A PROJECT REPORT

ON
NON-BANKING FINANCIAL INSTITUTIONS
(A Comparative Study with Banking Financial Institutions)

Submitted For:
The Partial Fulfillment of the requirement for the degree of

Master of Business Administration

CERTIFICATE OF ORIGINALITY

This is to certify that the project report entitled Non-Banking Financial

Institutions submitted to IP University in partial fulfilment of the requirement for
the

award

of

the

degree

of MASTER OF BUSINESS ADMINISTRATION

(FINANCE) , is original work carried out by Ms.PRIYA with enrolment no. 032982044
under my guidance.
The matter embodied in this project is genuine work done by the student and has
not been submitted whether to this University or to any other University / Institute for
the fulfilment of the requirement of any course of study.

....

Signature of the Student:

Signature of the Guide

Date: ..

Date:

Name and Address

Name, Designation

of the student

and Address of the

Guide:

..

..

..

..

..

..

..

..

Enrolment No 032982044

ACKNOWLEDGEMENT

It is well-established fact that behind every achievement lies an unfathomable

sea of gratitude to those who have extended their support and without whom the
project would never have come into existence.
I express my gratitude to IGNOU for providing me an opportunity to work on this
project as a part of the curriculum.
Also, I express my gratitude to (

) for his kind cooperation.

INDEX

ABOUT POWER FINANCE CORPORTION

EXECUTIVE SUMMARY..........................................................................................
INTRODUCTION.......................................................................................................
LITERATURE REVIEW
OBJECTIVE AND RESEARCH METHODOLOGY
LIMITATION...............................................................................................................
FINDINGS & ANALYSIS...........................................................................................
CONCLUSION..........................................................................................................
RECOMMENDATION...............................................................................................
BIBLIOGRAPHY.......................................................................................................
APPENDIX ...............................................................................................................

Introduction to the Company

1.1 History, Vision & Mission.
Power Finance Corporation is one of the major Public Sector Undertaking of the
Government of India. PFC was set up on 16th July 1986 as a Financial Institution (FI)
dedicated to Power Sector financing and committed to the integrated development of the
power and associated sectors. The Corporation was notified as a Public Financial
Institution in 1990 under Companies Act, 1956.
The Corporation is registered as a Non-Banking Financial Company with the Reserve
Bank of India (RBI). RBI, vide its revised Certificate of Registration no. B-14.00004
dated July 28, 2010 classified the company as an Infrastructure Finance Company
(NBFC-ND-IFC).
PFC, which has entered its Silver Jubilee Year in 2010, is a Schedule-A, Nav-Ratna
CPSE (conferred by Govt. of India on 22nd June, 2007) in the Financial Service Sector,
under the administrative control of the Ministry of Power. Its Registered and Corporate
Offices

are

at

New

Delhi.

PFC was incorporated with an objective to provide financial resources and encourage
flow of investments to the power and associated sectors, to work as a catalyst to bring
about institutional improvements in streamlining the functions of its borrowers in
financial, technical and managerial areas to ensure optimum utilization of available
resources and to mobilize various resources from domestic and international sources at
competitive rates. ItsVision is To be the leading institutional partner for the power and
allied infrastructure sectors in India overseas across the value chain.
Mission Statement of PFC:PFCs mission is to excel as a pivotal development financial institution in the power
sector committed to the integrated development of the power and associated sectors by
channeling the resources and providing financial, technological and managerial services
for ensuring the development of economic, reliable and efficient systems and institutions.

To become the most preferred Financial Institution in power and financial sectors,
providing best products and services;

PFC providing affordable and competitive products and services with efficient
and internationally integrated sourcing and servicing, partnering the reforms in
the Indian Power Sector and enhancing value to its shareholders; by promoting
efficient investments in the power and allied sectors in India and abroad.

We will achieve this being a dynamic, flexible, forward looking, trustworthy,

socially responsible organization, sensitive to our stakeholders interests,
profitable and sustainable at all times, with transparency and integrity in
operations.

To promote efficient investments in Power Sector to enable availability of power

of the required quality at minimum cost to consumers;

To reach out to the global financial system for financing power development;
To act as a catalyst for reforming India's Power Sector; and to build human assets
and systems for the Power Sector of tomorrow.

OBJECTIVES
To provide financial resources and encourage flow of investments to the power
and associated sectors.
To work as a catalyst to bring about institutional improvements in streamlining
the functions of its borrowers in the areas of financial ,technical, managerial to
ensure optimum utilization of available resources.

To mobilize various types of resources viz. domestic and international at

competitive rates
To strive for up gradation of skills in the power sector for effective and efficient
growth to the sector.

 To maximize rate of return through efficient operations and introduction of

innovative financial instruments and services for the power sector.

1.2 SWOT analysis

A powerful vision and a purposeful mission are essential elements of an

organizations strategic planning, which helps articulate a strategic direction, and
aligns and motivates the organization towards achieving a shared, common vision.
An essential part of outlining a Corporate Plan for the period 2012-32 is to review
the existing vision and mission of PFC and to suggest realignments in keeping
with the emerging opportunities and the strategic intent of the organization over

this period.
A strategic planning workshop was conducted on 12th January,2012 to identify the
strengths, weaknesses, opportunities and threats in PFC and its operative
environment, examine PFCs current vision and mission and realign the same in

keeping with its long-term strategic intent.

The results of this exercise are outlined below:-

Identified Strengths for PFC

Strong
domain
expertise

Source of Competitive Advantage

in

conventional power sector due to its

exclusive focus leading high mobility
barriers protecting PFCs competitive
positioning.
Focus on generation segment where the Higher investment demand would ensure
investment demand is likely to be reliance on PFC as a major source of
higher in next 5-year plan.
Market leadership position
dominant

market

share

in

financing.
with Higher market share ensures higher bargaining
Power power against borrowers.

financing.
Capacity to fund large power projects Protection against new competitors or other
with

higher

duration

due

to financial institutions such as banks.

inapplicability of sectoral exposure

limits.
Limited exposure in T&D segment and Minimize the probability of NPAs compared

overleveraged private developers with to its peers with such exposure

no operational cash flows
Enjoy excellent relationships with the Provides unmatched understanding of the
state and central utilities to understand unique needs of the borrowers
their needs and expectations.

Weaknesses identified for PFC based on the review of the business is provided
below. Going forward, the business strategy proposed in the corporate plan in the
subsequent sections address to mitigate the risks from these weaknesses.

Identified Weaknesses for PFC

Source of Disadvantage
Higher cost of funds compared with Lowers the mobility barriers for Banks to
SCBs due to dependence on wholesale complete head-on with PFC.
funding

sources

including

primary

markets and banks

Non-diversified business model leading Highly vulnerable to sector bridled with
to

very

high

vulnerability

to regulatory and commercial uncertainty

performance of power sector in India.

PFC has granted loans to the private May increase the risk of non-recovery and
sector on a non-resource or limited adversely affect PFCs financial condition.
resource basis.
Most of the other schemes except long Borrowers are demanding multiple products
term loans have met with limited apart from long term loans to fund CAPEX
success
Low people, process and systems Prohibitive costs and uncertainty around
preparedness for future entry into new roadmap for these new opportunities.
businesses
Need to enhance people, process and Could lead to significant execution risk.
systems

preparedness

for

future

business and entry into new businesses.

Identified Opportunities and Threats for PFC.

Based on the market analysis provided as part of Interim report, Opportunities for
PFC are identified in the section below.

Identified Opportunities for PFC

Source of Advantage

Growth in demand for funds for new Extension of already dominant market leading
power projects due to existing power position in the power financing market.
deficits and rapidly growing economy.
Investments in T&D system to Low current exposure in T&D may lead to
commensurate

with

investment

in PFC

cherry-picking

good

opportunities

Generation.
without concentration risk.
Renewed push from the state govt. for May benefit PFC in capitalizing
operational

improvement

of

these

SEBs opportunities with its experience and expertise

including tariff hikes and reduction in of working with SEBs.

aggregate technical and commercial
losses.
Huge growth in International markets Provides unmatched understanding of the
(both fund and fee based)
unique needs of the power sector borrowers.
Broaden footprint in funding Power Excellent understanding and appraisal
sector with equity Investments, PE and capabilities for power sector borrowers.
Power trading businesses.
Improve internal capabilities in he areas Immense growth opportunities in a rapidly
of attracting and retaining talent to meet expanding company
the needs of the new business
Increase in the use of technology and Improve service levels and overall customer
systems in the area of RM, Lead experience.
management, ERP, CRM.
Identified Threats for PFC
Source of Disadvantage
Uncertainty in extension of favorable Change in Government regulations may lead
position in terms of relaxation of PFC to lose its competitive positioning.
concentration and prudential norms
Growing competitive environment in Huge opportunity may continue to attract
power sector lending
competition from banks, FIs and other NBFCs
Self-sustenance and growth of power Utilities may raise capital directly from the
sector utilities may reduce importance market
of institutions such as PFC
Default or delay in realization of dues PFC has significant exposure to such utilities
from customers, particularly few state
utilities.
Inadequacy

of

the

insurance

of Borrowers may not have required insurance

borrowers assets
Uncertainty

over

coverage to cover all financial losses that the

recovering

borrowers may suffer

costs Inability to transfer these UMPPs or delays in

incurred on the shell companies of development of such UMPPs due to various

UMPPs
factors.
Legal issues in loans with restructured PFC has significant exposure to such utilities
state utilities

EXECUTIVE SUMMARY
With recent growth rates among large countries second only to Chinas, India has
experienced nothing short of an economic transformation since the liberalization
process began in the early 1990s. In the last few years, with a soaring stock
market, significant foreign portfolio inflows including the largest private equity
inflows in Asia, and a rapidly developing derivatives market, the Indian financial
system has been witnessing an exciting era of transformation. The banking
sector has seen major changes with deregulation of interest rates and the
emergence of strong domestic private players as well as foreign banks. At the
same time, there is some evidence of credit constraints for Indias SME firms that
rely heavily on trade credit. Corporate governance norms in India have
strengthened rapidly in the past few years. Family businesses, however, still
dominate the landscape and investor protection, while excellent on paper,
appears to be less effective owing to an overburdened legal system and
corruption. In the last few years microfinance has contributed in a big way to
financial inclusion and is now attracting venture capital and for-profit companies
both domestic and foreign.
Non-banking Financial Institutions carry out financing activities but their
resources are not directly obtained from the savers as debt. Instead, these
Institutions mobilise 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.
UNIT TRUST OF INDIA
LIFE INSURANCE CORPORATION (LIC)
GENERAL INSURANCE CORPORATION (GIC)

Apart from these NBFIs, another part of Indian financial system consists of a
large number of privately owned, decentralised, and relatively small-sized
financial intermediaries. Most work in different, miniscule niches and make the
market more broad-based and competitive. While some of them restrict
themselves to fund-based business, many others provide financial services of
various types. The entities of the former type are termed as "non-bank financial
companies (NBFCs)". The latter type are called "non-bank financial services
companies (NBFCs)".
Post 1996, Reserve Bank of India has set in place additional regulatory
and supervisory measure that demand more financial discipline and
transparency of decision making on the part of NBFCs. NBFCs regulations
are being reviewed by the RBI from time to time keeping in view the
emerging situations. Further, one can expect that some areas of cooperation between the Banks and NBFCs may emerge in the coming era
of E-commerce and Internet banking.

