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 marketable nature, leasing,

hire-purchase, insurance business, chit business; but it

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 NBFC (Residuary non-banking company).

Doing functions akin to that of banks; what is the difference

then?

NBFCs perform a very

importanf financial

intermediation role contributing

to the economic development of

the country. They supplement

the role of banking sector.

Role of the NBFCs.

RBI Act and Framework

The RBI regulates different types of NBFCs under the

provisions of chapter III – B and Chapter III of the RBI Act,

1934. It was amended in 1997 incorporating

(i) amendment of the existing sections –

45I,45 MA & 58 B

(ii) insertion of new schemes – 45 A/B/C

etc…

(iii) substitution by new section (45 S)

Registration and Net Owned Fund:- With effect from Jan

1997, in order to commence new Company / carry on (existing

company) the business of a Non banking Financial Institution , an

NBFC must obtain a certificate of Registration from the RBI.

Moreover its Net Owned Funds must be Rs. 200 lakh

w.e.f April 21, 1999.

Maintenance of Assets: NBFC are required to invest, in

unencumbered approved Indian Securities, at least 5 percent or

more of their outstanding deposits at the close of business on the

last working day of the second preceding quarter as specified by the

RBI from time to time.

Reserve Fund: Every NBFC must create a reserve fund to which

at least 20% of its net profits must be transferred before the

declaration of any dividend.

NBFC are classified into…

Asset Finance Company :

means any company carrying on as its principal

business the financing of physical assets supporting

productions/economic activity.

Investment Company :

a company that is a financial institution carrying on , as

its principal business, the acquisition of securities.

Loan Company :

any company that is a financial institution whose

principle business is providing finance, whether by making

loans or advances or otherwise for any activity other than its

own, but does not include an AFC.

Infrastructure finance Company:

is a financial institution whose principal business is

financing of infrastructure activities.

Restrictions on NBFC - Minimum Credit RatingNBFC’s that have Net owned Funds of Rs.200 lakh can

accept public deposits, provided they have minimum investment grade or

other specified credit rating for their fixed deposits from one of the approved

rating agencies, at least once a year.

Sl.No Credit Rating Agency Minimum Rating

1 CRISIL FA- (FA Minus)

2 ICRA MA - (MA Minus)

3 CARE CARE BBB (Triple B)

4 FTICH Rating India P Ltd Ind BBB- (Tripple B Minus)

Ceiling on Public deposits AFCs maintaining

CRAR of 15% without credit rating.

AFCs with CRAR of 12% and having minimum investment grade credit rating.

LC/IC with CRAR of 15% and having minimum investment grade credit rating.

1.5 times of NOF or Rs.10 crore whichever is less.

4 times of NOF.

1.5 times of NOF.

RBI NON BANKING FINANCIAL(Deposit Accepting/

Holding Companies PRUDENTIAL NORMS

DIRECTIONS, 2007

Pursuant to the recommendations of the Narasimham

Committee and Shah Committee prescribed prudential

norms for all types of financial companies with NOF’s of

Rs.50 lakh and above, which had to be compulsorily

registered with it. These are in conformity with the

standards and disclosure norms applicable to the banks

and Public Financial Institution.

RBI Issued directions with effect from Jan 31,1998 which relates to :-

Income Recognition:-> based on record recognized accounting

principles

-> NPA – Assets, Term Loans, Bills, Other Current

Assets, Lease rentals/Hire purchase, Loans, Advances

Accounting Standards: -> All accounting standards and guidance notes

issued by the institute of Charted Accountants of India(ICAI) must

be followed.

Asset Classification:->NBFC’s are required to classify their loans &

advances, lease/hire purchase assets and any other forms of

credit into four groups

->Standard Assets

-> Sub Standard Assets

->Doubtful Assets

-> Loss Assets

Provisioning for Loans and Services:

Capital Adequacy:-> All NBFC’s are required to maintain minimum capital

ratio if Tier I and Tier II equivalent to 12%

Concentration of Credit /Investments

Asset – Liability Management ALM System provides a comprehensive and dynamic framework for

measuring, monitoring and managing liquidity and interest

rates risks

The ALM Process rests on Three Pillars:-

1. ALM Information System

• Management Information System

• Information availability, accuracy, adequacy and expediency

2. ALM Organization

• Structure and responsibilities

• Level of Top Management Involvement

3. ALM Process

• Risk Parameters

• Risk Identification

• Risk Measurement

• Risk Management

• Risk policies and tolerance levels.

Guidelines on Fair Practices Code for NBFC’s

I. Applications form for Loans and their Processing

II. Loan Appraisal and Terms/Conditions

III. Disbursement of Loans including changes in Terms and

Conditions.