Role of Non-banking Financial Institutions in India

A PROJECT REPORT ON NON-BANKING FINANCIAL INSTITUTIONS

(A Comparative Study with Banking Finania! "n#titution#$

Submitted For:

The Partia! Fu!%i!!ment o% the re&uirement %or the degree o% 

'a#ter o% Bu#ine## Admini#tration

!ERTIFI!ATE !ERTIFI!ATE OF ORI*INA+IT, ORI*INA+IT ,

Non-Banking Financial Financial This This is to cert certif ify y that that the the proj projec ectt repo report rt enti entitl tled ed Non-Banking Institutions submitted to IP University in partial fulfilment of the requirement for 

the the

awar award d

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degre degreee

BUSINESS ADMINISTRA ADMINISTRATI TION ON of MASTER OF BUSINESS

FINAN!E" #  is original work carried out by Ms.PRIY with enrolment no. $%&'(&$))

under my guidance. The matter embodied in this project is genuine work done by the student and has not been submitted submitted whether to this !ni"ersit !ni"ersity y or to any other !ni"ersity !ni"ersity # Institute Institute for  the fulfilment of the requirement of any course of study.

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!ERTIFI!ATE !ERTIFI!ATE OF ORI*INA+IT, ORI*INA+IT ,

Non-Banking Financial Financial This This is to cert certif ify y that that the the proj projec ectt repo report rt enti entitl tled ed Non-Banking Institutions submitted to IP University in partial fulfilment of the requirement for 

the the

awar award d

of

the

degre degreee

BUSINESS ADMINISTRA ADMINISTRATI TION ON of MASTER OF BUSINESS

FINAN!E" #  is original work carried out by Ms.PRIY with enrolment no. $%&'(&$))

under my guidance. The matter embodied in this project is genuine work done by the student and has not been submitted submitted whether to this !ni"ersit !ni"ersity y or to any other !ni"ersity !ni"ersity # Institute Institute for  the fulfilment of the requirement of any course of study.

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A!NO.+ED*EMENT

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 wor on this project as a part of the curriculum.  !lso" I express my gratitude to #

$ for his ind cooperation.

"NE)

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 Introduction to the Company ,., -istory* ision / Mission. Power 0inance 1orporation is one of the major Public %ector !ndertaking of the 'o"ernment of India. P01 was set up on ,2th 3uly ,452 as a 0inancial Institution 60I7 dedicated to Power %ector financing and committed to the integrated de"elopment of the  power and associated sectors. The 1orporation was notified as a Public 0inancial Institution in ,448 under 1ompanies ct* ,492. The 1orporation is registered as a )on:;anking 0inancial 1ompany with the Reser"e ;ank of India 6R;I7. R;I* "ide its re"ised 1ertificate of Registration no. ;:,<.8888< dated 3uly =5* =8,8 classified the company as an >Infrastructure 0inance 1ompany 6);01:)(:I017?. P01* which has entered its %il"er 3ubilee Year in =8,8* is a %chedule:* )a":Ratna 1P%+ 6conferred by 'o"t. of India on ==nd 3une* =88@7 in the 0inancial %er"ice %ector* under the administrati"e control of the Ministry of Power. Its Registered and 1orporate Affices

are

at

)ew

(elhi.

P01 was incorporated with an objecti"e to pro"ide financial resources and encourage flow of in"estments to the power and associated sectors* to work as a catalyst to bring about institutional impro"ements in streamlining the functions of its borrowers in financial* technical and managerial areas to ensure optimum utiliBation of a"ailable resources and to mobiliBe "arious resources from domestic and international sources at competiti"e rates. Itsision is CTo be the leading institutional partner for the power and allied infrastructure sectors in India o"erseas across the "alue chain.D

Mission State/ent o0 PF!1-

P01?s mission is to eEcel as a pi"otal de"elopment financial institution in the power  sector committed to the integrated de"elopment of the power and associated sectors by channeling the resources and pro"iding financial* technological and managerial ser"ices for ensuring the de"elopment of economic* reliable and efficient systems and institutions.

•

To become the most preferred 0inancial Institution in power and financial sectors*  pro"iding best products and ser"icesF

•

P01 pro"iding affordable and competiti"e products and ser"ices with efficient and internationally integrated sourcing and ser"icing* partnering the reforms in the Indian Power %ector and enhancing "alue to its shareholdersF by promoting efficient in"estments in the power and allied sectors in India and abroad.

•

Ge will achie"e this being a dynamic* fleEible* forward looking* trustworthy* socially responsible organiBation* sensiti"e to our stakeholders? interests*  profitable and sustainable at all times* with transparency and integrity in operations.

•

To promote efficient in"estments in Power %ector to enable a"ailability of power 

•

of the required quality at minimum cost to consumersF To reach out to the global financial system for financing power de"elopmentF  To act as a catalyst for reforming IndiaHs Power %ectorF and to build human assets

•

and systems for the Power %ector of tomorrow.

OBJECTIVES 

To pro"ide financial resources and encourage flow of in"estments to the power  and associated sectors.



To work as a catalyst to bring about institutional impro"ements in streamlining the functions of its borrowers in the areas of financial *technical* managerial to ensure optimum utiliBation of a"ailable resources.



To mobiliBe "arious types of resources "iB. domestic and international at competiti"e rates



To stri"e for up gradation of skills in the power sector for effecti"e and efficient growth to the sector.



To maEimiBe rate of return through efficient operations and introduction of  inno"ati"e financial instruments and ser"ices for the power sector.

,.= %GAT analysis •

 powerful "ision and a purposeful mission are essential elements of an organiBation?s strategic planning* which helps articulate a strategic direction* and aligns and moti"ates the organiBation towards achie"ing a shared* common "ision. n essential part of outlining a 1orporate Plan for the period =8,=:= is to re"iew the eEisting "ision and mission of P01 and to suggest realignments in keeping with the emerging opportunities and the strategic intent of the organiBation o"er 

•

this period.  strategic planning workshop was conducted on ,=th 3anuary*=8,= to identify the strengths* weaknesses* opportunities and threats in P01 and its operati"e en"ironment* eEamine P01?s current "ision and mission and realign the same in

•

keeping with its long:term strategic intent. The results of this eEercise are outlined below&:

I2enti0ie2 Strengt3s 0or PF! %trong domain eEpertise

Source o0 !o/4etitive A2vantage

in

>con"entional? power sector due to its eEclusi"e focus leading high mobility  barriers protecting P01?s competiti"e  positioning. 0ocus on generation segment where the -igher in"estment demand would ensure in"estment demand is likely to be reliance on P01 as a major source of  higher in neEt 9:year plan. Market leadership position dominant

market

share

in

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

financing. 1apacity to fund large power projects Protection against new competitors or other  with

higher

inapplicability

duration of

sectoral

due

to financial institutions such as banks.

eEposure

limits. Jimited eEposure in T/( segment and MinimiBe the probability of )P?s compared

o"erle"eraged pri"ate de"elopers with to its peers with such eEposure no operational cash flows +njoy eEcellent relationships with the Pro"ides unmatched understanding of the state and central utilities to understand

unique needs of the borrowers

their needs and eEpectations. •

Geaknesses identified for P01 based on the re"iew of the business is pro"ided  below. 'oing forward* the business strategy proposed in the corporate plan in the subsequent sections address to mitigate the risks from these weaknesses.

I2enti0ie2 .eaknesses 0or PF! Source o0 Disa2vantage -igher cost of funds compared with Jowers the mobility barriers for ;anks to

%1;?s due to dependence on wholesale complete head:on with P01. funding

sources

including

primary

markets and banks  )on:di"ersified business model leading -ighly "ulnerable to sector bridled with to

"ery

high

"ulnerability

to regulatory and commercial uncertainty

 performance of power sector in India. P01 has granted loans to the pri"ate

May increase the risk of non:reco"ery and

sector on a non:resource or limited ad"ersely affect P01?s financial condition. resource basis. Most of the other schemes eEcept long ;orrowers are demanding multiple products term loans ha"e met with limited apart from long term loans to fund 1P+K success Jow people* process

and

systems Prohibiti"e

costs

and

uncertainty

around

 preparedness for future entry into new roadmap for these new opportunities.  businesses  )eed to enhance people* process and 1ould lead to significant eEecution risk. systems

preparedness

for

future

 business and entry into new businesses. • •

I2enti0ie2 O44ortunities an2 T3reats 0or PF!5 ;ased on the market analysis pro"ided as part of Interim report* Apportunities for 

P01 are identified in the section below. I2enti0ie2 O44ortunities 0or PF!