INTRODUCTION

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, hirepurchase, 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 property. A non-banking institution which is a
company and which has its principal business of receiving deposits under any
scheme or arrangement or any other manner, or lending in any manner is also a
non-banking financial company (Residuary non-banking company).
The financial system comprises of financial institutions, financial instruments and
financial markets that provide an effective payment and credit system and
thereby facilitate channelising of funds from savers to the investors of the
economy. In India considerable growth has taken place in the Non-banking
financial sector in last two decades. Over a period of time they are successful in
rendering a wide range of services.
Initially intended to cater to the needs of savers and investors, NBFCs later on
developed into institutions that can provide services similar to banks. In India
several factors have contributed to the growth of NBFCs. They provide tailor
made services to their clients.
Comprehensive regulation of the banking system and absence or relatively lower
degree of regulation over NBFCs have been some of the main reasons for the
growth momentum of the latter. It has been revealed by some research studies
that economic development and growth of NBFCs are positively related. In this
regard the World Development Report has observed that in the developing

counties banks hold a major share of financial assets than they do in the
industrially developed countries1. As the demand for financial services grow,
countries need to encourage the development NBFCs and securities market in
order to broaden the range of services and stimulate competition and efficiency.
In India the last decade has witnessed a phenomenal increase in the number of
NBFCs. The number of such companies stood at 7063 in 1981, at 15358 in 1985
and it increased to 24009 by 1990 and to 55995 in 1995.2 The main reason for
deposits with NBFCs are greater customer orientation and higher rate of interest
offered by them as compared to banks. With such a dramatic growth in the
numbers of NBFCs it was thought necessary to have a regulatory framework for
NBFCs. Slowly the RBI came out with set of guidelines for NBFCs. In one of
such step RBI gave definition of NBFCs. According to Reserve Bank
(Amendment act, 1997) A Non Banking Finance Company (NBFC) means- i) a
financial institution which is a company; ii) a non banking institution which is a
company and which has as its principal business the receiving of deposits under
any scheme or arrangement or in other manner a lending in any manner; iii) such
other non banking institution or class of such institutions as the bank may with
the previous approval of the central government specify. The definition excludes
financial institutions which carry on agricultural operations as their principle
business. NBFCs consists mainly of finance companies which carry on functions
like hire purchase finance, housing finance, investment, loan, equipment leasing
or mutual benefit financial operations, but do not include insurance companies or
stock exchange or stock broking companies.3 To encourage the NBFCs that are
run on sound business principles, on July 24, 1996 NBFCs were divided into two
classes: i) equipment leasing and hire purchase companies (finance companies)
and ii) loan and investment companies. However, the NBFCs segment of finance
was less regulated over a period of time. On account of the CRB scam and the
inability of some of the NBFCs to meet with the investors demand for return of
the deposits the need was felt by the Reserve Bank of India to increase the
regulations for the NBFCs. In the light of this background Reserve Bank of India
came out with the guidelines on January 2, 1998. The salient features of this

guideline are given below.4 1) The acceptance of deposits has been prohibited
for the NBFCs having net owned funds less than Rs.25 lakhs. 2) The extent of
public deposit raising is linked to credit rating and for equipment leasing and hire
purchase companies it can be raised to a higher tune. 3) Interest rate and rate of
brokerage is also defined under the new system. 4) Income recognition norms for
equipment leasing and Hire purchase finance companies were liberalized for
NPA from overdue for six months to twelve months. 5) Capital adequacy raised
10% by 31/3/98 and 12% by 31/3/99. 6) Grant of loan by NBFCs against the
security of its own shares is prohibited. 7) The liquid assets are required to be
maintained @ 12.5% and 15% of public deposits from 1/4/98 and 1/4/99
respectively. Modifications also came to these norms over a period of time. The
provisioning norms for hire purchase and lease companies were changed.
Accordingly, credit was to be given to the underlying assets provided as security.
The risk weight for investment in bonds of all PSBs and FD/CD/ bonds of PFI is
reduced to 20%5 By monetary and credit policy for 1999-2000 the RBI has raised
the minimum net owned funds limit for new NBFCs to Rs. 2 crores which are
incorporated on or after 20/4/99. According to the guideline issued on 8/4/99 the
company is to be classified as NBFCs if its financial assets account for more than
50% of its total assets i.e. net of intangible assets and the income from financial
assets should be more than 50% of the total income.6 By June 1999 RBI had
removed the ceiling on bank credit to all registered NBFCs which are engaged in
the principle business of equipment leasing, hire purchase, loan and investment
activities.7 From above brief summary regarding steps taken by RBI for
managing NBFC it is apparent that RBI assigns the priority for proper
management of NBFCs keeping in view the investors protection. In the light of
the above regulatory frame work one should like to examine various parameters
of different groups of NBFCs. The architecture of the financial system has to be
recast to ensure the growth of the economy along with adequate availability of
credit to the fastest growing sectors of the economy. The aims of the Reserve
Bank of India's monetary policy can be achieved if and only if the role of nonbanking

financial

institutions,

including

the

unincorporated

bodies,

are

recognized, encouraged and integrated in the financial system, says R.

Vaidyanathan.

THE last 15 years have witnessed significant growth in the

national income, more particularly in the service sectors. The share of the noncorporate sector (Proprietorship and partnership P&P firms) is more than
35 per cent.
We note that the services sector constituted nearly 60 per cent of the economy in
2002-03. In activities such as construction, P&P firms accounted for over 60 per
cent of the value addition in 2001-02 and in Trade, Hotels and Restaurant more
than 75 per cent. In the case of non-railway transport the share of the P&P sector
is 81 per cent and in real-estate and business services 76 per cent.

Table 1 gives the real growth rate of the services sector between 1993-94 and
2002-03 and all activities have grown above the national income growth rate of
5.89 per cent. Hotels and Restaurant grew by 10.5 per cent and Trade 7.9 per
cent and non-railway transport 7.6 per cent.
Financing of the non-corporate sector
The banking sector has been investing 45-50 per cent of its resources in
government securities the last couple of years. The lending pattern of banks
reveals an interesting picture, wherein the share of the P&P sector has come
down though this sector (predominantly in services) is the fastest growing.

Table 2 gives the share of the P&P sector along with private corporate and
government sectors in the credit outstanding of scheduled commercial banks.
The share of the P&P sector has come down to 43 per cent from 58 per cent in
the 1990s when the P&P sector in trade, transport, construction, restaurants, and
other business services has been growing at a CAGR of 8 per cent-plus. Here,

households include agricultural households and to that extent the fall is

significant.
The share of the private corporate sector in the national income is 12-15 per cent
but it absorbs nearly 40 per cent of the credit provided by the banking sector. The
fastest growing P&P sector gets lesser share of the bank credit, which reveals
that the non-banking financial sector is playing increasingly important role in the
credit delivery mechanisms of the growth of the economy. This is desispite the
household preference for bank deposits as a savings medium.

Table 3 gives the outstanding credit of loan accounts with Rs 25,000 (earlier Rs
10,000) from Scheduled Commercial Banks for selected period.
The number of accounts has shown a dramatic decline in the late 1990s and the
share of this segment has fallen to nearly 6 per cent in 2002 from a high of 15
per cent in the early 1980s.

Even the absolute amount outstanding for these accounts has come down from
Rs 41,000 crore to Rs 36,409 crore in 2000 to rise marginally in 2002 to Rs
38,501 crore. Something appears problematic with the banking sector particularly
in providing credit to the sections that not only require it most, but also which are
fastest growing.
For instance, the share of trade in 2000-01 at factor cost at current prices in
national income was 12.8 per cent at Rs 2.4 lakh crore (out of Rs 19 lakh crore).
Of this the share of non-corporate sector was 82 per cent or approximately Rs 2
lakh crore. If 75 per cent needs to be financed (which could be under estimation
since we are looking at value addition and not sale) by the outside institutions
then Rs 1.5 lakh crore is the credit need of the trade sector.
The bank financing of trade (non-food credit plus food credit) is Rs 57,836 crore
(17845 + 39991) which is around 38 per cent of the credit got by the sector
(Handbook of Statistics, pp62, RBI 2001). In other words more than 60 per cent
of the financial requirement of non-corporate sector in trade is met by nonbanking sources.
The financing of the activities undertaken by the non-corporate sectors
particularly in such areas as trade (wholesale and retail), hotels and restaurants
is mainly from private money markets where the rates of interest are much
higher. These are cash-flow-based lending, rather than based on asset and are
undertaken mostly by the unincorporated financing agencies. Also, funds need to
be available to these players without much paperwork and based on personal
assessment. Hence, the NBFCs mostly finance these activities.
Concentric circle of banking institutions
There is need to integrate domestic financial markets through a system of
making NBFCs the channel partners to large banks. The reforms have focused
only on the liability side of NBFCs and failures therein, but the asset side is

equally important in terms of credit delivery to large segments of our economy.

The focus is more on failure of some institutions.
There are two types of failures. One due to malfeasance on the part of promoters
in terms of running these institutions, which has resulted in the loss to the
depositors. This is related to the operational and supervisory mechanism. The
other relates to the riskiness of the underlying assets invested in by these entities
and that is part of business risk phenomena.
There is a need to understand the return-risk paradigm of any financial operation
and these entities are into cash flow based lending as in activities such as trade,
hotels, and construction. They do not have the benefit of sovereign guarantee
provided to public sector banks nor have they any insurance facility as given to
bank deposits. They also do not have the " comfort letters" provided to the MNC
bankers in India by their parent's abroad.
In such a situation, some failures are to be expected when we are dealing with
thousands of institutions. In the case of failure of commercial banks, particularly
those in the public sector, it is explained as "systemic" failure and the
government pumps more funds to re-capitalise these institutions Protecting the
depositor interest should go hand-in-hand with enhancing the credit delivery
mechanism to the largest sections of the economy, which are not currently bankdependent for their activities.
In a sense the NBFC sector is the best route to finance these activities in the
service sectors. This is because in their area they are market savvy and have the
ability to rate the P&P groups, monitor them and recover the money lent to them.
Already in truck financing the large domestic and foreign banks are using the
NBFCs as channel partners. Hence, the public sector banks could finance the
the NBFCs on a wholesale basis and they, in turn, could fund the non-corporate
sectors in a chain of retailing credit and recovery functions.

