Q) NBFCs utility and regulation.
Non-banking financial companies, or NBFCs, are financial institutions that provide banking services, but do not hold a banking license. These institutions are not allowed to take deposits from the public. Banking regulations cover all operations of these institutions. These offer banking services, such as loans and credit facilities, retirement planning, money markets, underwriting, and merger activites. In the last several years there has been an expansion of non-banking financial companies since the lending business has been started by the venture capital companies, retail and industrial companies . Every NBFC must be registered with RBI to conduct any business of non-banking financial institution as defined in clause (a) of Section 45 I of the RBI Act, 1934. NBFC’s are different from Banks in a sense that:
Demand deposits cannot be accepted by them. It cannot issue cheques to its customers; and not a part of the payment and settlement system. Deposit insurance facility of DICGC is not available for NBFC depositors unlike in case of banks. They cannot charge rate of interest more than the limit prescribed by RBI.
The NBFCs that are registered with RBI are:
(i) Equipment leasing company In this a loan is bought by the lender,then on becomes the owner of the equipment and for a specific period gives it to a business on a rent.Finally for a market value business might buy the equipment.
(ii) Hire-purchase company In this the businessman becomes the owner of the equipment.The fundamental characteristic of a lease is that ownership never passes to the business customer. Capital allowances are claimed by the leasing company and business customer receives the benefit by way of reduced rental charges.
(iii) Loan company The principal business of this company is that of providing finance, by making loans or advances or otherwise any other activity .
(iv)Investment company It is any financial medium which is basically into buying and selling of securities. The main utitilty of NBFC is that it ensures smooth functioning of the economy.RBI keeps a Regular track of what and how the NBFC’s are performing.Two aspects of NBFCs functioningA) REGULATORY FRAMEWORK B) SUPERVISORY FRAMEWORK
REGULATORY FRAMEWORK >The interest of depositors is protected by this framework. >The emphasis is given by NBFCs mainly on monetary and credit policy. >It includes setting up entry norms and refraining deposit acceptance by unincorporated bodies engaged in financial business. >Registration is made compulsory for maintenance of liquid assets and creation of reserve fund. > RBI has power to issue directions for NBFCs.
o Supervision and regulation of deposit taking NBFCs and over those accpting public deposits. o Submission of periodical returns for the purpose of off-site surveillance Asset liability and risk management system for NBFCs o Co-ordination with State Governments to reduce unauthorized and fraudulent activities. Work upon improving depositors' education and awareness through workshops / seminars for trade and industry organizations
B) SUPERVISORY ASPECTS: Reserve Bank of India has instituted a comprehensive supervisory mechanism : On-site Inspection Off-site Surveillance System Market intelligence
ON-SITE INSPECTION: It includes visting the NBFC’s directly and getting all the balances sorted if applicable. OFF-SITE SURVEILLANCE: Based upon analytical system of financial statements an in house reviewis conducted by RBI. MARKET INTELLIGENCE: It keeps an eye on advancements in the financial services sector via press,electronic media and properly arranges the data mainitaing its sensitivity and confidentiality so give a brief idea to RBI about the actions to be taken.
For individual loans maximum variance should be between the minimum and maximum interest ratecannot exceed 4%. Minimum amount of money to be lent to income generating assets to 70%, from 75%.
Of the 15%, NBFCs are required to invest not less than 10% in approved securities and the remaining 5% can be in term deposits with any scheduled commercial bank. Thus, the liquid assets may consist of government securities, government guaranteed bonds and term deposits with any scheduled commercial bank. A person could be a member of only one group, either a self-help group (SHG) or a joint liability group (JLG). A SHG or a JLG can borrow from a maximum of two microlenders.
New entities looking to start as NBFC MFI need a minimum fund of Rs 5 crore while existing ones should have net-owned funds of Rs 3 crore by March 31, 2013, and Rs 5 crore by March 31, 2014. RBI has also decided that income generation activities should constitute at least 70% of the total loans of the MFI so that the remaining 30% can be allocated for other purposes such as housing repairs, education, medical and other emergencies.
NBFCs have been directed to maintain the mandated liquid asset securities in a dematerialised form with the entities stated above at a place where the registered office of the company is situated.