Source o0 A2vantage

'rowth in demand for funds for new +Etension of already dominant market leading  power projects due to eEisting power   position in the power financing market. deficits and rapidly growing economy. In"estments in T/( system to Jow current eEposure in T/( may lead to commensurate

with

in"estment

in P01

cherry:picking

good

opportunities

'eneration. without concentration risk. Renewed push from the state go"t. for  May benefit P01 in capitaliBing operational

impro"ement

of

these

%+;?s opportunities with its eEperience and eEpertise

including tariff hikes and reduction in of working with %+;?s. aggregate technical and commercial losses. -uge growth in International markets Pro"ides unmatched understanding of the 6both fund and fee based7 unique needs of the power sector borrowers. ;roaden footprint in funding Power  +Ecellent understanding and appraisal sector with equity In"estments* P+ and capabilities for power sector borrowers. Power trading businesses. Impro"e internal capabilities in he areas Immense growth opportunities in a rapidly of attracting and retaining talent to meet

eEpanding company

the needs of the new business Increase in the use of technology and

Impro"e ser"ice le"els and o"erall customer 

systems in the area of RM* Jead eEperience. management* +RP* 1RM. I2enti0ie2 T3reats 0or PF! Source o0 Disa2vantage !ncertainty in eEtension of fa"orable 1hange in 'o"ernment regulations may lead  position in terms of relaEation of  P01 to lose its competiti"e positioning. concentration and prudential norms 'rowing competiti"e en"ironment in -uge opportunity may continue to attract  power sector lending competition from banks* 0I?s and other );01s %elf:sustenance and growth of power  !tilities may raise capital directly from the sector utilities may reduce importance market of institutions such as P01 (efault or delay in realiBation of dues P01 has significant eEposure to such utilities from customers* particularly few state utilities. Inadequacy

of

the

insurance

of ;orrowers may not ha"e required insurance

 borrowers? assets !ncertainty

o"er

co"erage to co"er all financial losses that the reco"ering

 borrowers may suffer  costs Inability to transfer these !MPPs or delays in

incurred on the shell companies of  de"elopment of such !MPPs due to "arious !MPPs Jegal issues in loans with restructured state utilities

factors. P01 has significant eEposure to such utilities

E)EC*T"+E S*''AR, (ith recent growth rates among large countries second only to ,hina8s" India has experienced nothing short of an economic transformation since the liberali9ation process began in the early :;;<8s. In the last few years" with a soaring stoc maret" significant foreign portfolio inflows including the largest private e=uity inflows in !sia" and a rapidly developing derivatives maret" the Indian financial system has been witnessing an exciting era of transformation. &he baning sector has seen major changes with deregulation of interest rates and the emergence of strong domestic private players as well as foreign bans. !t the same time" there is some evidence of credit constraints for India8s 01) firms that rely heavily on trade credit. ,orporate governance norms in India have strengthened rapidly in the past few years. +amily 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-baning +inancial 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. !ll such Institutions are financial intermediaries and when they lend" they are nown as Non-%aning +inancial Intermediaries #N%+Is$ or  Investment Institutions. UNI& &*U0& O+ IN3I! 4I+) IN0U*!N,) ,O*'O*!&ION #4I,$ G)N)*!4 IN0U*!N,) ,O*'O*!&ION #GI,$

 !part from these N%+Is" another part of Indian financial system consists of a large number of privately owned" decentralised" and relatively small-si9ed financial intermediaries. 1ost wor in different" miniscule niches and mae the maret more broad-based and competitive. (hile some of them restrict themselves to fund-based business" many others provide financial services of  various types. &he entities of the former type are termed as ?non-ban financial companies #N%+,s$?. &he latter type are called ?non-ban financial services companies #N%+,s$?. 'ost :;;@" *eserve %an of India has set in place additional regulatory and supervisory measure that demand more financial discipline and transparency of decision maing on the part of N%+,s. N%+,s regulations are being reviewed by the *%I from time to time eeping in view the emerging situations. +urther" one can expect that some areas of cooperation between the %ans and N%+,s may emerge in the coming era of )-commerce and Internet baning.

IN&*O3U,&ION

 ! Non-%aning +inancial ,ompany #N%+,$ is a company registered under the ,ompanies !ct" :;A@ and is engaged in the business of loans and advances" ac=uisition of sharesBstocBbondsBdebenturesB securities issued by Government or local authority or other securities of lie maretable nature" leasing" hirepurchase" insurance business" chit business but does not include any institution whose principal business is that of agriculture activity" industrial activity" saleB purchaseBconstruction of immovable property. ! non-baning 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-baning financial company #*esiduary non-baning company$. &he financial system comprises of financial institutions" financial instruments and financial marets 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 taen place in the Non-baning 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" N%+,s later on developed into institutions that can provide services similar to bans. In India several factors have contributed to the growth of N%+,s. &hey provide tailor  made services to their clients. ,omprehensive regulation of the baning system and absence or relatively lower  degree of regulation over N%+,s 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 N%+,s are positively related. In this regard the (orld 3evelopment *eport has observed that in the developing

counties bans hold a major share of financial assets than they do in the industrially developed countries:. !s the demand for financial services grow" countries need to encourage the development N%+,s and securities maret 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  N%+,s. &he number of such companies stood at C<@D in :;E:" at :ADAE in :;EA and it increased to F<<; by :;;< and to AA;;A in :;;A.F &he main reason for  deposits with N%+,s are greater customer orientation and higher rate of interest offered by them as compared to bans. (ith such a dramatic growth in the numbers of N%+,s it was thought necessary to have a regulatory framewor for  N%+,s. 0lowly the *%I came out with set of guidelines for N%+,s. In one of  such step *%I gave definition of N%+,s. !ccording to *eserve %an #!mendment act" :;;C$ H! Non %aning +inance ,ompany #N%+,$ means- i$ a financial institution which is a companyJ ii$ a non baning 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 mannerJ iii$ such other non baning institution or class of such institutions as the ban may with the previous approval of the central government specify. &he definition excludes financial institutions which carry on agricultural operations as their principle business. N%+,s consists mainly of finance companies which carry on functions lie hire purchase finance" housing finance" investment" loan" e=uipment leasing or mutual benefit financial operations" but do not include insurance companies or  stoc exchange or stoc broing companies.D &o encourage the N%+,s that are run on sound business principles" on 5uly F" :;;@ N%+,s were divided into two classesK i$ e=uipment leasing and hire purchase companies #finance companies$ and ii$ loan and investment companies. 6owever" the N%+,s segment of finance was less regulated over a period of time. On account of the ,*% scam and the inability of some of the N%+,s to meet with the investors demand for return of  the deposits the need was felt by the *eserve %an of India to increase the regulations for the N%+,s. In the light of this bacground *eserve %an of India came out with the guidelines on 5anuary F" :;;E. &he salient features of this

guideline are given below. :$ &he acceptance of deposits has been prohibited for the N%+,s having net owned funds less than *s.FA lahs. F$ &he extent of  public deposit raising is lined to credit rating and for e=uipment leasing and hire purchase companies it can be raised to a higher tune. D$ Interest rate and rate of  broerage is also defined under the new system. $ Income recognition norms for  e=uipment leasing and 6ire purchase finance companies were liberali9ed for  N'! from overdue for six months to twelve months. A$ ,apital ade=uacy raised :
financial

institutions"

including

the

unincorporated bodies"

are

recogni9ed" encouraged and integrated in the financial system" says *. /aidyanathan.

&6) last :A years have witnessed significant growth in the

national income" more particularly in the service sectors. &he share of the noncorporate sector #'roprietorship and partnership  '7'  firms$ is more than DA per cent. (e note that the services sector constituted nearly @< per cent of the economy in F<
&able : gives the real growth rate of the services sector between :;;D-; and F<
&he baning sector has been investing A-A< per cent of its resources in government securities the last couple of years. &he lending pattern of bans reveals an interesting picture" wherein the share of the '7' sector has come down though this sector #predominantly in services$ is the fastest growing.

&able F gives the share of the '7' sector along with private corporate and government sectors in the credit outstanding of scheduled commercial bans. &he share of the '7' sector has come down to D per cent from AE per cent in the :;;
households include agricultural households and to that extent the fall is significant. &he share of the private corporate sector in the national income is :F-:A per cent but it absorbs nearly < per cent of the credit provided by the baning sector. &he fastest growing '7' sector gets lesser share of the ban credit" which reveals that the non-baning financial sector is playing increasingly important role in the credit delivery mechanisms of the growth of the economy. &his is desispite the household preference for ban deposits as a savings medium.