If the banks finance the NBFCs after rating them even at 4 -5 per cent above
Prime Lending Rate (PLR) then these institutions could fund the non-corporate
sector at perhaps 8-10 per cent over and above the PLR. This would still be
lower than the open market rates of two and half to three times the PLR at which
this sector, in many of these activities, is financed.
The financing of non-bank organisations (both corporate and unincorporated) by
the commercial banks should be treated on a par with priority sector lending.
The commercial banker could be given the powers to licence these entities and
provide credit to them to reach the larger market. It can also be specified that
only licensed non-corporate bodies will be permitted to operate in the credit
market in terms of collecting deposits and also getting loans from the banking
institutions.
This would provide opportunities to banks to enlarge their scope of operations
and also allow the un-incorporated bodies (UIBs) to carry on their business with
loans from the banking system. It will also introduce orderliness in terms of banks
rating these entities for licensing them and reviewing this process annually. The
depositors are also protected to some extent in the context of assessment by the
commercial banks for licensing them.
This concentric circle of banking will end the current inverse relationship between
the size and the cost of borrowings without much application of credit rating of
the borrower. It would also facilitate creation of proper database in these
activities for credit rating of these entities.
Non-banking financial companies represent a heterogenous group of institutions
separated by their type of activity, organisational structure and portfolio mix. Four
types of institutions, categorized in terms of their primary business activity and
under the regulatory purview of the Reserve Bank, are equipment leasing
companies, hire purchase companies, loan companies and investment
companies. The residuary non-banking companies (RNBCs) have been

classified as a separate category as their business does not conform to any of

the other defined classes of NBFC businesses. Besides, there are other NBFCs,
viz., miscellaneous nonbanking companies (Chit Fund), mutual benefit finance
companies (Nidhis and Potential Nidhis) and housing finance companies, which
are either partially regulated by the Reserve Bank or are outside the purview of
the Reserve Bank. This section broadly focuses on the policy developments and
operations of NBFCs under the regulatory purview of the Reserve Bank.
However, in view of their diverse nature, operations of NBFCs and RNBCs have
been discussed separately. Besides, operations of NBFCs not accepting public
deposits but having asset size of Rs.500 crore and above have also been
discussed separately in view of their implications for systemic risk.

Regulatory and Supervisory Initiatives

The focus of regulatory initiatives in respect of NBFCs during 2004-05 was on
deposit acceptance norms and improved disclosures.
Issuance of Guidelines on Credit Cards by NBFCs
NBFCs were allowed to enter into credit card business on their own or in
association with another NBFC or a scheduled commercial bank. The permission
to this effect was granted on a selective basis keeping in view the financial
position of the company and its record of compliance. NBFCs are not allowed to
issue any debit card as it tantamounts to opening and operating a demand
deposit account, which is the exclusive privilege of banks. Emergency cash
withdrawal facility through ATMs of associate bank may only be allowed to credit

card holders as a short-term advance with a reasonable limit and necessary builtin safeguards. NBFCs have been advised to be selective while issuing credit
cards with adequate appraisal on the standing of the applicant. It was clarified
that any NBFC, including a non-deposit taking company, intending to engage in
the activity of issue of credit card would have to obtain a Certificate of
Registration, apart from specific permission to enter into this business from the
Reserve Bank.
The NBFC would have to satisfy the requirement of a minimum net owned fund
of Rs.100 crore and such other terms and conditions as the Reserve Bank may
specify to this effect from time to time. Acceptance of Public Deposits by NBFCs
Registered in Non-public Deposit Taking Category
NBFCs which were granted Certificate of Registration (CoR) in the non-public
deposit taking category should meet the minimum capital requirement of Rs.2
crore for being eligible to apply to the Reserve Bank for accepting deposits.
Accordingly, NBFCs were advised to ensure compliance with this requirement
before applying to the Reserve Bank for approval to accept public deposits.
Preparation of Balance Sheet as on March 31 of Every Year
In terms of the extant directions, every NBFC is required to prepare its balance
sheet and profit and loss account as on March 31 every year.
However, a few companies obtained permission directly from the Registrar of
Companies (RoC) for extension of the financial year as required under the
provisions of the Companies Act, 1956. In order to ensure that there is no
eventual violation of the directions of the Reserve Bank, NBFCs were advised
that whenever an NBFC intends to extend the date of its balance sheet as per
provisions of the Companies Act, it should take prior approval of the Reserve
Bank before approaching the RoC for this purpose. It was also clarified that even
in the cases where the Reserve Bank and the RoC grant extension of time, the
company is required to furnish to the Reserve Bank a proforma balance sheet
(unaudited) as on March 31 of the year and the statutory returns due on the
above date.

Premature Withdrawal of Deposits by NBFCs,

RNBCs and MNBCs
NBFCs which have defaulted in repayment of deposits, are prohibited from
making premature repayment of any public deposits (in the case of NBFCs) or
deposits (in the case of MNBCs/RNBCs) or granting any loan against such
deposits (in the case of NBFCs/MNBCs), except in the case of death of a
depositor or for repaying tiny deposit, i.e., deposits up to Rs.10,000. The
remaining amount and the interest thereon may be paid only after maturity. In the
case of normally run companies, the premature repayment, after the lock-in
period, will be at the sole discretion of the company and cannot be claimed as a
matter of right by the depositor. However, in the event of death of the depositor,
public deposit/deposits may be repaid prematurely, even within lock-in period to
the surviving depositor or legal heir/s of the deceased depositor. The rate of
interest to be paid on premature repayment of deposits has also been
rationalised by the Reserve Bank.
Reporting System for NBFCs not Accepting/ Holding Public Deposits and Having
Asset Size of Rs.500 Crore and Above 5.46 NBFCs not accepting/holding public
deposits and having an asset size of Rs.500 crore and above were advised to
submit a quarterly return in the prescribed format beginning from the quarter
ended September 2004 within a period of 30 days of the month following the
close of the quarter. It was also advised that a provisional return for the quarter
ended March of every year may be submitted, within 30 days of the close of the
quarter and a final return duly certified by the statutory auditors should be
submitted, with a copy of the audited balance sheet, as soon as the same is
finalised but not later than September 30 of the year. Nonsubmission of return
would be viewed seriously and penal action would be taken for such
noncompliance.
With effect from September 2005, periodicity of return has been reduced to
monthly and cut off point for submission of return has been reduced to asset size

of Rs.100 crore and above. Cover for Public Deposits 5.47 In order to protect
depositors interest, all NBFCs accepting/holding public deposits were advised to
ensure that there is full cover available at all times for public deposits accepted
by them.
While calculating this cover, the value of all debentures (secured and unsecured)
and outside liabilities other than the aggregate liabilities to depositors may be
deducted from total assets. For this purpo se, they were advised that the assets
should be evaluated at their book value or realisable/market value, whichever is
lower. NBFCs are required to report to the Reserve Bank in case the asset cover
calculated, as advised, falls short of the liability on account of public deposits.
They were further directed to create a floating charge on the statutory liquid
assets invested as required under Section 45-IB of the RBI Act, 1934 in favour of
their depositors and that the charge should be duly registered in accordance with
the requirements of the Companies Act, 1956. Know Your Customer (KYC)
Guidelines Anti- Money Laundering Standards. NBFCs/RNBCs were advised in
January 2004 to follow certain customer identification procedure for opening of
accounts and monitoring transactions of a suspicious nature for the purpose of
reporting it to the appropriate authority. The know your customer (KYC)
guidelines were revisited in the context of the recommendations made by the
Financial Action Task Force (FATF) on Anti-Money Laundering (AML) standards
and on Combating Financing of Terrorism (CFT). Subsequently, the Reserve
Bank issued detailed guidelines to banks based on the recommendations of the
Financial Action Task Force and the paper issued on Customer Due Diligence
(CDD) for banks by the Basel Committee on Banking Supervision. NBFCs were
advised on February 21, 2005 to adopt the same guidelines with suitable
modifications depending on the activity undertaken by them and ensure that a
proper policy framework on KYC and AML measures is formulated and put in
place with the approval of the Board within three months. NBFCs are required to
ensure full compliance with the provisions of the guidelines before December 31,
2005. Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest Act, 2002 Certain sections of the SARFAESI Act, 2002 were
amended by passing the Enforcement of Security Interest and Recovery of Debts
Laws (Amendment) Act, 2004. The amendment to the Act was necessitated in
view of the Supreme Court judgment and suggestions received from various
sources including Indian Banks Association (IBA), NHB and the Government.
The constitutional validity of the SARFAESI Act was challenged in the Supreme
Court in the case of Mardia Chemicals Ltd. vs. ICICI Bank Ltd. And others. The
Supreme Court while upholding the Act declared sub-section (2) of Section 17 of
the Act, requiring the defaulting borrower to predeposit 75 per cent of the liability
in case the borrower wants to appeal against the order of the attachment of an
asset, as ultra vires of Article 14 of the Constitution of India.
Supervision of NBFCs 5.50 Supervisory oversight by the Reserve Bank over
NBFCs encompasses a four-pronged strategy; (a) on-site inspection based on
the CAMELS methodology; (b) off-site monitoring supported by state-of-the-art
technology; (c) market intelligence; and (d) excep tion reports of statutory
auditors. During the period April 2004 to March 2005, a total of 573 (318 deposit
taking companies and 255 nondeposit taking companies) registered NBFCs were
inspected. In addition to the inspections, the Bank also conducted 236 snap
scrutinies. Registration. By the end of March 2005, the Reserve Bank had
received 38,096 applications for grant of Certificate of Registration (CoR). Of
these, the Reserve Bank has approved 13,187 applications (net of cancellation),
including 474 applications

(net of cancellation) of companies authorised to

accept/hold public deposits. The total number of NBFCs increased to 13,261 (net
of cancellation) by end-June 2005, of which 507 were public deposit accepting
companies.

