nbfc by ashok srikrishna

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NON-BANKING FINANCIAL COMPANIES Ashok srikrishna

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Page 1: Nbfc by ashok srikrishna

NON-BANKING FINANCIAL COMPANIES

Ashok srikrishna

Page 2: Nbfc by ashok srikrishna

FINANCIAL INSTITUTION A financial institution is an institution which

collects funds from the public, and places them in financial assets, such as deposits, loans and bonds rather than tangible property.

FINANCIAL INSTITUTION

Banking institution

Non banking institution

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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, hire-purchase, insurance business, chit business.

It does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property.

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DIFFERENCE BETWEEN NBFC’S AND BANK’S(i) a NBFC cannot accept demand deposits

(demand deposits are funds deposited at a depository institution that are payable on demand -- immediately or within a very short period -- like your current or savings accounts.)

(ii) it is not a part of the payment and settlement system and as such cannot issue cheque to its customers drawn to itself.

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NBFC’S VERSUS BANK’SBANKS NBFCS

Definition Banking is acceptance of deposits withdraw able by cheque or demand; NBFC cannot accept demand deposits

NBFC are companies carrying financial business

Scope of business

Scope of business of the bank is limited by sec 16(1) of BR Act.

There is no bar on NBFC carrying activity other then financial activity.

Major limitation on Business

No non banking activity are carried.

Cannot provide checking facilities.

Foreign investment

Up to 74% is allowed to private sector bank

Up to 100% is allowed

Need for a license

License norms are tightly controlled and generally it is perceived to be quite difficult to get a license for a bank

It is comparatively much easier to get a registration as an NBFC.

Regulations BR Act and RBI Act lay down the stringent control over the bank.

Much lesser control over NBFC

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The NBFCs that are registered with RBI are: (i) equipment leasing company; (ii) hire-purchase company; (iii) loan company; (iv) investment company.

With effect from December 6, 2006 the above NBFCs registered with RBI have been reclassified as (i) Asset Finance Company (AFC)(ii) Investment Company (IC)(iii) Loan Company (LC)

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Asset finance Companies (AFC) AFC are financial institutions whose principal business is of

financing physical assets such as automobiles, tractors, construction equipments material handling equipments and other machines.ex: Bajaj Auto Finance corp. , Fullerton India etc

Investment Companies (IC) ICs generally are involved in the business of shares, stocks,

bonds, debentures issued by government or local authority that are marketable in nature

ex: Stock Broking Companies, Gilt firms Loan Companies (LC) LCs are loan giving companies which operate in the business

of providing loans. These can be housing loans, gold loans etc ex: Mannapuram Gold Finance, HDFC

TYPES OF NBFC

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NBFCS : OVERVIEW 13000+ players registered under RBI : A & B

categories

Spread all across the country Approx. 570 NBFCs authorized to accept public deposits (Catg.

A) Assets worth Rs. 15000 Crore financed annually & growing

steadily

Asset financing Commercial vehicles Passenger cars Multi-utility & multi-purpose vehicles Two-wheelers & Three-wheelers Construction equipments Consumer durables

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ROLE OF NBFCS

As recognized by RBI & Expert Committees / Taskforce Development of sectors like Transport & Infrastructure Substantial employment generation Help & increase wealth creation Broad base economic development Irreplaceable supplement to bank credit in rural

segments To finance economically weaker sections

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ROLE OF NBFCS (CONTD..) 70-80% of Commercial Vehicles are

finance driven

Indian economy is more dependent on roads Heavy Govt. outlay for mega road projects CRISIL in its study has placed commercial vehicle

financing under “low risk” category Each commercial vehicle manufactured, sold and

financed gives employment to minimum 20 persons (direct and indirect)

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CUSTOMER SERVICE The key factor for our survival & growth

NBFCs provide prompt, tailor made service with least hassles. This more than compensates for the higher lending rates of NBFCs as compared to Banks & FIs

All customers get direct and easy access to and individual attention of the top management

NBFCs cater to a class of borrowers who :-- Do not necessarily have a high income- But have adequate net worth- Are honest and sincere (gauged by the personal touch

maintained with them).

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A company incorporated under the Companies Act, 1956 and having desire of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should have a minimum net owned fund of Rs 25 lakh (raised to Rs 200 lakh w.e.f April 21, 1999). The company is required to submit its application for registration in the prescribed format along with necessary documents for Bank’s consideration. The Bank issues Certificate of Registration after satisfying itself that the conditions as enumerated in Section 45-IA of the RBI Act, 1934 are satisfied.

REGISTRATIONwww.professoraugustin.com

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In case a NBFC defaults in repayment of deposit what course of action can be taken by depositors?

If a NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit to recover the deposits

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OVERVIEW OF PRESENT POSITION NBFCs are highly heterogeneous, continue to offer

wide range of niche and tailor-made financial services.

In terms of relative importance of various activities financed by them, hire purchase finance is the largest activity, accounting for greater than 1/3rd of total assets, followed by loans and equipment leasing.

The number of NBFCs have declined after 2000 due to mergers, closures, cancellation of licenses, regulatory strictness.

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The maximum rate of interest that NBFCs can pay on their deposits has been reduced from 12.5 % to 11% per annum w.e.f March 4, 2003.

The NPAs of NBFCs has not shown a clear decline over the years.ed increase in their cost of funds.

RBI has decided to impose penalties on NBFCs having deposits of Rs. 50 crores & above if they don’t submit periodic returns to RBI.

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TOP FIVE NBFCS IN INDIA:• Housing Development Finance Corporation

Limited• Power Finance Corporation Limited• Rural Electrification Corporation Limited• National Bank of Agricultural and Rural

Development• Infrastructure Development Finance

Company Limited

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Category of NBFC Ceiling on public deposits

AFCs maintaining CRAR of 15% without credit rating 

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

1.5 times of NOF or Rs 10 crorewhichever is less

4 times of NOF

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

1.5 times of NOF

CEILING ON PUBLIC DEPOSITS

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The symbols of minimum investment grade rating of the Credit rating agencies are:

Name of rating agencies Level of minimum investmentgrade credit rating (MIGR)

CRISIL FA- (FA MINUS)

ICRA MA- (MA MINUS)

CARE CARE BBB (FD)

FITCH Ratings India Pvt. Ltd tA-(ind)(FD)

SYMBOLS OF MINIMUM INVESTMENT GRADE RATING

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CONCLUSION The NBFCs have not been very much profitable. The operating cost of NBFCs has increased and it

stands much higher than co-operative banks. This is one area in which improvement is needed.

Enhancing the credit delivery mechanisms: The credit delivery mechanism needs to be more transparent and hassle free. There should be more stringent norms for the defaulters.

RBI needs to educate people about NBFC

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