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Non-Banking Financial Companies

Non-Banking Financial Companies (NBFCs) broadly fall into three categories, viz.,

  • NBFCs accepting deposits from the public;
  • NBFCs not accepting/holding public deposits: and
  • core investment companies (i.e., those acquiring shares / securities of their group/ holding/ subsidiary companies to the extent of not less than 90 percent of total assets and which do not accept public deposit).

NBFCs are a hybrid mix of companies, comprising those which may be engaged in housing finance; those providing various insurance products; those engaged in leasing and hire-purchase business; those providing venture/start-up capital; those engaged in chit fund business; those which may be providing loans against gold and those which may be providing finance for tractors/trucks etc.

An NBFC is a company registered under the Companies Act, 1956. These companies may be primarily those which do not accept deposits from the public.

Moreover, deposit taking NBFCs are those which accept deposits under any scheme or arrangement or another manner but not the way a bank accepts deposits (i.e. these would not be chequeable deposits) and they may also give loans in any manner/arrangement but not the way a bank does.

All deposit-taking NBFCs are called residuary non-banking companies i.e. RNBCs which are regulated by the RBI under RBI Act, 1934 and have to be registered with the RBI.

To prevent dual regulation, certain categories of NBFCs are exempted from the requirement of registration with the RBI as these NBFCs are regulated by other regulators, for example, housing finance companies by NHB; Insurance product companies by IRDA; Venture Capital companies by SEBI and Chit fund companies under the Chit Funds Act, 1982.

Until some years back, the prudential norms applicable to banking and non-banking financial companies were not uniform. Moreover, within the NBFC group, the prudential norms applicable to deposit taking NBFCs (NBFCs-D) were more stringent than those for non-deposit taking NBFCs (NBFCs-ND). Since the NBFCs-ND were not subjected to any exposure norms, they could take large exposures. The absence of capital adequacy requirements resulted in high leverage by the NBFCs. Therefore, since 2000, the Reserve Bank has initiated measures to reduce the scope of “regulatory arbitrage” between banks, NBFCs-D and NBFCs- ND.

NBFC's

NBFC’s

Borrowings by NBFCs are mainly from banks and financial institutions and by way of bonds and debentures and “other sources” (which include miscellaneous sources including money borrowed from other companies, unsecured loans from directors/promoters, commercial paper, borrowings from mutual funds and any other type of funds which are not treated as public deposits). Financial performance of NBFCs improved during 2009-10 due to increases in fund-based and fee-based incomes. Continuing the trend witnessed during the last few years, gross Non Performing Assets (NPAs) as well as net NPAs (as percentage of gross advances and net advances, respectively) of reporting NBFCs declined further during the year ended March 2010.

Capital to risk-weighted assets ratio (CRAR) norms were made applicable too in terms of which, every deposit taking NBFC is required to maintain a minimum capital, consisting of Tier-I and Tier-II capital, of not less than 12 percent (15 percent in the case of unrated deposit-taking loan/investment companies) of its aggregate risk-weighted assets and of risk-adjusted value of off-balance sheet items. It is noteworthy that the NBFC sector is witnessing a consolidation process in the last few years, wherein the weaker NBFCs are gradually exiting, paving the way for a stronger NBFC sector.

With a view to protecting the interests of depositors, regulatory attention was mostly focused on NBFCs accepting public deposits (NBFCs-D) until recently. Over the last few years however, this regulatory framework has undergone a significant change, with increasingly more attention now being paid to non-deposit taking NBFCs (NBFCs­-ND) as well. This change was necessitated mainly on account of a significant increase in both the number and balance sheet size of NBFCs-ND segment which gave rise to systemic concerns. To address this issue, NBFCs-ND with asset size of Rs. 100 crore and above were classified as systemically important NBFCs (NBFCs-ND-SI) and were subjected to “limited regulations”. The NBFCs-NDSI are now subject to CRAR and exposure norms prescribed by the Reserve Bank.

The regulatory and supervisory framework of NBFCs continued to focus on prudential regulations with specific attention to the systematically important non-deposit taking companies called NBFC-ND-SI. The RBI released new and stricter norms for NBFCs in November 2014 which, inter-alia, bring them at par with banks as they have to adopt 90 day NPA recognition norm. It has also released requirements for capital adequacy, enhanced disclosure requirements and tighter corporate governance norms.

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