Profile of NBFCs (including RNBCs). The number of reporting NBFCs (registered

and unregistered) declined from 875 at end-March 2003 to 777 at end-March
2004 and further to 573 at end-March 2005. The decline was mainly due to the
exit of many NBFCs from deposit taking activity. The number of RNBCs, which
were five at the end-March 2003, declined to three at end- March 2004 and
remained unchanged at that level at end-March 2005. Assets and public deposits
accepted by reporting NBFCs, which declined during the year ended March
2004, increased marginally during the year ended March 2005 even as the
number of reporting NBFCs declined sharply. The net owned funds of NBFCs
increased in 2004 as well as 2005 (Table V.15). Deposits of reporting NBFCs
constituted 1.1 per cent of aggregate deposits of scheduled commercial banks at
end- March 2005 as against 1.2 per cent at end-March 2004 and 1.5 per cent at
end-March 2003. Reflecting the decline in public deposits held by NBFCs, the

share of NBFC deposits in broad liquidity (L3) has declined sharply over the
years.
Operations of NBFCs (Excluding RNBCs) 5.54 Total assets/liabilities of NBFCs
(excluding RNBCs), which had declined sharply by 13.1 per cent during 2003-04,
increased marginally during 2004-05. Borrowings represent the major source of
funds for NBFCs, followed by owned funds (capital and reserves) and public
deposits. All these sources of funds declined during 2003-04 as well as 2004-05,
except borrowings, which increased marginally during 2004-05 after a sharp
decline in 2003-04. On the asset side, loans and advances, hire purchase and
equipment leasing assets constitute the major assets of NBFCs. Reflecting the
impact of slowdown in borrowing and deposits, growth of all major assets such
as loans and advances and equipment leasing assets, except SLR investments,
declined during 2003-04. The decline in assets continued during 2004-05, except
hire purchase assets, bill business and SLR investments which increased
sharply.

5.55 Among NBFC groups, assets/liabilities of hire purchase finance companies

and equipment leasing companies, which declined during the year ended March
2004, increased marginally during the year ended March 2005. Assets/liabilities
of investment and loan companies which expanded during the year ended March
2004, declined in the following year. This broadly reflected the impact of
resources raised. Hire purchase finance companies, the largest NBFC group,
constituted 59.2 per cent of total assets/liabilities of all NBFCs at end-March

2005, followed distantly by loan companies (15.7 per cent), equipment leasing
companies (14.0 per cent) and investment companies (5.6 per cent).

Deposits Profile of Public Deposits of Different Categories of NBFCs

Public

deposits held by all NBFCs declined significantly during the year ended March
2004 (14.2 per cent) as well as March 2005 (15.6 per cent). Significantly, public
deposits by all NBFC groups declined in both the years, except loan companies,
which increased marginally during 2003-04 and other companies, which
increased during 2003-04 and 2004-05. Hire purchase companies held the
largest share of public deposits (63.5 per cent), followed remotely by equipment
leasing companies, loan companies and investment companies.
Deposit Size-wise Classification of NBFCs 5.57 The number of NBFCs and
deposits held by them in all categories of deposit size declined during the year
ended March 2004 as well as March 2005, barring NBFCs in the deposit size of
Rs.10 crore to Rs.20 crore, deposit in respect of which increased marginally
during 2004-05

RBI ROLE IN INDIA

The Reserve Bank of India is entrusted with the responsibility of regulating and
supervising the Non-Banking Financial Companies by virtue of powers vested in
Chapter III B of the Reserve Bank of India Act, 1934. The regulatory and
supervisory objective, is to:
a) ensure healthy growth of the financial companies;
b) ensure that these companies function as a part of the financial system within
the policy framework, in such a manner that their existence and functioning do
not lead to systemic aberrations; and that
c) the quality of surveillance and supervision exercised by the Bank over the
NBFCs is sustained by keeping pace with the developments that take place in
this sector of the financial system.
It has been felt necessary to explain the rationale underlying the regulatory
changes and provide clarification on certain operational matters for the benefit of
the NBFCs, members of public, rating agencies, Chartered Accountants etc. To
meet this need, the clarifications in the form of questions and answers, is being
brought out by the Reserve Bank of India (Department of Non-Banking

Supervision) with the hope that it will provide better understanding of the
regulatory framework.
Reserve Bank of India Act, 1934
Section 45-I of the RBI Act, defines financial institution as under:
"Financial Institution" means any non-banking institution which carries on as its
business or part of its business any of the following activities, namely:(a)the financing, whether by way of making loans or advances or otherwise, of
any activity other than its own;
(b)the acquisition of shares, stock, bonds, debentures or securities issued by a
government or local authority or other marketable securities of a like nature;
(c)letting or delivering of any goods to a hirer under a hire-purchase agreement
as defined in clause (c ) of section 2 of the Hire-Purchase Act, 1972;
(d)the carrying on of any class of insurance business;
(e)managing, conducting or supervising, as foreman, agent or in any other
capacity, of chits or kuries as defined in any law which is for the time being in
force in any State, or any business, which is similar thereto;
(f)collecting, for any purpose or under any scheme or arrangement by whatever
name called monies in lump sum or otherwise, by way of subscriptions or by sale
of units, or other instruments or in any other manner and awarding prizes or gifts,
whether in cash or kind, or disbursing monies in any other way, to persons from
whom monies are collected or to any other person.
But does not include any institution, which carries on as its principal business,(a)agricultural operations; or
(bb) industrial activity; or;
(b)the purchase or sale of any goods (other than securities) or the providing of
any services; or

(c)the purchase, construction or sale of immovable property, so however, that no

portion of the income of the institution is derive from the financing of purchases,
constructions or sales of immovable property by other persons;
As per Section 45-I(f) of the RBI act, "non-banking financial company" means:(i)a financial institution which is a company;
(ii)a non banking institution which is a company and which has as its principal
business the receiving of deposits, under any scheme or arrangement or in any
other manner, or lending Tiny manner;
(iii)such other non-banking institution or class of such institutions, as the bank
may, with the previous approval of the Central Government and by notification in
the Official Gazette, specify."

LITERTURE REVIEW

The Evolution of Indian financial system

The evolution of the Indian financial system from somewhat of a constricted and
an undersized one to a more open, deregulated and market oriented one and its
interface with the growth process are the major areas of analysis in this Chapter.
The process of financial development in independent India hinged effectively on
the

development

of

commercial

banking,

with

the

impetus

given

to

industrialisation based on the initiatives provided in the five year plans. Financing
of emerging trade and industrial activities during the 'fifties, and the 'sixties
reflected the dominance of banking as the critical source. The number of banks
and branches had gone up, notwithstanding the consolidation of small banks,
and the support given to co-operative credit movement1. Functionally, banks
catered to the needs of the organised industrial and trading sectors. The primary
sector consisting of 'agriculture, forestry and fishing' which formed more than 50
per cent of GDP during this period had to depend largely on own financing and
on sources outside the commercial banks. It is against this backdrop that the
process of financial development was given impetus with the adoption of the
policy of social control over banks in 1967, reinforced in 1969 by the
nationalisation of 14 major scheduled commercial banks. Since then, the banking
system has formed the core of the Indian financial system. Driven largely by the
public sector initiative and policy activism, commercial banks have a dominant
share in total financial assets and are the main source of financing for the private
corporate sector. They also channel a sizeable share of household savings to the
public sector. Besides, in recent years, they have been performing most of the
payment system functions. With increased diversification in recent years, banks
in both public and private sectors have been providing a wide range of financial
services.

In the three decades following the first wave of bank nationalisation (the second
wave consisted of six commercial banks in 1980), the number of scheduled
commercial banks has quadrupled and the number of bank branches has
increased eight-fold. Aggregate deposits of scheduled commercial banks have
increased at a compound annual average growth rate of 17.8 per cent during this
period (1969 to 1999), while bank credit expanded at a rate of 16.3 per cent per
annum. Banks' investments in government and other approved securities
recorded a growth of 18.8 per cent per annum. The increased role of bank
intermediation is also reflected in its payment system activities. The total cheque
clearances have gone up by 2175 times during this period, spurred by a
qualitative shift from a manual to an electronic cheque clearing system.
The financial system outside the banks has also exhibited considerable
dynamism. The system today is varied, with a well-diversified structure of
financial institutions, financial companies and mutual funds. Financial institutions
comprise all-India Financial Institutions (AIFIs), State-level Institutions (SFCs and
SIDCs) and other institutions (ECGC and DICGC).2 AIFIs include all-India
Development Banks (IFCI, ICICI, IDBI, SIDBI and IIBI), specialised institutions
(EXIM Bank, IVCF, ICICI Venture, TFCI and IDFC), investment institutions (UTI,
LIC and GIC and its subsidiaries) and refinance institutions (NABARD and NHB).
The setting up of some specialised financial institutions and refinance institutions
during last three decades and the onset of reforms from about the early 'nineties,
provided depth to the financial intermediation outside the banking sector. These
developments, coupled with increased financial market liberalisation, have
enhanced competition. A number of the existing financial institutions have
diversified into several new activities, such as, investment banking and
infrastructure financing, providing guarantees for domestic and offshore lending
for infrastructure projects. Apart from the financial institutions, rapid expansion of
Non-Banking Financial Companies (NBFCs) took place in the 'eighties and
provided avenues for depositors to hold assets and for borrowers to enhance the
scale of funding of their activities. Various types of NBFCs have provided varied

services that include equipment leasing, hire purchase, loans, investments,

mutual benefit and chit fund activities. More recently, NBFC activity has picked
up in the area of housing finance. Financial development is also reflected in the
growing importance of mutual funds. In the 'nineties, they have enabled sizable
mobilisation of financial surpluses of the households for investment in capital
markets. Capital markets themselves have become an important source of
financing corporate investments, especially after firms were permitted to charge
share premium in a flexible manner.
Sanctions as well as disbursements of all-financial institutions, including the
SFCs and the SIDCs has expanded at a rate of 24.1 per cent per annum and
23.8 per cent per annum, respectively, during 1970-71 to 1999-2000. In addition,
there has been a spurt in the activities of NBFCs and mutual funds over the last
two decades. Deposits of NBFCs recorded an impressive growth of about 35 per
cent per annum from the mid-'eighties to the middle of the 'nineties. In the 'sixties
and 'seventies, the Unit Trust of India (UTI) was the only mutual fund. By 19992000 as many as 34 mutual funds were operating of which 7 mutual funds were
set up by the public sector banks and financial institutions. Their total resource
mobilisation in 1999-2000 was nearly Rs. 22,000 crore, with 78 per cent of this
having been mobilised by the private sector mutual funds.
The financial development in the banking and non-bank financial sector has
supported saving and investment in the economy and contributed to growth in
real activity. By pooling risks, reaping economies of scale and scope, and by
providing maturity transformation, financial intermediation supports economic
activity of the non-financial sectors. Its influence on growth, however, needs to be
examined from different viewpoints that are of potential relevance in the Indian
context.
Banking-based Indicators of Financial Development