&able D gives the outstanding credit of loan accounts with *s FA"<<< #earlier *s :<"<<<$ from 0cheduled ,ommercial %ans for selected period. &he number of accounts has shown a dramatic decline in the late :;;
)ven the absolute amount outstanding for these accounts has come down from *s :"<<< crore to *s D@"<; crore in F<<< to rise marginally in F<
&here is need to integrate domestic financial marets through a system of  maing N%+,s the channel partners to large bans. &he reforms have focused only on the liability side of N%+,s and failures therein" but the asset side is

e=ually important in terms of credit delivery to large segments of our economy. &he focus is more on failure of some institutions. &here 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. &his is related to the operational and supervisory mechanism. &he other relates to the risiness of the underlying assets invested in by these entities and that is part of business ris phenomena. &here is a need to understand the return-ris paradigm of any financial operation and these entities are into cash flow based lending as in activities such as trade" hotels" and construction. &hey do not have the benefit of sovereign guarantee provided to public sector bans nor have they any insurance facility as given to ban deposits. &hey also do not have the ? comfort letters? provided to the 1N, baners 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 bans" particularly those in the public sector" it is explained as ?systemic? failure and the government pumps more funds to re-capitalise these institutions 'rotecting 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 bandependent for their activities. In a sense the N%+, sector is the best route to finance these activities in the service sectors. &his is because in their area they are maret savvy and have the ability to rate the '7' groups" monitor them and recover the money lent to them.  !lready in truc financing the large domestic and foreign bans are using the N%+,s as channel partners. 6ence" the public sector bans could finance the the N%+,s 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 bans finance the N%+,s after rating them even at  -A per cent above 'rime 4ending *ate #'4*$ then these institutions could fund the non-corporate sector at perhaps E-:< per cent over and above the '4*. &his would still be lower than the open maret rates of two and half to three times the '4* at which this sector" in many of these activities" is financed. &he financing of non-ban organisations #both corporate and unincorporated$ by the commercial bans should be treated on a par with priority sector lending. &he commercial baner could be given the powers to licence these entities and provide credit to them to reach the larger maret. It can also be specified that only licensed non-corporate bodies will be permitted to operate in the credit maret in terms of collecting deposits and also getting loans from the baning institutions. &his would provide opportunities to bans to enlarge their scope of operations and also allow the un-incorporated bodies #UI%s$ to carry on their business with loans from the baning system. It will also introduce orderliness in terms of bans rating these entities for licensing them and reviewing this process annually. &he depositors are also protected to some extent in the context of assessment by the commercial bans for licensing them. &his concentric circle of baning will end the current inverse relationship between the si9e 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-baning financial companies represent a heterogenous group of institutions separated by their type of activity" organisational structure and portfolio mix. +our  types of institutions" categori9ed in terms of their primary business activity and under the regulatory purview of the *eserve %an" are e=uipment leasing companies" hire purchase companies" loan companies and investment companies. &he residuary non-baning companies #*N%,s$ have been

classified as a separate category as their business does not conform to any of  the other defined classes of N%+, businesses. %esides" there are other N%+,s" vi9." miscellaneous nonbaning companies #,hit +und$" mutual benefit finance companies #Nidhis and 'otential Nidhis$ and housing finance companies" which are either partially regulated by the *eserve %an or are outside the purview of  the *eserve %an. &his section broadly focuses on the policy developments and operations of N%+,s under the regulatory purview of the *eserve %an. 6owever" in view of their diverse nature" operations of N%+,s and *N%,s have been discussed separately. %esides" operations of N%+,s not accepting public deposits but having asset si9e of *s.A<< crore and above have also been discussed separately in view of their implications for systemic ris.

Regu!atory and Supervi#ory "nitiative#

&he focus of regulatory initiatives in respect of N%+,s during F<<-
N%+,s were allowed to enter into credit card business on their own or in association with another N%+, or a scheduled commercial ban. &he permission to this effect was granted on a selective basis eeping in view the financial position of the company and its record of compliance. N%+,s 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 bans. )mergency cash withdrawal facility through !&1s of associate ban may only be allowed to credit

card holders as a short-term advance with a reasonable limit and necessary builtin safeguards. N%+,s have been advised to be selective while issuing credit cards with ade=uate appraisal on the standing of the applicant. It was clarified that any N%+," including a non-deposit taing company" intending to engage in the the acti activi vity ty of issu issue e of cred credit it card card woul would d have have to obta obtain in a ,ert ,ertif ific icat ate e of  *egistration" apart from specific permission to enter into this business from the *eserve %an. &he N%+, would have to satisfy the re=uirement of a minimum net owned fund of *s.:<< crore and such other terms and conditions as the *eserve %an may specify to this effect from time to time. !cceptance of 'ublic 3eposits by N%+,s *egistered in Non-public Non- public 3eposit &aing &aing ,ategory N%+,s which were granted ,ertificate of *egistration #,o*$ in the non-public deposit taing category should meet the minimum capital re=uirement of *s.F crore for being eligible to apply to the *eserve %an for accepting deposits.  !ccordingly" N%+,s were advised to ensure compliance with this re=uirement before applying to the *eserve %an for approval to accept public deposits. 'reparation of %alance 0heet as on 1arch D: of )very 2ear  2ear  In terms of the extant directions" every N%+, is re=uired to prepare its balance sheet and profit and loss account as on 1arch D: every year. 6owever" a few companies obtained permission directly from the *egistrar of  ,ompan ,ompanies ies #*o,$ #*o,$ for extens extension ion of the financial financial year as re=uire re=uired d under under the provisions of the ,ompanies !ct" :;A@. In order to ensure that there is no eventual violation of the directions of the *eserve %an" N%+,s were advised that whenever an N%+, intends to extend the date of its balance sheet as per  provisions of the ,ompanies !ct" it should tae prior approval of the *eserve %an before approaching the *o, for this purpose. It was also clarified that even in the cases where the *eserve %an and the *o, grant extension of time" the company is is re=uired re=uired to furnish to to the *eserve *eserve %an a proforma balance balance sheet #unaudited$ as on 1arch D: of the year and the statutory returns due on the above date.

'remature (ithdrawal of 3eposits by N%+,s" *N%,s and 1N%,s N%+,s N%+,s which which have have defaul defaulted ted in repaym repayment ent of deposi deposits" ts" are prohib prohibite ited d from from maing premature repayment of any public deposits #in the case of N%+,s$ or  deposits #in the case of 1N%,sB*N%,s$ or granting any loan against such deposits #in the case of N%+,sB1N%,s$" except in the case of death of a deposi deposito torr or for for repay repayin ing g tiny tiny depo deposi sit" t" i.e. i.e."" depo deposi sits ts up to *s.: *s.:<" <"<< <<<. <. &he &he remaining amount and the interest thereon may be paid only after maturity. In the case of normal normally ly run compan companies" ies" the prematu premature re repaym repayment ent"" after after the loc-in loc-in period" will be at the sole discretion of the company and cannot be claimed as a matter of right by the depositor. 6owever" in the event of death of the depositor" public depositBdeposits may be repaid prematurely" even within loc-in period to the surviving depositor or legal heirBs of the deceased depositor. &he rate of  inte intere rest st to be paid paid on prem premat atur ure e repa repay yment ment of depo deposi sits ts has has also also been been rationalised by the *eserve %an. *eporting 0ystem for N%+,s not !cceptingB 6olding 'ublic 3eposits and 6aving  !sset 0i9e of *s.A<< ,rore and an d !bove A.@ N%+,s not acceptingBholding public deposits and having an asset si9e of *s.A<< crore and above were advised to submit a =uarterly return in the prescribed format beginning from the =uarter  ended 0eptember F<< within a period of D< days of the month following the close of the =uarter. It was also advised that a provisional return for the =uarter  ended 1arch of every year may be submitted" submitted" within within D< days of the close of the =uarter =uarter and a final final return return duly certif certified ied by the statutor statutory y audito auditors rs should should be submitted" with a copy of the audited balance sheet" as soon as the same is finalised but not later than 0eptember D< of the year. Nonsubmission of return would ould be view viewed ed seri seriou ousl sly y and pena penall acti action on would ould be tae taen n for for such such noncompliance. (ith effect from 0eptember F<
of *s.:<< crore and above. ,over for Q'ublic 3eposits8 A.C In order to protect depositors8 interest" all N%+,s acceptingBholding public deposits were advised to ensure that there is full cover available at all times for public deposits accepted by them. (hile calculating this cover" the value of all debentures #secured and unsecured$ and outside liabilities other than the aggregate liabilities to depositors may be deducted deducted from total assets. assets. +or this purpo se" they were advised that the assets should be evaluated evaluated at their boo value or realisableBmaret realisableBmaret value" whichever whichever is lower. N%+,s are re=uired to report to the *eserve %an in case the asset cover  calculated" as advised" falls short of the liability on account of public deposits. &hey were further directed to create a floating charge on the statutory li=uid assets invested as re=uired under 0ection A-I% of the *%I !ct" :;D in favour of  their depositors and that the charge should be duly registered in accordance with the re=uire re=uirement ments s of the ,ompan ,ompanies ies !ct" !ct" :;A@. :;A@. QRnow QRnow 2our ,ustom ,ustomer8 er8 #R2,$ #R2,$ Guidelines > !nti- 1oney 4aundering 0tandards. N%+,sB*N%,s were advised in 5anuary F<< to follow certain customer identification procedure for opening of  accounts and monitoring transactions of a suspicious nature for the purpose of  report reportin ing g it to the the appro appropri priat ate e auth authori ority ty.. &he &he Qnow Qnow your your cust custom omer8 er8 #R2,$ #R2,$ guidelines were revisited in the context of the recommendations made by the +inancial !ction &as +orce #+!&+$ on !nti-1oney 4aundering #!14$ standards and on ,ombating +inancing of &errorism #,+&$. 0ubse=uently" the *eserve %an issued detailed guidelines guidelines to bans based on the recommendations recommendations of the +inancial !ction &as +orce and the paper issued on ,ustomer 3ue 3iligence #,33$ for bans by the %asel ,ommittee ,ommittee on %aning 0upervision. 0upervision. N%+,s were advis advised ed on +ebr +ebrua uary ry F:" F:" F<
0ecurity Interest !ct" F<
#net of cancellation$ of companies authorised to

