundle services provided by
banks and market the components on a
competitive basis. The distinction between banks
and non-banks has been gradually getting
blurred since both the segments of the financial
system engage themselves in many similar types
of activities. At present, NBFCs in India have
become prominent in a wide range of activities
like hire-purchase finance, equipment lease
finance, loans, investments, etc. By employing
innovative marketing strategies and devising
tailor-made products, NBFCs have also been able
to build up a clientele base among the
depositors, mop up public savings and command
large resources as reflected in the growth of their
deposits from public, shareholders, directors and
other companies, and borrowings by issue of
non-convertible debentures, etc. Consequently,
the share of non-bank deposits in household
sector savings in financial assets, increased from
3.1 per cent in 1980-81 to 10.6 per cent in 199596. In 1998, the definition of public deposits was for the first time contemplated as distinct from
regulated deposits and as such, the figures
thereafter are not comparable with those before.

In response lo the perceived need for better
regulation of the NBFC sector, the Reserve Bank
of India (RBI) Act, 1934 was amended in 1997,
providing for a comprehensive regulatory
framework for NBFCs. The RBI (Amendment) Act,
1997 conferred powers on the RBI to issue
directions to companies and its auditors, prohibit
deposit acceptance and alienation of assets by
companies and initiate action for winding up of
companies. The Amendment Act provides for
compulsory registration with the RBI of all
NBFCs, irrespective of their holding of public
deposits, for commencing and carrying on
business of a non-banking financial institution;
minimum entry point norms; maintenance of a
portion of deposits in liquid assets; and creation
of reserve fund and transfer of 20 per cent of
profit after tax but before dividend annually to
the fund. Accordingly, to monitor the financial
health and prudential functioning of NBFCs, the
RBI issued directions to companies on:
acceptance of public deposits; prudential norms
like capital adequacy, income recognition, asset
classification, provisioning for bad and doubtful
assets, exposure norms and other measures.
Directions were also issued to the statutory
auditors to report non-compliance with the RBI
Act and regulations to the RBI, and Board of
Directors and shareholders of the NBFCs.

Box 6.1: An Overview of Regulation of NBFCs
(1) Mission

(3)

To ensure that

Prescription of prudential norms akin to those
applicable to banks,

the financial companies function on healthy
lines,


Basic Structure of Regulatory and
Supervisory Framework

Submission
of
periodical
returns
the purpose of off-site surveillance,

these companies function in consonance

250

for

Non-Banking Financial Companies

Box 6.1: An Overview of...
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