The banking system in India consists of commercial banks and co-operative

banks, but it is the former which is dominant in terms of deposits, advances and
investments. Commercial banks include foreign banks operating in India in
addition to Indian banks in the public sector and the private sector, including
Regional Rural Banks. Since 1969, the commercial banks, after nationalisation of
14 banks, have made rapid strides in all the spheres of banking operations, be it
the mobilisation of deposits, deployment of credit or geographical coverage, and
have accounted for most of the growth in the banking system. Illustratively, while
the number of scheduled commercial banks has gone up moderately, the number
of bank offices in India expanded nearly eight-fold from 8,262 in June 1969 to
67,339 in March 2000, as a result of which the population per bank office
improved from 64,000 to 15,000 over the same period. Both per capita deposit
and per capita credit have witnessed manifold growth. While per capita deposit
expanded from a mere Rs.88 in 1969 to Rs.8,247 in 1999-2000, per capita credit,
over the same period, expanded from Rs.68 to Rs.4,705; the increase in both
these indicators was more pronounced since the latter half of the 'eighties.
Development Financial Institutions
Development financial institutions (DFIs) were established in India to resolve a
typical market inadequacy problem, viz., the shortage of long-term resources and
the perceived risk aversion of savers and creditors to part with funds for long
gestation projects. In view of the inadequate provision of long-term finance
through banks and/or markets, many of these institutions were set up by the
Government. The endorsement of planned industrialisation at the national level
provided the critical inducement for establishment of DFIs at both the all-India
and state levels. Besides DFIs at the national and state levels, there are also
investment institutions and specialised financial institutions. These institutions
provided financial assistance in the form of term loans, underwriting/direct
subscription to shares/debentures and guarantees. There has been a secular
increase in the disbursements of financial institutions. As a percentage of GDP,
disbursements by financial institutions rose from as low as 0.5 per cent in the

first-half of the 'seventies to 1.4 per cent in the first-half of the 'eighties. The ratio
increased further to 2.9 per cent in the first-half of the 'nineties and stood at 3.3
per cent in the second-half of the 'nineties.
Mutual Funds
Mutual funds provide households an option for portfolio diversification and
relative risk-aversion through collection of funds from the households and make
investments in the stock and debt markets. Resources mobilised by mutual funds
(UTI was the only mutual fund until 1987-88) grew at a steady rate until 1992-93;
since then they showed some variations. Resources mobilised by mutual funds
which was just 0.04 per cent of GDP (at current market prices) during the period
1970-71 to 1974-75 increased to 1.59 per cent during 1990-91 to 1992-93. Total
resources mobilised as proportion of GDP declined to 1.12 per cent by 1994-95
but nevertheless remained positive. During the period from 1995-96 to 1996-97,
there was a net outflow of funds from mutual funds, especially UTI, as a result of
which the ratio turned negative. From 1997-98 onwards, the ratio again turned
positive and stood at 1.13 per cent during 1999-2000.
Non-Banking Financial Companies
Non-banking financial companies (NBFCs) have emerged as an important part of
the Indian financial system. These companies have grown rapidly in the secondhalf of the 'eighties and the first-half of the 'nineties. The regulated deposits of
NBFCs increased from an average of 0.12 per cent of GDP during the period
from 1970-71 to 1974-75 to 0.30 per cent during the period from 1985-86 to
1989-90. They witnessed a steady growth thereafter to 0.45 per cent of GDP
during 1990-91 to 1992-93. During the period 1993-94 to 1996-97, they
experienced a sharp rise from 2.02 per cent of GDP to 3.90 per cent. In recent
years, however, deposits with NBFCs have witnessed a decline.
The trend in the growth in total deposits with NBFCs as a percentage of
aggregate deposits exhibited more or less similar trend, rising from a low of 0.71

per cent of bank deposits during the period from 1970-75 to 1.18 per cent during
1990-93. During the period from 1993-94 to 1996-97, deposits with NBFCs
experienced a sharper rise from 5.02 per cent of commercial bank deposits to
9.47 per cent. Recent years have, however, witnessed relatively lower ratios.
This could be attributed partly to the setting up of a strong regulatory and
supervisory framework and partly to changes in the definition of deposits

OBJECTIVE AND RESEARCH METHODOLOGY

OBJECTIVE

The main aim of making this project is to analyze the structure of Indian
Financial System & its constituents.

To identify the services which offered in the non-banking industry & the
effective services with reference to NBFIs.

To measure the customer satisfaction level in the non-banking industry on

the predetermined attributes. Following attributes will be considered for my
project work- punctuality, safety, supportive staff, frequency, promptness of
services etc.

To focus on the non-banking financial institution like LIC (Life Insurance

Corporation), GIC (General insurance Corporation) etc.

To study the special role of non-banking financial institutions & how they
operate in India & their rate of interest.

To make a comparison between non-banking financial institution &

banking industry.

RESEARCH METHODOLOGY
Every project should incorporate and entail all the aspects about the company.
The total information can be captured from primary as well as secondary sources
of data. Keeping in mind the above said assumption as well as the better
comprehension of the topics it becomes mandatory to have an access to both the
sources. Thus I have adopted a comprehensive research methodology which
depicts a judicious blend of both primary as well as secondary sources.
SECONDAY RESEARCH
We would be using Internet, Journals, Articles and new paper as our source for
Secondary data collection. We would be starting with secondary research to
understand the topic and the trends that s followed in the industry.

PRIMARY RESEARCH
In Primary Research we would be using Questionnaire & Open interview as our
tool for data collection. We would be using the structured questionnaire and a
open interview forum as our tool. We structured 10 questions to be asked by
employees of different Banking companies. The total respondents that we
targeted was 50 and the scope of study was limited to Gurgaon and Noida. The
sample size as mention was 100 employees of Banks and this would include all
levels and not specific to any one department. As the questions are a bit
technical so asking the general public would not gain us to perfect response A
sample of the Questionnaire is attached below.

LIMITATION
As the Topic of study is a bit out of rage of general public, so we had to only
target the Bank employees to answer the questionnaire. But the response from
the employees were not very great as the level required to answer some
questions needed an informative answer. So we had to depend on the responses
that we got from the limited respondents.

FINDINGS & ANALYSIS

PRIMARY SOURCE
Following are the Response that we got from the respondents, collated in one.
- How would you distinguish Non Banking Financial institution & Banks
NBFCs are doing functions akin to that of banks, however there are a few
differences:
Response:
(i) a NBFC cannot accept demand deposits;
(ii) it is not a part of the payment and settlement system and as such cannot
issue cheques to its customers; and
(iii) deposit insurance facility of DICGC is not available for NBFC depositors
unlike in case of banks.

- Is it necessary that every NBFC should be registered with RBI?

Response:
29% of respondents said that yes it has to be registered with RBI and 71% of
respondents said that they are not aware about it.

The reason for getting registered is mentioned as : In terms of Section 45-IA of

the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI
to commence or carry on any business of non-banking financial institution as
defined in clause (a) of Section 45 I of the RBI Act, 1934. However, to obviate
dual regulation, certain category of NBFCs which are regulated by other
regulators are exempted from the requirement of registration with RBI viz.
Venture Capital Fund/Merchant Banking companies/Stock broking companies
registered with SEBI, Insurance Company holding a valid Certificate of
Registration issued by IRDA, Nidhi companies as notified under Section 620A of
the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of

the Chit Funds Act, 1982 or Housing Finance Companies regulated by National
Housing Bank.
- Is there any ceiling on acceptance of Public Deposits? What is the rate of
interest and period of deposit which NBFCs can accept?
Response:
Yes, there is ceiling on acceptance of Public Deposits. A NBFC maintaining
required NOF/CRAR and complying with the prudential norms can accept public
deposits as follows:

Category of NBFC

Ceiling on public deposits

AFCs maintaining CRAR of 15%

1.5 times of NOF or Rs 10 crore

without credit rating

whichever is less

AFCs with CRAR of 12% and having 4 times of NOF

minimum investment grade credit rating
LC/IC
having

with

CRAR

minimum

of

15%

and

1.5 times of NOF

investment

grade credit rating

Presently, the maximum rate of interest a NBFC can offer is 11%. The interest
may be paid or compounded at rests not shorter than monthly rests.
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.
The RNBCs have different norms for acceptance of deposits which are explained
elsewhere in this booklet.

- What are the salient features of NBFCs regulations which the depositor
may note at the times of investment?
Response:
Some of the important regulations relating to acceptance of deposits by NBFCs
are as under:
i) 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.
ii) NBFCs cannot offer interest rates higher than the ceiling rate prescribed by
RBI from time to time. The present ceiling is 11 per cent per annum. The interest
may be paid or compounded at rests not shorter than monthly rests.
iii) NBFCs cannot offer gifts/incentives or any other additional benefit to the
depositors.
iv) NBFCs (except certain AFCs) should have minimum investment grade credit
rating.
v) The deposits with NBFCs are not insured.
vi) The repayment of deposits by NBFCs is not guaranteed by RBI.
vii) There are certain mandatory disclosures about the company in the
Application Form issued by the company soliciting deposits.

- What is deposit and public deposit

Response:
The term deposit is defined under Section 45 I(bb) of the RBI Act, 1934.
Deposit includes and shall be deemed always to have included any receipt of
money by way of deposit or loan or in any other form but does not include:

amount raised by way of share capital, or contributed as capital by

partners of a firm;

amount received from scheduled bank, co-operative bank, a banking

company, State Financial Corporation, IDBI or any other institution
specified by RBI;

amount received in ordinary course of business by way of security deposit,

dealership deposit, earnest money, advance against orders for goods,
properties or services;

amount received by a registered money lender other than a body

corporate;

amount received by way of subscriptions in respect of a Chit.

Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of

Public Deposits ( Reserve Bank) Directions, 1998 defines a public deposit as a
deposit as defined under Section 45 I(bb) of the RBI Act, 1934 and further
excludes the following:

amount received from the Central/State Government or any other source

where repayment is guaranteed by Central/State Government or any
amount received from local authority or foreign government or any foreign
citizen/authority/person;

any amount received from financial institutions;

any amount received from other company as inter-corporate deposit;

amount received by way of subscriptions to shares, stock, bonds or

debentures pending allotment or by way of calls in advance if such
amount is not repayable to the members under the articles of association
of the company;

amount received from shareholders by private company;

amount received from directors or relative of the director of a NBFC;

amount raised by issue of bonds or debentures secured by mortgage of

any immovable property or other asset of the company subject to
conditions;

the amount brought in by the promoters by way of unsecured loan;

amount received from a mutual fund;

any amount received as hybrid debt or subordinated debt;

any amount received by issuance of Commercial Paper.

Thus, the directions have sought to exclude from the definition of public deposit
amount raised from certain set of informed lenders who can make independent
decision.

- Whether NBFCs can accept deposits from NRIs?

Response :
72% of respondents said yes that now NRI can deposit and 28% said that
they are not sure.

Effective from April 24, 2004, 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 (B) account. However, the existing
NRI deposits can be renewed.

- Is nomination facility available to the Depositors of NBFCs?

Response:
Yes, nomination facility is available to the depositors of NBFCs. The Rules for
nomination facility are provided for in section 45QB of the Reserve Bank of India
Act, 1934. Non-Banking Financial Companies have been advised to adopt the
Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the
Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted
to nominate, one person to whom, the NBFC can return the deposit in the event
of the death of the depositor/s. NBFCs are advised to accept nominations made
by the depositors in the form similar to one specified under the said rules, viz
Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for
cancellation of nomination and variation of nomination respectively.

- What are the responsibilities of the NBFCs accepting/holding public

deposits with regard to submission of Returns and other information to
RBI?
Response:
The NBFCs accepting public deposits should furnish to RBI
i. 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;
ii. Statutory Annual Return on deposits - NBS 1;
iii. Certificate from the Auditors that the company is in a position to repay the
deposits as and when the claims arise;
iv. Quarterly Return on liquid assets;
v. Half-yearly Return on prudential norms;
vii. Half-yearly ALM 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 ;
viii. Monthly return on exposure to capital market by companies having public
deposits of Rs. 50 crore and above; and
ix. A copy of the Credit Rating obtained once a year along with one of the Halfyearly Returns on prudential norms as at (v) above.

- What are the documents or the compliance required to be submitted to

the Reserve Bank of India by the NBFCs not accepting/holding public
deposits?
Response:
The NBFCs having assets size of Rs. 100 crore and above but not accepting
public deposits are required to submit a Monthly Return on important financial
parameters of the company. All companies not accepting public deposits have to
pass a board resolution to the effect that they have neither accepted public
deposit nor would accept any public deposit during the year.
However, all the NBFCs (other than those exempted) are required to be
registered with RBI and also make sure that they continue to be eligible to remain
Registered. Further, all NBFCs (including non-deposit taking) 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 under Section 45-IA
of the RBI Act, 1934.
RBI has powers to cause Inspection of the books of any company and call for
any other information about its business activities. For this purpose, the NBFC is
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. With effect from April 1, 2007 non-deposit taking NBFCs with
assets size of Rs 100 crore and above have been advised to maintain minimum
CRAR of 10% and shall also be subject to single/group exposure norms.

SECONDARY SOURCE
A robust banking and financial sector is critical for activating the economy and
facilitating higher economic growth. Financial intermediaries like NBFCs have a
definite and very important role in the financial sector, particularly in a developing
economy like ours. They are a vital link in the system. After the proliferation
phase of 1980s and early 90s, the NBFCs witnessed consolidation and now the
number of NBFCs eligible to accept deposits is around 600, down from 40000 in
early 1990s. The number of asset financing
NBFCs would be even lower, around 350, the rest are investment and loan
companies. Almost 90% of the asset financing NBFCs are engaged in financing
transportation equipments and the balance are in financing equipments for
infrastructure projects. Therefore, the role of non-banking sector in both
manufacturing and services sector is significant and they play the role of an
intermediary by facilitating the flow of credit to end consumers particularly in
transportation, SMEs and other unorganized sectors. NBFCs
due to their inherent strengths in the areas of fast and easy access to market
information for credit appraisal, a well-trained collection machinery, close
monitoring of individual borrowers & personalized attention to each client as well
as minimum overhead costs, are in a better position to cater to these segments.
Now, unlike in the past, NBFCs are very well regulated and supervised. Just like
banks they are required to be registered with RBI, follow stringent prudential
norms prescribed by RBI in the matters of capital adequacy, credit/investment
norms, asset-liability management, income recognition, accounting standards,
asset classification, provisioning for NPA and several disclosure requirements.
Besides this, RBI also supervises the functioning of NBFCs by conducting annual
on-site audits through its officials. Such a rigorous regulatory framework ensures
that NBFCs function properly and follow all the guidelines of RBI. Thus in all
respect the monitoring of NBFCs
is similar to or in some case more stringent than banks. The role of NBFCs in
creation of productive national assets can hardly be undermined. This is more
than evident from the fact that most of the developed economies in the world

have relied heavily on lease finance route in their developmental process, e.g.,
lease penetration for asset creation in the US is as high as 30% as against 3-4%
in India. A conducive and enabling environment has been created for the NBFC
industry globally, which has helped it grow and become an essential part of the
financial sector for accelerated economic growth of the countries. This is not the
case in our country. It is, therefore, obvious that the development process of the
Indian economy shall have to include NBFCs as one of its major constituents
with a very significant role to play. NBFCs, as an entity, play a very useful role in
channelising funds towards acquisition of commercial vehicles and consequently,
aid in the development of the road transport industry. Needless to mention, the
road transport sector accounts for nearly 70% of goods movement and 80% of
passenger movement across the length and breadth of the country and the role
of NBFCs in the growth and development of this sector has been historically
acknowledged by several committees set up by the Government and RBI, over
the years. In fact, RBIs latest report titled Report on trends on progress of
banking in India 2002-2003" observes: Notwithstanding their diversity, NBFCs
are characterized by their ability to provide niche financial services in the Indian
economy. Because of their relative organisational flexibility leading to a better
response mechanism, they are often able to provide tailor-made services
relatively faster than banks and financial institutions. This enables them to build
up a clientele that ranges from small borrowers to established corporates. While
NBFCs have often been leaders in financial innovations, which are capable of
enhancing the functional efficiency of the financial system, instances of
unsustainability, often on account of high rates of interest on their deposits and
periodic bankruptcies, underscore the need for reinforcing their financial viability.
The report further adds, The regulatory challenge is, thus, to design a
supervisory framework that is able to ensure financial stability without dampening
the very
spirit of manoeuvrability and innovativeness that sustains the sector.
TAXATION ISSUES: SEC.36 (1) (viia) / 43D OF THE IT ACT:

We would like to state that, like banks, NBFCs play a crucial and prominent role
in the rural and social sectors of the economy by providing finance for the
acquisition of trucks, buses and tractors, which operate mainly in rural and semiurban India. In fact, our exposure to the rural / social sectors is direct and
pronounced, since financing for acquisition of vehicles provides a spin-off benefit
by creating jobs and opportunities in the rural parts of our country. It is pertinent
to note that a significant part of the priority sector lending done by banks is to the
road transport sector. In fact, banks lending to NBFCs, for onward lending to the
road transport sector, is also considered as part of their priority sector lending by
RBI. On the other hand, the major portion of lending by NBFCs goes directly to
the road transport sector. Subjected, as we are, to all the prudential norms on
provisioning and income recognition, it is only fair and equitable that the benefits
already available to Banks & FIs under the captioned sections of the IT Act be
extended to NBFCs also.
EXTENSION OF INCOME TAX BENEFITS UNDER SEC.10(23G)
& 36(1)(viii) TO NBFCs:
The benefits available under the existing provisions of sec. 10(23G) and 36(1)
(viii) of Income Tax Act, 1961applicable to infrastructure funding by various
institutions are not available to NBFCs. As of now, an Infrastructure Capital
Company (ICC) or Infrastructure Capital Fund (ICF) as defined under section
10(23G) is entitled to tax exemption in respect of all its earnings arising out of its
investments (equity or debt) made in infrastructure projects listed under section
80-IA. Similarly under section 36(1)(viii), notified Companies, who are engaged,
among others, in providing long term finance for construction or for purchase of
houses for residential use can claim deduction up to 40% of their profits for
creating a special reserve.
However, an NBFC is not entitled to the same tax reliefs insofaras its
investments in the specified infrastructure projects through lease, hire purchase
or loan transactions are concerned. It is imperative to extend these benefits to
NBFCs also as long as the objective of channelling investments in certain
designated infrastructure projects are met. Any investment in infrastructure sector

should be welcome to meet the countrys requirements since it is key to the

development of the entire economy. If an appropriate environment for
development of infrastructure is to be created, one must provide incentives for all
kinds of investments and participants in the listed infrastructure projects
irrespective of their types or categories.
We, therefore, strongly urge that the benefits provided under section 10(23G)
and sec.36 (1)(viii) of Indian Income Tax Act, 1961 be extended to NBFCs also.
EXEMPTION TO NBFCs FROM TDS REQUIREMENTS U/S 194A(3)(iii) OF THE
I.T.ACT:
As per Section 194A of the Income Tax Act 1961, tax has to be deducted out of
the interest payments made by specified borrowers to the lender at the rates in
force. The rates vary depending on the constitution of the payee (lender). For the
category of domestic companies in which NBFCs fall, the rate of TDS is presently
20.91% including surcharge of 2% and the newly introduced educational cess of
2%. Banking companies, Cooperative societies engaged in banking business,
public financial institutions, LIC, UTI, Insurance companies and some other
notified institutions are exempted from the purview of this section, implying that if
the payment of interest is made to these entities, the borrower is not required to
deduct TDS out of the interest payment. This is not available to NBFCs even
though they are in similar lending activities. Consequently, their margins and
cash-flow are severely affected as further explained here. In a typical case of
lending by an NBFC charging interest, say, @ 16% p.a. and borrowing, say, @
13%, it gives a gross spread of 3% p.a. The interest income of the NBFC is
subject to TDS of 20.91%, implying 3.35% out of 16% will go for TDS, which is
more than the total margin available. This hardship puts NBFCs in a
disadvantageous position compared to the other similar players.
It is thus essential that the TDS anomaly explained above be rectified
immediately, in order to reduce the cost of intermediaries and ensure flow of
capital to infrastructure and road transport sectors of the economy, which is the
direct focus area of Asset Financing NBFCs. This will also ensure uniformity in
taxation of similar businesses.