acceptBhold public deposits. &he total number of N%+,s increased to :D"F@: #net of cancellation$ by end-5une F<
'rofile of N%+,s #including *N%,s$. &he number of reporting N%+,s #registered and unregistered$ declined from ECA at end-1arch F<
share of N%+, deposits in broad li=uidity #4D$ has declined sharply over the years. Operations of N%+,s #)xcluding *N%,s$ A.A &otal assetsBliabilities of N%+,s #excluding *N%,s$" which had declined sharply by :D.: per cent during F<
A.AA !mong N%+, groups" assetsBliabilities of hire purchase finance companies and e=uipment leasing companies" which declined during the year ended 1arch F<<" increased marginally during the year ended 1arch F<
F<
3eposits 'rofile of 'ublic 3eposits of 3ifferent ,ategories of N%+,s

'ublic

deposits held by all N%+,s declined significantly during the year ended 1arch F<< #:.F per cent$ as well as 1arch F<
RB" RO0E "N "N"A

&he *eserve %an of India is entrusted with the responsibility of regulating and supervising the Non-%aning +inancial ,ompanies by virtue of powers vested in ,hapter III % of the *eserve %an of India !ct" :;D. &he regulatory and supervisory objective" is toK a$ ensure healthy growth of the financial companiesJ b$ ensure that these companies function as a part of the financial system within the policy framewor" in such a manner that their existence and functioning do not lead to systemic aberrationsJ and that c$ the =uality of surveillance and supervision exercised by the %an over the N%+,s is sustained by eeping pace with the developments that tae 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 N%+,s" members of public" rating agencies" ,hartered !ccountants etc. &o meet this need" the clarifications in the form of =uestions and answers" is being brought out by the *eserve %an of India #3epartment of Non-%aning

0upervision$ with the hope that it will provide better understanding of the regulatory framewor. Re#erve Bank o% "ndia At1 2345

0ection A-I of the *%I !ct" defines financial institution as underK ?+inancial Institution? means any non-baning institution which carries on as its business or part of its business any of the following activities" namelyK#a$the financing" whether by way of maing loans or advances or otherwise" of  any activity other than its ownJ #b$the ac=uisition of shares" stoc" bonds" debentures or securities issued by a government or local authority or other maretable securities of a lie natureJ #c$letting or delivering of any goods to a hirer under a hire-purchase agreement as defined in clause #c $ of section F of the 6ire-'urchase !ct" :;CFJ #d$the carrying on of any class of insurance businessJ #e$managing" conducting or supervising" as foreman" agent or in any other  capacity" of chits or uries as defined in any law which is for the time being in force in any 0tate" or any business" which is similar theretoJ #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 pri9es or gifts" whether in cash or ind" 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$agricultural operationsJ or #bb$ industrial activityJ orJ #b$the purchase or sale of any goods #other than securities$ or the providing of  any servicesJ or

#c$the purchase" construction or sale of immovable property" so however" that no portion of the income of the institution is derive from the financing of purchases" constructions or sales of immovable property by other personsJ  !s per 0ection A-I#f$ of the *%I act" ?non-baning financial company? meansK#i$a financial institution which is a companyJ #ii$a non baning 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 &iny mannerJ #iii$such other non-baning institution or class of such institutions" as the ban may" with the previous approval of the ,entral Government and by notification in the Official Ga9ette" specify.?

0"TERT*RE RE+"E6

The Evo!ution o% "ndian %inania! #y#tem

&he evolution of the Indian financial system from somewhat of a constricted and an undersi9ed one to a more open" deregulated and maret oriented one and its interface with the growth process are the major areas of analysis in this ,hapter. &he process of financial development in independent India hinged effectively on the development of commercial

baning"

with

the impetus given

to

industrialisation based on the initiatives provided in the five year plans. +inancing of emerging trade and industrial activities during the fifties" and the sixties reflected the dominance of baning as the critical source. &he number of bans and branches had gone up" notwithstanding the consolidation of small bans" and the support given to co-operative credit movement:. +unctionally" bans catered to the needs of the organised industrial and trading sectors. &he primary sector consisting of agriculture" forestry and fishing which formed more than A< per cent of G3' during this period had to depend largely on own financing and on sources outside the commercial bans. It is against this bacdrop that the process of financial development was given impetus with the adoption of the policy of social control over bans in :;@C" reinforced in :;@; by the nationalisation of : major scheduled commercial bans. 0ince then" the baning system has formed the core of the Indian financial system. 3riven largely by the public sector initiative and policy activism" commercial bans have a dominant share in total financial assets and are the main source of financing for the private corporate sector. &hey also channel a si9eable share of household savings to the public sector. %esides" in recent years" they have been performing most of the payment system functions. (ith increased diversification in recent years" bans in both public and private sectors have been providing a wide range of financial services.

In the three decades following the first wave of ban nationalisation #the second wave consisted of six commercial bans in :;E<$" the number of scheduled commercial bans has =uadrupled and the number of ban branches has increased eight-fold. !ggregate deposits of scheduled commercial bans have increased at a compound annual average growth rate of :C.E per cent during this period #:;@; to :;;;$" while ban credit expanded at a rate of :@.D per cent per  annum. %ans investments in government and other approved securities recorded a growth of :E.E per cent per annum. &he increased role of ban intermediation is also reflected in its payment system activities. &he total che=ue clearances have gone up by F:CA times during this period" spurred by a =ualitative shift from a manual to an electronic che=ue clearing system. &he financial system outside the bans has also exhibited considerable dynamism. &he system today is varied" with a well-diversified structure of  financial institutions" financial companies and mutual funds. +inancial institutions comprise all-India +inancial Institutions #!I+Is$" 0tate-level Institutions #0+,s and 0I3,s$ and other institutions #),G, and 3I,G,$.F !I+Is include all-India 3evelopment %ans #I+,I" I,I,I" I3%I" 0I3%I and II%I$" specialised institutions #)I1 %an" I/,+" I,I,I /enture" &+,I and I3+,$" investment institutions #U&I" 4I, and GI, and its subsidiaries$ and refinance institutions #N!%!*3 and N6%$. &he setting up of some specialised financial institutions and refinance institutions during last three decades and the onset of reforms from about the early nineties" provided depth to the financial intermediation outside the baning sector. &hese developments" coupled with increased financial maret liberalisation" have enhanced competition. ! number of the existing financial institutions have diversified into several new activities" such as" investment baning and infrastructure financing" providing guarantees for domestic and offshore lending for infrastructure projects. !part from the financial institutions" rapid expansion of  Non-%aning +inancial ,ompanies #N%+,s$ too place in the eighties and provided avenues for depositors to hold assets and for borrowers to enhance the scale of funding of their activities. /arious types of N%+,s have provided varied

services that include e=uipment leasing" hire purchase" loans" investments" mutual benefit and chit fund activities. 1ore recently" N%+, activity has piced up in the area of housing finance. +inancial development is also reflected in the growing importance of mutual funds. In the nineties" they have enabled si9able mobilisation of financial surpluses of the households for investment in capital marets. ,apital marets themselves have become an important source of  financing corporate investments" especially after firms were permitted to charge share premium in a flexible manner. 0anctions as well as disbursements of all-financial institutions" including the 0+,s and the 0I3,s has expanded at a rate of F.: per cent per annum and FD.E per cent per annum" respectively" during :;C<-C: to :;;;-F<<<. In addition" there has been a spurt in the activities of N%+,s and mutual funds over the last two decades. 3eposits of N%+,s recorded an impressive growth of about DA per  cent per annum from the mid-eighties to the middle of the nineties. In the sixties and seventies" the Unit &rust of India #U&I$ was the only mutual fund. %y :;;;F<<< as many as D mutual funds were operating of which C mutual funds were set up by the public sector bans and financial institutions. &heir total resource mobilisation in :;;;-F<<< was nearly *s. FF"<<< crore" with CE per cent of this having been mobilised by the private sector mutual funds. &he financial development in the baning and non-ban financial sector has supported saving and investment in the economy and contributed to growth in real activity. %y pooling riss" 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-.a#ed "ndiator# o% Finania! eve!opment

&he baning system in India consists of commercial bans and co-operative bans" but it is the former which is dominant in terms of deposits" advances and investments. ,ommercial bans include foreign bans operating in India in addition to Indian bans in the public sector and the private sector" including *egional *ural %ans. 0ince :;@;" the commercial bans" after nationalisation of  : bans" have made rapid strides in all the spheres of baning operations" be it the mobilisation of deposits" deployment of credit or geographical coverage" and have accounted for most of the growth in the baning system. Illustratively" while the number of scheduled commercial bans has gone up moderately" the number  of ban offices in India expanded nearly eight-fold from E"F@F in 5une :;@; to @C"DD; in 1arch F<<<" as a result of which the population per ban office improved from @"<<< to :A"<<< over the same period. %oth per capita deposit and per capita credit have witnessed manifold growth. (hile per capita deposit expanded from a mere *s.EE in :;@; to *s.E"FC in :;;;-F<<<" per capita credit" over the same period" expanded from *s.@E to *s."C
3evelopment financial institutions #3+Is$ were established in India to resolve a typical maret inade=uacy problem" vi9." the shortage of long-term resources and the perceived ris aversion of savers and creditors to part with funds for long gestation projects. In view of the inade=uate provision of long-term finance through bans andBor marets" many of these institutions were set up by the Government. &he endorsement of planned industrialisation at the national level provided the critical inducement for establishment of 3+Is at both the all-India and state levels. %esides 3+Is at the national and state levels" there are also investment institutions and specialised financial institutions. &hese institutions provided financial assistance in the form of term loans" underwritingBdirect subscription to sharesBdebentures and guarantees. &here has been a secular  increase in the disbursements of financial institutions. !s a percentage of G3'" disbursements by financial institutions rose from as low as <.A per cent in the

first-half of the seventies to :. per cent in the first-half of the eighties. &he ratio increased further to F.; per cent in the first-half of the nineties and stood at D.D per cent in the second-half of the nineties. 'utua! Fund#

1utual funds provide households an option for portfolio diversification and relative ris-aversion through collection of funds from the households and mae investments in the stoc and debt marets. *esources mobilised by mutual funds #U&I was the only mutual fund until :;EC-EE$ grew at a steady rate until :;;F-;DJ since then they showed some variations. *esources mobilised by mutual funds which was just <.< per cent of G3' #at current maret prices$ during the period :;C<-C: to :;C-CA increased to :.A; per cent during :;;<-;: to :;;F-;D. &otal resources mobilised as proportion of G3' declined to :.:F per cent by :;;-;A but nevertheless remained positive. 3uring the period from :;;A-;@ to :;;@-;C" there was a net outflow of funds from mutual funds" especially U&I" as a result of  which the ratio turned negative. +rom :;;C-;E onwards" the ratio again turned positive and stood at :.:D per cent during :;;;-F<<<. Non-Banking Finania! Companie#

Non-baning financial companies #N%+,s$ have emerged as an important part of  the Indian financial system. &hese companies have grown rapidly in the secondhalf of the eighties and the first-half of the nineties. &he regulated deposits of  N%+,s increased from an average of <.:F per cent of G3' during the period from :;C<-C: to :;C-CA to <.D< per cent during the period from :;EA-E@ to :;E;-;<. &hey witnessed a steady growth thereafter to <.A per cent of G3' during :;;<-;: to :;;F-;D. 3uring the period :;;D-; to :;;@-;C" they experienced a sharp rise from F.
per cent of ban deposits during the period from :;C<-CA to :.:E per cent during :;;<-;D. 3uring the period from :;;D-; to :;;@-;C" deposits with N%+,s experienced a sharper rise from A.
OBJECT"+E AN RESEARC7 'ET7OO0O/, OBJECT"+E •

&he main aim of maing this project is to analy9e the structure of Indian +inancial 0ystem 7 its constituents.

•

&o identify the services which offered in the non-baning industry 7 the effective services with reference to N%+Is.

•

&o measure the customer satisfaction level in the non-baning industry on the predetermined attributes. +ollowing attributes will be considered for my project wor- punctuality" safety" supportive staff" fre=uency" promptness of  services etc.

•

&o focus on the non-baning financial institution lie 4I, #4ife Insurance ,orporation$" GI, #General insurance ,orporation$ etc.

•

&o study the special role of non-baning financial institutions 7 how they operate in India 7 their rate of interest.

•

&o mae a comparison between non-baning financial institution 7 baning industry.

RESEARC7 'ET7OO0O/,

)very project should incorporate and entail all the aspects about the company. &he total information can be captured from primary as well as secondary sources of data. Reeping 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. &hus I have adopted a comprehensive research methodology which depicts a judicious blend of both primary as well as secondary sources. SECONA, RESEARC7

(e would be using Internet" 5ournals" !rticles and new paper as our source for  0econdary data collection. (e would be starting with secondary research to understand the topic and the trends that s followed in the industry.

PR"'AR, RESEARC7

In 'rimary *esearch we would be using Suestionnaire 7 Open interview as our  tool for data collection. (e would be using the structured =uestionnaire and a open interview forum as our tool. (e structured :< =uestions to be ased by employees of different %aning companies. &he total respondents that we targeted was A< and the scope of study was limited to Gurgaon and Noida. &he sample si9e as mention was :<< employees of %ans and this would include all levels and not specific to any one department. !s the =uestions are a bit technical so asing the general public would not gain us to perfect response ! sample of the Suestionnaire is attached below.

0"'"TAT"ON

 !s the &opic of study is a bit out of rage of general public" so we had to only target the %an employees to answer the =uestionnaire. %ut the response from the employees were not very great as the level re=uired to answer some =uestions needed an informative answer. 0o we had to depend on the responses that we got from the limited respondents.

F"N"N/S 8 ANA0,S"S PR"'AR, SO*RCE

+ollowing are the *esponse that we got from the respondents" collated in one. - 7ow wou!d you di#tingui#h Non Banking Finania! in#titution 8 Bank# NBFC# are doing %untion# akin to that o% .ank#1 however there are a %ew di%%erene#9

*esponseK #i$ a N%+, cannot accept demand depositsJ #ii$ it is not a part of the payment and settlement system and as such cannot issue che=ues to its customersJ and #iii$ deposit insurance facility of 3I,G, is not available for N%+, depositors unlie in case of bans.

- "# it nee##ary that every NBFC #hou!d .e regi#tered with RB": Re#pon#e9

F;L of respondents said that yes it has to be registered with *%I and C:L of  respondents said that they are not aware about it.

&he reason for getting registered is mentioned as K In terms of 0ection A-I! of  the *%I !ct" :;D" it is mandatory that every N%+, should be registered with *%I to commence or carry on any business of non-baning financial institution as defined in clause #a$ of 0ection A I of the *%I !ct" :;D. 6owever" to obviate dual regulation" certain category of N%+,s which are regulated by other  regulators are exempted from the re=uirement of registration with *%I vi9. /enture ,apital +undB1erchant %aning companiesB0toc broing companies registered with 0)%I" Insurance ,ompany holding a valid ,ertificate of  *egistration issued by I*3!" Nidhi companies as notified under 0ection @F
the ,hit +unds !ct" :;EF or 6ousing +inance ,ompanies regulated by National 6ousing %an. - "# there any ei!ing on aeptane o% Pu.!i epo#it#: 6hat i# the rate o%  intere#t and period o% depo#it whih NBFC# an aept: Re#pon#e9

2es" there is ceiling on acceptance of 'ublic 3eposits. ! N%+, maintaining re=uired NO+B,*!* and complying with the prudential norms can accept public deposits as followsK

Category o% NBFC

Cei!ing on pu.!i depo#it#

 !+,s maintaining ,*!* of :AL

:.A times of NO+ or *s :< crore

without credit rating

whichever is less

 !+,s with ,*!* of :FL and having  times of NO+ minimum investment grade credit rating 4,BI, having

with

,*!* of :AL

minimum

and

:.A times of NO+

investment

grade credit rating

'resently" the maximum rate of interest a N%+, can offer is ::L. &he interest may be paid or compounded at rests not shorter than monthly rests. &he N%+,s are allowed to acceptBrenew public deposits for a minimum period of  :F months and maximum period of @< months. &hey cannot accept deposits repayable on demand. &he *N%,s have different norms for acceptance of deposits which are explained elsewhere in this boolet.