It is, therefore, submitted that exemption should be granted from TDS on interest
payment to NBFCs u/s 194A(3)(iii) of the IT Act. To prevent misuse of the
exemption, CBDT may stipulate that only NBFCs registered with RBI shall be
entitled to the exemption. This will provide a level playing field to the NBFCs.
REFINANCING:
NBFCs have a proven track record in financing the acquisition of vehicles in rural
India for over six decades. Any finance for a second hand or used vehicle is, in
reality, working capital finance and the borrower who avails such finance often
deploys it towards improving business in the rural sector. The security is the
vehicle in question and this is the comfort factor for NBFCs to lend to the
prospective borrower who is very often an agriculturist. It is relevant to note that
trucks are often referred to as Mobile factories, providing direct employment to
at least 20 persons per vehicle, besides many more on an indirect basis. NBFCs
are also involved in financing earthmoving equipment, which aid the development
of infrastructure and in the process, provide employment to thousands of persons
in the rural sector. The reach and location of these entities in remote corners of
the country has enabled them to stay in close touch with the customers and they
have the necessary knowledge and skills in credit appraisal and understanding
the needs of the borrowers. NBFCs have become an accepted and integral part
of the Indian financial system in view of their complementary as well as
competitive role." There is today a crying need to provide adequate funding
support to these entities, similar to that being provided by the National Housing
Bank to HFCs. It is suggested that a Transportation Financing Fund be created
by SIDBI to refinance NBFCs engaged in financing the road transport sector.
RECOVERY MECHANISMS:
1. SARFAESI ACT:
Banks and Financial institutions have been notified under the Act, giving them the
ability to move against defaulting borrowers and secure their assets.
Subsequently, specified housing finance companies, (HFCs), have also been
notified under the act. NBFCs are the only segment of the financial sector that
have not been notified under the Act. It is submitted that in order that the

interests of investors be protected, NBFCs may also be brought within the

purview of the SARFAESI Act. As per the Act, RBI can do this by way of a
notification.
2. DEBT RECOVERY TRIBUNALS (DRTs) :
We request you to grant access to NBFCs to DRTs. We also request you to
increase the number of DRTs if the existing set-up is found inadequate. This
would fulfil a long felt need of the NBFCs and lead to speedier realisation of their
dues.
What We Demand:
To sum up, we wish to reiterate the representations as under:
1. Taxation Issues:
a. Deductibility of Provisioning norms as per the provisions of Sec.36 (1)
(Viia)/43D of the IT Act
b. Extension of Income Tax Benefits for financing of infrastructure projects under
Sec.10(23G) & 36(1)(viii) to NBFCs
c. Exemption to NBFCs from TDS Requirements U/S 194A(3)(iii) of the I.T.Act
2. Refinancing:
Separate Funding Institution/Fund.
3. Recovery Mechanisms:
a. Extension of provisions of SARFAESI Act to Registered NBFCs.
b. Access to Debt Recovery Tribunals (DRTs)
THE CHANGING FACE OF BANKING
Even as banks move closer to international standards, they cannot lose touch
with the realities of the Indian economy.
THE Indian financial sector is undergoing rapid change. Structural reforms aimed
at improving the productivity and efficiency of the economy are apace. The $28billion sector, growing at roughly 15 per cent, has displayed remarkable stability
over the years even when other markets in the Asian region were facing a crisis.

The Indian financial sector has kept pace with the growing needs of its
borrowers.
Changing environment
The most important factor shaping today's world is globalisation. Companies are
constantly in search of low-cost markets. Technology is driving growth in
production and productivity and competition is stiff. Secondly, rapid development
in communication technology has lead to greater integration of global financial
markets, in turn boosting private capital flows and foreign direct investment.
A third factor is the increasing share of emerging market economies in world
trade. Another fallout of globalisation is the increase in volatility and vulnerability
of markets. This calls for the adoption of international standards and global
benchmarks.
Aligning with global standards
To strengthen India's banking system in an increasingly competitive environment
and guard against financial fragility, financial sector reforms were initiated as part
of the economic reforms launched in the country since 1991-92. Significant
progress has been made in the past few years to bring the Indian Banking
system closer to international standards.
India has adopted international prudential norms and practices with regard to
capital adequacy, income recognition, provisioning requirement and supervision
and these norms have been progressively tightened over the years. There has
been a steady decline in the level of resource pre-emption from the banking
system in the form of CRR (cash reserve ratio) and SLR (statutory liquidity ratio).
Interest rates in various segments of financial markets have been deregulated in
a phased manner.

The mark-to-market practice for valuation of government securities has been

gradually enhanced and further refinement, in line with international best
practices, carried out in valuation and classification of investment by banks.
Risk management in banks has been strengthened and measures put in place to
mitigate credit and market risks and efforts are on to measure and control
operational risk. Banks have been given greater freedom in investing as also
raising funds abroad and managing their external liability, subject to prudential
guidelines.
In the area of supervision, the Basel core principles for effective banking
supervision are being followed. Along with off-site surveillance there is periodic
on-site monitoring of the risk profile of banks and their compliance with prudential
guidelines and a "CAMELS"-based rating system is being followed.
The Reserve Bank of India's regulatory and supervisory responsibility has been
widened to include banking institutions and non-banking financial companies.
The end result, is that the Indian banking sector has been considerably
strengthened; there is greater transparency and closer convergence of Indian
financial system with practices prevailing in international financial markets.
There is special focus on corporate governance and the setting up of specialised
board-level

panels

such

as

the

executive,

risk

management,

audit,

compensation, asset-liability management committees, and so on.

The RBI's Standing Committee on International Financial Standards and Codes
under the Chairmanship of Dr Y. V. Reddy has identified global standards and
codes as part of the efforts to create a sound financial architecture aligned with
global practices.
Moving forward
But there are some areas that need greater attention.

 Need to check NPAs: The biggest challenge is the problem of NPAs (nonperforming assets). Around 12 per cent of bank credit is locked in NPAs, which
means that banks do not earn any interest on NPA accounts. This is a drain on
the financial health of banks. If banks have to cut their costs and improve
performance, they must reduce their NPAs.
The Government has re-promulgated the ordinance to help banks expedite
recovery. This calls for strengthening credit appraisal and risk management and
developing review and control systems in tune with the changing requirements.

Strengthening internal controls: While the information technology

explosion has been beneficial, it has also brought with it some unsavoury sideeffects.The increase in frauds and scams in the financial sector is a cause for
concern and calls for the strengthening of internal controls of banks and financial
institutions.
Focus on Indian economy: Even as banks move closer to international
standards, they cannot lose touch with the realities of the Indian economy. In this
context, agriculture, small industries/businesses and the services sectors, must
be given special consideration and credit flow to the rural sector increased. In an
age where the world has become smaller and money moves as quickly as
information, achieving global benchmarks is important for global players.
But underlying this is the need to have sound fundamentals. There is no doubt
that only banks and financial institutions that are focussed on efficiency,
productivity and profitability have a chance to survive in a highly competitive
environment and therefore need to equip themselves thoroughly to face the
future competition.
NBFC & RBI IN ECONOMY
IT is now the turn of non-banking financial companies (NBFCs) to knock at the
doors of officialdom for greater empowerment.

After co-operative banks got themselves listed under the Securitisation Act, the
NBFC sector has recently moved the Ministry of Finance seeking powers under
the legislation to enable them to wield the stick against defaulters.
The Securitisation Act provides enormous powers to the lenders to recover nonperforming assets (NPAs) from chronic defaulters allowing them to seize and
auction the assets of borrowers unwilling to come for settlement or to change the
management of the defaulting companies.
"The NBFC sector has approached us through some of their associations
requesting that they be also given the powers under the Act. We are examining
their demand," a senior Finance Ministry official said. However, is seems unlikely
that the Act would be extended to NBFCs in a hurry.
"The law is too new. We will have to see how it progresses over a period of time
before we broaden the entities that can avail of the powers under it," officials
said.
The burden of NPAs of the NBFCs is much smaller compared to the banking
sector. While on last count, the banking sector was carrying a bad debt burden of
around Rs 60,000 crore, the aggregate NPAs of the NBFCs up to March 31,
2002, (which is the latest figure available with the Reserve Bank of India) were
merely Rs 3,294.87 crore.
The Securitisation Act provides that if the Government wishes, it could bring in
other entity under the Act by issuing a notification for the purpose. The Act, which
allows all major lenders, including commercial banks, financial institutions and
co-operative banks, to exercise powers under it, came into effect towards the fag
end of 2002 after getting the Presidential assent. Prior to that, action has already
started under the proposed law by giving effect to it by promulgating an
Ordinance in mid-2002.

On its part, the banking sector has been going strong in its recovery efforts under
the Securitisation Act with industry figures up to end December 2002 available
with the Government indicating that public sector banks and financial institutions
had, till then, issued nearly 17,000 notices to defaulters and had been able to
recovery nearly Rs 80 crore through negotiated settlement arrived at by the
borrowers under the threat of action under the new law.
Though lenders have initiated much wider action during the past few months,
including attachment of properties of several defaulters, the industry-wide figures
till date were not available. The lenders have, however, been unable to dispose
of the assets under the law in the wake of pending litigation that blocks such
action.

CONCLUSION
UNITED TRUST OF INDIA
The Unit Trust of India (UTI) was established in 1964 with three main
objectives namely (i) to contribute to Indias industrial development by
transforming

household savings into corporate investment, (ii) to enable

common investors to participate in the prosperity of the capital market through

portfolio management aimed at reasonable return, liquidity and safety and (iii) to
facilitate orderly development of the capital market. UTI offers a variety of saving
and investment instruments in the form of units, which are sold primarily to the
household savers, assuring them of safety, liquidity, regular return and capital
appreciation. During 2003-04, UTI has sold its units with cash value of
Rs.5,545.24 lakh to 27,500 applicants under its different schemes within the
State in comparison to sale units to 28,316 applicants with cash value of
Rs.4501.87 lakh in the previous year.
LIFE INSURANCE CORPORATION OF INDIA (LIC)
Life Insurance Corporation of India provides life insurance cover under a number
of schemes. The Corporation deploys its funds keeping in view the best interests
of policyholders and the community. It invests its funds in Government and other
approved securities and extends development loan assistance in socially
oriented sectors like power, drinking water supply, housing and sewerage, road
transport and cooperative industrial units. It also provides term loans to industrial
units and gives share/debenture and other resource support to term lending
institutions.
LIC business in the State went up to 8,78,660 policies with assured
sum of Rs.5,026.32 crore during 2003-04 as against 8,58,868 policies and
assured sum of Rs.4,724.63 crore in the preceding year. It has invested
Rs.1,726.60 crore in Orissa as on 31.03.2003 in Government securities and
other developmental activities of which 87% is in Government securities, 8.15%
in shares/debentures & loans to companies and 3.55% for other social sector
investments. Table below presents sector wise investment of LIC.