- 6hat are the #a!ient %eature# o% NBFC# regu!ation# whih the depo#itor  may note at the time# o% inve#tment: Re#pon#e9

0ome of the important regulations relating to acceptance of deposits by N%+,s are as underK i$ &he N%+,s are allowed to acceptBrenew public deposits for a minimum period of :F months and maximum period of @< months. &hey cannot accept deposits repayable on demand. ii$ N%+,s cannot offer interest rates higher than the ceiling rate prescribed by *%I from time to time. &he present ceiling is :: per cent per annum. &he interest may be paid or compounded at rests not shorter than monthly rests. iii$ N%+,s cannot offer giftsBincentives or any other additional benefit to the depositors. iv$ N%+,s #except certain !+,s$ should have minimum investment grade credit rating. v$ &he deposits with N%+,s are not insured. vi$ &he repayment of deposits by N%+,s is not guaranteed by *%I. vii$ &here are certain mandatory disclosures about the company in the  !pplication +orm issued by the company soliciting deposits.

 - 6hat i# ;depo#it< and ;pu.!i depo#it< Re#pon#e9

&he term Qdeposit8 is defined under 0ection A I#bb$ of the *%I !ct" :;D. Q3eposit8 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 includeK •

amount raised by way of share capital" or contributed as capital by partners of a firmJ

•

amount received from scheduled ban" co-operative ban" a baning company" 0tate +inancial ,orporation" I3%I or any other institution specified by *%IJ

•

amount received in ordinary course of business by way of security deposit" dealership deposit" earnest money" advance against orders for goods" properties or servicesJ

•

amount received by a registered money lender other than a body corporateJ

•

amount received by way of subscriptions in respect of a Q,hit8.

'aragraph F#:$#xii$ of the Non-%aning +inancial ,ompanies !cceptance of  'ublic 3eposits # *eserve %an$ 3irections" :;;E defines a Q public deposit8 as a Qdeposit8 as defined under 0ection A I#bb$ of the *%I !ct" :;D and further  excludes the followingK •

amount received from the ,entralB0tate Government or any other source where repayment is guaranteed by ,entralB0tate Government or any amount received from local authority or foreign government or any foreign citi9enBauthorityBpersonJ

•

any amount received from financial institutionsJ

•

any amount received from other company as inter-corporate depositJ

•

amount received by way of subscriptions to shares" stoc" 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 companyJ

•

amount received from shareholders by private companyJ

•

amount received from directors or relative of the director of a N%+,J

•

amount raised by issue of bonds or debentures secured by mortgage of  any immovable property or other asset of the company subject to conditionsJ

•

the amount brought in by the promoters by way of unsecured loanJ

•

amount received from a mutual fundJ

•

any amount received as hybrid debt or subordinated debtJ

•

any amount received by issuance of ,ommercial 'aper.

&hus" the directions have sought to exclude from the definition of public deposit amount raised from certain set of informed lenders who can mae independent decision.

- 6hether NBFC# an aept depo#it# %rom NR"#: Re#pon#e 9 =>? o% re#pondent# #aid ye# that now NR" an depo#it and >@? #aid that they are not #ure

)ffective from !pril F" F<<" N%+,s cannot accept deposits from N*I except deposits by debit to N*O account of N*I provided such amount do not represent inward remittance or transfer from N*)B+,N* #%$ account. 6owever" the existing N*I deposits can be renewed.

- "# nomination %ai!ity avai!a.!e to the epo#itor# o% NBFC#: Re#pon#e9

2es" nomination facility is available to the depositors of N%+,s. &he *ules for  nomination facility are provided for in section AS% of the *eserve %an of India  !ct" :;D. Non-%aning +inancial ,ompanies have been advised to adopt the %aning ,ompanies #Nomination$ *ules" :;EA made under 0ection AT! of the %aning *egulation !ct" :;;. !ccordingly" depositorBs of N%+,s are permitted to nominate" one person to whom" the N%+, can return the deposit in the event of the death of the depositorBs. N%+,s are advised to accept nominations made by the depositors in the form similar to one specified under the said rules" vi9 +orm 3! : for the purpose of nomination" and +orm 3!F and 3!D for  cancellation of nomination and variation of nomination respectively.

- 6hat are the re#pon#i.i!itie# o% the NBFC# aeptingho!ding pu.!i depo#it# with regard to #u.mi##ion o% Return# and other in%ormation to RB": Re#pon#e9

&he N%+,s accepting public deposits should furnish to *%I i. !udited 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 %oard of 3irectors and a copy of the report and the notes on accounts furnished by its !uditorsJ ii. 0tatutory !nnual *eturn on deposits - N%0 :J iii. ,ertificate from the !uditors that the company is in a position to repay the deposits as and when the claims ariseJ iv. Suarterly *eturn on li=uid assetsJ v. 6alf-yearly *eturn on prudential normsJ vii. 6alf-yearly !41 *eturns by companies having public deposits of *s. F< crore and above or with assets of *s. :<< crore and above irrespective of the si9e of deposits J viii. 1onthly return on exposure to capital maret by companies having public deposits of *s. A< crore and aboveJ and ix. ! copy of the ,redit *ating obtained once a year along with one of the 6alfyearly *eturns on prudential norms as at #v$ above.

- 6hat are the doument# or the omp!iane re&uired to .e #u.mitted to the Re#erve Bank o% "ndia .y the NBFC# not aeptingho!ding pu.!i depo#it#: Re#pon#e9

&he N%+,s having assets si9e of *s. :<< crore and above but not accepting public deposits are re=uired to submit a 1onthly *eturn on important financial parameters of the company. !ll 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. 6owever" all the N%+,s #other than those exempted$ are re=uired to be registered with *%I and also mae sure that they continue to be eligible to remain *egistered. +urther" all N%+,s #including non-deposit taing$ should submit a certificate from their 0tatutory !uditors every year to the effect that they continue to undertae the business of N%+I re=uiring holding of ,o* under 0ection A-I! of the *%I !ct" :;D. *%I has powers to cause Inspection of the boos of any company and call for  any other information about its business activities. +or this purpose" the N%+, is re=uired to furnish the information in respect of any change in the composition of  its %oard of 3irectors" address of the company and its 3irectors and the nameBs and official designations of its principal officers and the name and office address of its !uditors. (ith effect from !pril :" F<
SECONAR, SO*RCE

 ! robust baning and financial sector is critical for activating the economy and facilitating higher economic growth. +inancial intermediaries lie N%+,s have a definite and very important role in the financial sector" particularly in a developing economy lie ours. &hey are a vital lin in the system. !fter the proliferation phase of :;E
have relied heavily on lease finance route in their developmental process" e.g." lease penetration for asset creation in the U0 is as high as D
(e would lie to state that" lie bans" N%+,s play a crucial and prominent role in the rural and social sectors of the economy by providing finance for the ac=uisition of trucs" buses and tractors" which operate mainly in rural and semiurban India. In fact" our exposure to the rural B social sectors is direct and pronounced" since financing for ac=uisition 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 bans is to the road transport sector. In fact" bans8 lending to N%+,s" for onward lending to the road transport sector" is also considered as part of their priority sector lending by *%I. On the other hand" the major portion of lending by N%+,s goes directly to the road transport sector. 0ubjected" as we are" to all the prudential norms on provisioning and income recognition" it is only fair and e=uitable that the benefits already available to %ans 7 +Is under the captioned sections of the I& !ct be extended to N%+,s also. )&)N0ION O+ IN,O1) &! %)N)+I&0 UN3)* 0),.:<#FDG$ 7 D@#:$#viii$ &O N%+,sK &he benefits available under the existing provisions of sec. :<#FDG$ and D@#:$ #viii$ of Income &ax !ct" :;@:applicable to infrastructure funding by various institutions are not available to N%+,s. !s of now" an Infrastructure ,apital ,ompany #I,,$ or Infrastructure ,apital +und #I,+$ as defined under section :<#FDG$ is entitled to tax exemption in respect of all its earnings arising out of its investments #e=uity or debt$ made in infrastructure projects listed under section E<-I!. 0imilarly under section D@#:$#viii$" notified ,ompanies" 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 
should be welcome to meet the country8s re=uirements since it is ey 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 inds of investments and participants in the listed infrastructure projects irrespective of their types or categories. (e" therefore" strongly urge that the benefits provided under section :<#FDG$ and sec.D@ #:$#viii$ of Indian Income &ax !ct" :;@: be extended to N%+,s also. ))1'&ION &O N%+,s +*O1 &30 *)SUI*)1)N&0 UB0 :;!#D$#iii$ O+ &6) I.&.!,&K  !s per 0ection :;! of the Income &ax !ct :;@:" tax has to be deducted out of  the interest payments made by specified borrowers to the lender at the rates in force. &he rates vary depending on the constitution of the payee #lender$. +or the category of domestic companies in which N%+,s fall" the rate of &30 is presently F<.;:L including surcharge of FL and the newly introduced educational cess of  FL. %aning companies" ,ooperative societies engaged in baning business" public financial institutions" 4I," U&I" 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 re=uired to deduct &30 out of the interest payment. &his is not available to N%+,s even though they are in similar lending activities. ,onse=uently" their margins and cash-flow are severely affected as further explained here. In a typical case of  lending by an N%+, charging interest" say" M :@L p.a. and borrowing" say" M :DL" it gives a gross spread of DL p.a. &he interest income of the N%+, is subject to &30 of F<.;:L" implying D.DAL out of :@L will go for &30" which is more than the total margin available. &his hardship puts N%+,s in a disadvantageous position compared to the other similar players. It is thus essential that the &30 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 !sset +inancing N%+,s. &his will also ensure uniformity in taxation of similar businesses.

It is" therefore" submitted that exemption should be granted from &30 on interest payment to N%+,s uBs :;!#D$#iii$ of the I& !ct. &o prevent misuse of the exemption" ,%3& may stipulate that only N%+,s registered with *%I shall be entitled to the exemption. &his will provide a level playing field to the N%+,s. *)+IN!N,INGK N%+,s have a proven trac record in financing the ac=uisition of vehicles in rural India for over six decades. !ny finance for a second hand or used vehicle is" in reality" woring capital finance and the borrower who avails such finance often deploys it towards improving business in the rural sector. &he security is the vehicle in =uestion and this is the comfort factor for N%+,s to lend to the prospective borrower who is very often an agriculturist. It is relevant to note that trucs are often referred to as Q1obile factories8" providing direct employment to at least F< persons per vehicle" besides many more on an indirect basis. N%+,s are also involved in financing earthmoving e=uipment" which aid the development of infrastructure and in the process" provide employment to thousands of persons in the rural sector. &he 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 nowledge and sills in credit appraisal and understanding the needs of the borrowers. N%+,s have become an accepted and integral part of the Indian financial system in view of their complementary as well as competitive role.? &here is today a crying need to provide ade=uate funding support to these entities" similar to that being provided by the National 6ousing %an to 6+,s. It is suggested that a Q&ransportation +inancing +und8 be created by 0I3%I to refinance N%+,s engaged in financing the road transport sector. *),O/)*2 1),6!NI010K :. 0!*+!)0I !,&K %ans and +inancial institutions have been notified under the !ct" giving them the ability to move against defaulting borrowers and secure their assets. 0ubse=uently" specified housing finance companies" #6+,s$" have also been notified under the act. N%+,s are the only segment of the financial sector that have not been notified under the !ct. It is submitted that in order that the

interests of investors be protected" N%+,s may also be brought within the purview of the 0!*+!)0I !ct. !s per the !ct" *%I can do this by way of a notification. F. 3)%& *),O/)*2 &*I%UN!40 #3*&s$ K (e re=uest you to grant access to N%+,s to 3*&s. (e also re=uest you to increase the number of 3*&s if the existing set-up is found inade=uate. &his would fulfil a long felt need of the N%+,s and lead to speedier realisation of their  dues. (hat (e 3emandK &o sum up" we wish to reiterate the representations as underK :. &axation IssuesK a. 3eductibility of 'rovisioning norms as per the provisions of 0ec.D@ #:$ #/iia$BD3 of the I& !ct b. )xtension of Income &ax %enefits for financing of infrastructure projects under  0ec.:<#FDG$ 7 D@#:$#viii$ to N%+,s c. )xemption to N%+,s from &30 *e=uirements UB0 :;!#D$#iii$ of the I.&.!ct F. *efinancingK 0eparate +unding InstitutionB+und. D. *ecovery 1echanismsK a. )xtension of provisions of 0!*+!)0I !ct to *egistered N%+,s. b. !ccess to 3ebt *ecovery &ribunals #3*&s$

T7E C7AN/"N/ FACE OF BAN"N/

)ven as bans move closer to international standards" they cannot lose touch with the realities of the Indian economy. &6) Indian financial sector is undergoing rapid change. 0tructural reforms aimed at improving the productivity and efficiency of the economy are apace. &he FEbillion sector" growing at roughly :A per cent" has displayed remarable stability over the years even when other marets in the !sian region were facing a crisis.

&he Indian financial sector has ept pace with the growing needs of its borrowers. Changing environment

&he most important factor shaping todays world is globalisation. ,ompanies are constantly in search of low-cost marets. &echnology is driving growth in production and productivity and competition is stiff. 0econdly" rapid development in communication technology has lead to greater integration of global financial marets" in turn boosting private capital flows and foreign direct investment.  ! third factor is the increasing share of emerging maret economies in world trade. !nother fallout of globalisation is the increase in volatility and vulnerability of marets. &his calls for the adoption of international standards and global benchmars. A!igning with g!o.a! #tandard#

&o strengthen Indias baning 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 :;;:-;F. 0ignificant progress has been made in the past few years to bring the Indian %aning system closer to international standards. India has adopted international prudential norms and practices with regard to capital ade=uacy" income recognition" provisioning re=uirement and supervision and these norms have been progressively tightened over the years. &here has been a steady decline in the level of resource pre-emption from the baning system in the form of ,** #cash reserve ratio$ and 04* #statutory li=uidity ratio$. Interest rates in various segments of financial marets have been deregulated in a phased manner.

&he mar-to-maret 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 bans. *is management in bans has been strengthened and measures put in place to mitigate credit and maret riss and efforts are on to measure and control operational ris. %ans 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 %asel core principles for effective baning supervision are being followed. !long with off-site surveillance there is periodic on-site monitoring of the ris profile of bans and their compliance with prudential guidelines and a ?,!1)40?-based rating system is being followed. &he *eserve %an of Indias regulatory and supervisory responsibility has been widened to include baning institutions and non-baning financial companies. &he end result" is that the Indian baning sector has been considerably strengthenedJ there is greater transparency and closer convergence of Indian financial system with practices prevailing in international financial marets. &here is special focus on corporate governance and the setting up of specialised board-level

panels

such

as

the

executive"

ris

management"

audit"

compensation" asset-liability management committees" and so on. &he *%Is 0tanding ,ommittee on International +inancial 0tandards and ,odes under the ,hairmanship of 3r 2. /. *eddy has identified global standards and codes as part of the efforts to create a sound financial architecture aligned with global practices. 'oving %orward

%ut there are some areas that need greater attention.



Need to hek NPA#9  &he biggest challenge is the problem of N'!s #non-

performing assets$. !round :F per cent of ban credit is loced in N'!s" which means that bans do not earn any interest on N'! accounts. &his is a drain on the financial health of bans. If bans have to cut their costs and improve performance" they must reduce their N'!s. &he Government has re-promulgated the ordinance to help bans expedite recovery. &his calls for strengthening credit appraisal and ris management and developing review and control systems in tune with the changing re=uirements.



Strengthening interna! ontro!#9 (hile the information technology

explosion has been beneficial" it has also brought with it some unsavoury sideeffects.&he increase in frauds and scams in the financial sector is a cause for  concern and calls for the strengthening of internal controls of bans and financial institutions. 

Fou# on "ndian eonomy9  )ven as bans move closer to international

standards" they cannot lose touch with the realities of the Indian economy. In this context" agriculture" small industriesBbusinesses 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 =uicly as information" achieving global benchmars is important for global players. %ut underlying this is the need to have sound fundamentals. &here is no doubt that only bans 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 e=uip themselves thoroughly to face the future competition. NBFC 8 RB" "N ECONO',

I& is now the turn of non-baning financial companies #N%+,s$ to noc at the doors of officialdom for greater empowerment.