Sector-wise Investment of LIC in Orissa

DEVELOPMENT FINANCIAL INSTITUTION INDUSTRIAL DEVELOPMENT

BANK OF INDIA (IDBI)
The Industrial Development Bank of India is an apex financial institution in the
field of industrial financing. It extends financial support both directly and indirectly
for the promotion and development of medium and large-scale industries in the
country. IDBI has diversified its activities in different areas of credit, merchant
banking, stock exchange, capital market, corporate services and research. The
promotional activities of IDBI include setting up of Technological Consultancy
Organizations, sponsoring of Quality Testing Centers, Science and Technology
Parks, Industrial Potential Survey, Entrepreneurship Development Programs, and
training program for the employees of other development banks. During 2003-04,
IDBI has disbursed Rs.108.06 crore to 3 companies in the State in comparison to
disbursements of Rs.71.88 crore to 7 companies in the previous year.

ROLE OF RBI

Regulated as the non-bank entities are by different agents, an integrated

financial market is conspicuous by its absence. It is time for a unified regulatory
agency, which alone can leverage the sector's strengths to ensure faster
economic growth.
Recently, the Reserve Bank of India re-grouped the asset-financing non-bank
financing companies (NBFCs) engaged in financing real and physical assets
supporting economic activity such as automobiles and general purpose
industrial machinery as asset financing companies (AFCs). The remaining
companies will continue to be called loan and investment companies. In the
proposed structure, the following categories will emerge asset financing
companies, investment companies and loan companies.
This highlights the need for a comprehensive approach towards the non-banking
sector instead of looking at issues piece-meal. The non-banking sector consists
of an assorted group of entities, regulated by different agencies with the stress
more on regulation than on the development of an integrated financial market.
To quote the RBI's (Trend and Progress of Banking in India; November 14,
2006): "Though heterogeneous, NBFCs could be broadly classified into four
categories equipment leasing, hire purchase, loan companies and investment
companies. A separate category of NBFCs, called residuary non-banking
companies (RNBCs), also exists, as they could not be categorized slotted into
any one of the other four categories. Besides, there are miscellaneous nonbanking companies (chit funds), mutual benefit financial companies (nidhis and
un-notified nidhis) and housing finance companies.
"It is noteworthy that nidhi companies are not regulated by the RBI as they come
under the regulatory purview of the Ministry of Company Affairs, while the chit
fund companies, although governed by the Miscellaneous Non-Banking
Companies (MNBCs) (Reserve Bank of India) Directions, 1977, issued by the
Reserve Bank with regard to acceptance of deposits, are regulated by the

Registrar of Chits of the respective State Governments. Furthermore, MNBCs,

not accepting public deposits have been exempted from submitting returns to the
RBI since December 27, 2005."
This indicates that heterogeneous entities are put together and regulated by
different agencies, with serious implications for the unification of the market
structure.
Heterogeneous entities
There are, for instance, the unincorporated bodies, mainly money-lenders, which
are regulated by State governments, including the rates and other covenants.
The chit funds also come under the Registrar of Chits of the State governments,
while the nidhis are overseen by the Department of Company Affairs.
Many committees and groups have been constituted to develop the non-banking
sector so as to create an integrated financial market. Some of these panels are
the Bhabatosh Datta Study Group; the James Raj Study Group, the Chakravarty
Committee; the Vaghul Committee; the Narasimham Committee; the Shah
Committee; the Khanna Committee; and the Vasudev Committee.
But, unfortunately, the focus seems to be on regulation rather than development.
Particularly after the bad experience with some NBFCs in the late 1990s, the
focus has significantly shifted to the liability side of the entities rather than the
asset side.
The fact that the non-banking sector plays a crucial role in financing activities that
are the engines of economic growth, such as non-railway transport (trucking);
hotels and restaurants, wholesale trade and retail trade and other services, is not
to be ignored or glossed over.
Vital role in economy

There is a need to recognise that these financial entities from the smallest
money-lender to large corporates play a vital role in the economy. The focus
must be on the development of the sector and, in the process, strengthen credit
availability for the non-corporate sector.
According to RBI data, the NBFCs have total assets of nearly Rs 60,000 crore as
of 2006. This is without considering the unincorporated bodies, which are large in
number and also play a major role in the credit market.
Other than the NBFCs on which data are provided by the RBI, there is a huge
informal sector, of moneylenders, etc., which provides a substantial portion of the
credit requirements of the economy. Table 1 shows the share of the noninstitutional sector in the credit needs of the economy.

From Table 2, it is clear that 43 per cent of the debt of rural households was from
moneylenders (25 per cent in the case of urban households) during 2002.
Hence, we need to recognize the importance of the entire spectrum of the nonbank sector, rather than see it in a segmented fashion.
The focus should be on development and not just on regulations. It is time the
Government and the RBI think of constituting a Non-Bank Developmental and
Regulatory Agency (NBDRA).

Of course, regulation should come after development. The said authority should
also have it under its ambit the unincorporated bodies now regulated by State
governments.
The authority can be under the Finance Ministry or under the RBI as long as the
learning curve is being traversed.
The said authority should facilitate:
Enhancing the credit delivery mechanism for "unorganised" sectors;
Introduction of rating processes at retail level;
Creating a level playing field when global players enter retail;
Reversing the inverse relationship between the size of borrowing and the cost of
borrowing;
Strengthen the professionalism of the non-bank sector through education and
training
Integrating the financial markets.
It is evident that the architecture of the Indian financial system must be recast if it
has to ensure growth of the economy along with adequate availability of credit to
the fastest growing sectors of the economy.
The aggregate monetary policy of the central banker can be achieved if, and only
if, the role of non-banking financial institutions, including the UIBs, are
recognised encouraged and integrated into our financial system. And, for that, we
need the kind of authority mentioned above.

RECOMMENDATION
There are efforts by governments both at the Centre and in the States to allow
global companies into such activities as retail trade, transportation and
construction and restaurants. If the competition from the international giants has
to be effectively met, then cost effective and efficient credit delivery mechanism is
important for the local institutions.
Globalising the financial sector without domestic integration of the financial
markets may lead to a situation of cherry picking by the global players and/or
linkages created only at the "creamy layer" level without adequate strengthening
of the base. The paradigm of taking the UIBs as channel partners by the
commercial banks on a large scale would facilitate the players in these fastest
growing activities to compete effectively with global players in the emerging
scenario.
Suggested are certain steps that will facilitate
Reduction in interest cost and hence benefits the ultimate consumer;
Enhancing the credit delivery mechanisms;
Introduction of rating processes at retail level;
Creating level playing field when global players enter retail;
Reversing the inverse relationship between the size of borrowing and the cost
of borrowing;
Strengthening the professionalism of the NBFC sector through education and
training, and
Integrating the financial markets.
It is required for us to recast the architecture of the Indian financial system if it
has to ensure growth of the economy along with adequate availability of credit to
the fastest growing sectors of the economy. The aggregate monetary policy of
the RBI can be achieved if and only if the role of NBFCs, including the UIBs, are
recognised, encouraged and integrated in the financial system.

BIBLIOGRAPHY

1. Nabhis Law relating to Non Banking Financial Companies, A Nabhi

Publication, 2007, pp. 1, 3, 5.
2. Reserve Bank of India Bulletin, August 907, p. 591
3. Machiraju H.R.: Indian Financial System, Vikas Publishing House Pvt. Limited,
2007, p. 7.1
4. CMIE, Monthly Review of Indian Economy, Dec. 2007, pp. 129-131.
5. Reserve Bank of India Bulletin, July 2007, p. 581
6. CMIE, Monthly Review of Indian Economy, May 2006, pp. 119.
7. CMIE, Monthly Review of Indian Economy, June 2007, pp. 110.
8. Seema Saggar, Financial Performance of Leasing Companies, During the
Quinquennium Ending
06-07 Reserve Bank of India: Occasional Papers, Vol. 16, No. 3 September 07,
pp. 223-236.
9. Harihar T.S. Non-Banking Finance Companies, The Imminent Squeeze,
Chartered Financial Analyst, February2006, p. 40-47.
10. Reserve Bank of India Bulletin, August 2007, pp. 592-593.
11. Reserve Bank of India Bulletin Various issues, February 2007, May 2007,
December 2007 etc.
12. Economic Times, Ahmedabad Edition, 26/3/06, p. 10
13. Bhole, L.M., Financial Institutions and Markets, Tata MC Graw Hill Publishing
CO. Ltd., 2006.
14. Report of the Working Group on Financial Companies, Reserve Bank of
India, Bombay, September, 1992.

15. Guide to Companies Act- A. Ramaiya, Twelfth Edition, Wadhwa and

Company, Nagpur, 1992.
16. Dr. Guruswamy S., NBFCs The Rating Blues, Charterd Secretary, August
2007, pp. A169-A173.
17. http://www.rbi.org.in/scripts/FAQView.aspx?Id=58
18. http://indiabudget.nic.in/es98-99/chap35.pdf
19. http://www.rbi.org.in/scripts/FAQView.aspx?Id=58
20.http://en.wikipedia.org/wiki/Non-banking_financial_company
21. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/67319.pdf
22. http://www.banknetindia.com/finance/fbanking.htm

APPENDIX

QUESTIONNAIRE
1. Name
2. How would you distinguish Non Banking Financial institution & Banks?
3. Is it necessary that every NBFC should be registered with RBI?
4. Is there any ceiling on acceptance of Public Deposits? What is the rate of
interest and period of deposit which NBFCs can accept?
5. What are the salient features of NBFCs regulations which the depositor may
note at the times of investment?
6. What is deposit and public deposit?
7. Whether NBFCs can accept deposits from NRIs? If Yes Then Why?
8. Is nomination facility available to the Depositors of NBFCs?
9. What are the responsibilities of the NBFCs accepting/holding public deposits
with regard to submission of Returns and other information to RBI?
10. What are the documents or the compliance required to be submitted to the
Reserve Bank of India by the NBFCs not accepting/holding public deposits?