 !fter co-operative bans got themselves listed under the 0ecuritisation !ct" the N%+, sector has recently moved the 1inistry of +inance seeing powers under  the legislation to enable them to wield the stic against defaulters. &he 0ecuritisation !ct provides enormous powers to the lenders to recover nonperforming assets #N'!s$ from chronic defaulters allowing them to sei9e and auction the assets of borrowers unwilling to come for settlement or to change the management of the defaulting companies. ?&he N%+, sector has approached us through some of their associations re=uesting that they be also given the powers under the !ct. (e are examining their demand"? a senior +inance 1inistry official said. 6owever" is seems unliely that the !ct would be extended to N%+,s in a hurry. ?&he law is too new. (e 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. &he burden of N'!s of the N%+,s is much smaller compared to the baning sector. (hile on last count" the baning sector was carrying a bad debt burden of  around *s @<"<<< crore" the aggregate N'!s of the N%+,s up to 1arch D:" F<
On its part" the baning sector has been going strong in its recovery efforts under  the 0ecuritisation !ct with industry figures up to end 3ecember F<
CONC0*S"ON *N"TE TR*ST OF "N"A

&he Unit &rust of India #U&I$ was established in :;@ with three main objectives namely #i$ to contribute to India8s industrial development by transforming

household savings into corporate investment" #ii$ to enable

common investors to participate in the prosperity of the capital maret through portfolio management aimed at reasonable return" li=uidity and safety and #iii$ to facilitate orderly development of the capital maret. U&I 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" li=uidity" regular return and capital appreciation. 3uring F<
4ife Insurance ,orporation of India provides life insurance cover under a number  of schemes. &he ,orporation deploys its funds eeping 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 lie power" drining water supply" housing and sewerage" road transport and cooperative industrial units. It also provides term loans to industrial units and gives shareBdebenture and other resource support to term lending institutions. 4I, business in the 0tate went up to E"CE"@@< policies with assured sum of *s.A"
Setor-wi#e "nve#tment o% 0"C in Ori##a

E+E0OP'ENT F"NANC"A0 "NST"T*T"ON "N*STR"A0 E+E0OP'ENT BAN OF "N"A ("B"$

&he Industrial 3evelopment %an 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. I3%I has diversified its activities in different areas of credit" merchant baning" stoc exchange" capital maret" corporate services and research. &he promotional activities of I3%I include setting up of &echnological ,onsultancy Organi9ations" sponsoring of Suality &esting ,enters" 0cience and &echnology 'ars" Industrial 'otential 0urvey" )ntrepreneurship 3evelopment 'rograms" and training program for the employees of other development bans. 3uring F<
RO0E OF RB"

*egulated as the non-ban entities are by different agents" an integrated financial maret 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. *ecently" the *eserve %an of India re-grouped the asset-financing non-ban financing companies #N%+,s$ engaged in financing real and physical assets supporting economic activity  such as automobiles and general purpose industrial machinery  as asset financing companies #!+,s$. &he remaining companies will continue to be called loan and investment companies. In the proposed structure" the following categories will emerge  asset financing companies" investment companies and loan companies. &his highlights the need for a comprehensive approach towards the non-baning sector instead of looing at issues piece-meal. &he non-baning sector consists of an assorted group of entities" regulated by different agencies with the stress more on regulation than on the development of an integrated financial maret. &o =uote the *%Is #&rend and 'rogress of %aning in IndiaJ November :" F<<@$K ?&hough heterogeneous" N%+,s could be broadly classified into four  categories  e=uipment leasing" hire purchase" loan companies and investment companies. ! separate category of N%+,s" called residuary non-baning companies #*N%,s$" also exists" as they could not be categori9ed slotted into any one of the other four categories. %esides" there are miscellaneous nonbaning companies #chit funds$" mutual benefit financial companies #nidhis and un-notified nidhis$ and housing finance companies. ?It is noteworthy that nidhi companies are not regulated by the *%I as they come under the regulatory purview of the 1inistry of ,ompany !ffairs" while the chit fund companies" although governed by the 1iscellaneous Non-%aning ,ompanies #1N%,s$ #*eserve %an of India$ 3irections" :;CC" issued by the *eserve %an with regard to acceptance of deposits" are regulated by the

*egistrar of ,hits of the respective 0tate Governments. +urthermore" 1N%,s" not accepting public deposits have been exempted from submitting returns to the *%I since 3ecember FC" F<
&here are" for instance" the unincorporated bodies" mainly money-lenders" which are regulated by 0tate governments" including the rates and other covenants. &he chit funds also come under the *egistrar of ,hits of the 0tate governments" while the nidhis are overseen by the 3epartment of ,ompany !ffairs. 1any committees and groups have been constituted to develop the non-baning sector so as to create an integrated financial maret. 0ome of these panels are the %habatosh 3atta 0tudy GroupJ the 5ames *aj 0tudy Group" the ,haravarty ,ommitteeJ the /aghul ,ommitteeJ the Narasimham ,ommitteeJ the 0hah ,ommitteeJ the Rhanna ,ommitteeJ and the /asudev ,ommittee. %ut" unfortunately" the focus seems to be on regulation rather than development. 'articularly after the bad experience with some N%+,s in the late :;;
&here is a need to recognise that these financial entities  from the smallest money-lender to large corporates  play a vital role in the economy. &he focus must be on the development of the sector and" in the process" strengthen credit availability for the non-corporate sector.  !ccording to *%I data" the N%+,s have total assets of nearly *s @<"<<< crore as of F<<@. &his is without considering the unincorporated bodies" which are large in number and also play a major role in the credit maret. Other than the N%+,s on which data are provided by the *%I" there is a huge informal sector" of moneylenders" etc." which provides a substantial portion of the credit re=uirements of the economy. &able : shows the share of the noninstitutional sector in the credit needs of the economy.

+rom &able F" it is clear that D per cent of the debt of rural households was from moneylenders #FA per cent in the case of urban households$ during F<
Of course" regulation should come after development. &he said authority should also have it under its ambit the unincorporated bodies now regulated by 0tate governments. &he authority can be under the +inance 1inistry or under the *%I as long as the learning curve is being traversed. &he said authority should facilitateK Enhaning the credit delivery mechanism for ?unorganised? sectorsJ "ntrodution o%  rating processes at retail levelJ Creating a !eve!  playing field when global players enter retailJ Rever#ing the inverse relationship between the si9e of borrowing and the cost of 

borrowingJ Strengthen the professionalism of the non-ban sector through education and

training "ntegrating the financial marets.

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 ade=uate availability of credit to the fastest growing sectors of the economy. &he aggregate monetary policy of the central baner can be achieved if" and only if" the role of non-baning financial institutions" including the UI%s" are recognised encouraged and integrated into our financial system. !nd" for that" we need the ind of authority mentioned above.

RECO''ENAT"ON &here are efforts by governments both at the ,entre and in the 0tates 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 marets may lead to a situation of cherry picing by the global players andBor  linages created only at the ?creamy layer? level without ade=uate strengthening of the base. &he paradigm of taing the UI%s as channel partners by the commercial bans on a large scale would facilitate the players in these fastest growing activities to compete effectively with global players in the emerging scenario. 0uggested are certain steps that will facilitate 

*eduction in interest cost and hence benefits the ultimate consumerJ



)nhancing the credit delivery mechanismsJ



Introduction of rating processes at retail levelJ



,reating level playing field when global players enter retailJ



*eversing the inverse relationship between the si9e of borrowing and the cost

of borrowingJ 

0trengthening the professionalism of the N%+, sector through education and

training" and 

Integrating the financial marets.

It is re=uired for us to recast the architecture of the Indian financial system if it has to ensure growth of the economy along with ade=uate availability of credit to the fastest growing sectors of the economy. &he aggregate monetary policy of  the *%I can be achieved if and only if the role of N%+,s" including the UI%s" are recognised" encouraged and integrated in the financial system.

B"B0"O/RAP7,

:. Nabhi’s Law relating to Non Banking Financial Companies,  ! Nabhi 'ublication" F<
:<. Reserve Bank of India Bulletin,  !ugust F< /arious issues" +ebruary F<
:A. )uide to Companies &ct*  !. *amaiya" &welfth )dition" (adhwa and ,ompany" Nagpur" :;;F. :@. 3r. Guruswamy 0." HN%+,s > &he *ating %lues" Charterd +ecretar!, !ugust F<