Discuss briefly the regulatory framework governing the Non-Banking Financial Companies (NBFCs) in India.
1. Registered with RBI: With the amendment of the Reserve Bank of India Act, 1934 in January 1997, in terms of Section 45-IA, all Non-Banking Financial Companies have to be mandatorily registered with the RBI.
2. Provision under RBI Act: The Reserve Bank of India (RBI) is entrusted with the responsibility of regulating and supervising the Non-Banking Financial Companies by virtue of powers vested in Chapter III-B of the p Reserve Bank of India Act, 1934.
3. Objective: The regulatory and supervisory objective is:
- To ensure healthy growth of the financial companies;
- To ensure that these companies function as a part of the financial system within the policy framework, in such a manner that their existence and functioning do not lead to systemic aberrations.
The quality of surveillance and supervision exercised by the RBI over the NBFCs is sustained by keeping pace with the developments that take place in the non-banking sector of the financial system.
Distinguish between: Banks and Non-Banking Financial Companies
Following are the main points of distinction between Banks and Non-Banking Financial Companies:
|Points||Banks||Non-Banking Financial Companies|
|Meaning||The bank is an RBI-authorized financial institution that aims at providing banking services to the general public.||NBFC is a company engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, and securities issued by the Government or local authority or other marketable securities of a like nature, leasing, hire- purchase, insurance business, and chit business.|
|Demand deposits||Banks can accept term deposits as well as demand deposits.||NBFCs can accept only term deposits but not demand deposits.|
|Payment & settlement system||Banks form part of the payment and settlement system.||NBFCs do not form part of the payment and settlement system.|
|Cheque||Banks can issue cheques drawn on themselves.||NBFCs cannot issue cheques drawn on themselves.|
|Credit creation||Banks are termed as creators of credit through money multiplier activity.||NBFCs cannot be termed as creators of credit.|
|Transaction services||Banks provide a variety of transaction services.||NBFCs do not facilitate transaction services.|
|Reserve ratios||Banks are required to maintain reserve ratios with RBI.||NBFCs are not required to maintain reserve ratios with RBI.|
Explain the various advantages of NBFCs.
Various advantages of NBFCs are as follows:
1. Competitive Interest Rates: Non-Banking Financial has brought down the interest rates to either equal to bank lending rates or at times even lower to bank rates. When the rate of interest is also lowered, borrowers found this more easy and affordable. This has also resulted in lower EMI (Equated Monthly Instalment) for borrowers.
2. Quick Processing: As compared to banks, NBFC’s are lenient towards eligibility criteria. This makes loan approval easier, a smoother process, and quicker. Most of the time, people apply for loans when they are in immediate need of money. NBFCs have taken this as an opportunity to meet the demand by quickly processing the loans at the competitive rate of interest. At times, borrowers are even ready to compromise on the interest rates if the loan amount is huge and if they could get it approved quickly.
3. fewer Rules and Regulations: The rules and regulations for lending are not as stringent as banks. Example: NBFC’s do not have statutory reserve ratios and can open branches at their will. This helps borrowers to get loans easily. In view of less complicated loan processing requirements, borrowers are highly satisfied. Even the loan amount approved will be quite lesser than the collateral value. This is due to the high risk of default.
4. Loan available for Individuals with Poor Credit Rating: Individuals with poor credit ratings generally will not get loans from banks. On the other hand, loans will be offered to individuals with low credit scores by NBFCs but most of the time the interest rates for such borrowers will be higher than market rates. Due to these aforementioned advantages, most of the NBFCs are growing.
5. NBFCs offer a variety of loans: Corporate sector prefers banks; however retail sector chooses NBFCs over banks. Simple loans such are vehicle financing loans, gold loans, home loans, and durable loans are offered by NBFCs and the customer satisfaction ratio is high here.
Rakesh is interested to form a Non-Banking Financial Company (NBFC) for carrying business of providing microfinance in the rural areas in the name of ‘SABKO Loan Company Ltd.’. Advice him about the g various categories of NBFCs and let him know which category of NBFC will suit him for applying for the license. [Dec. 2018 (5 Marks)]
Before applying for NBFC License, the type and category of the NBFC license must first be determined. The following are the categories of NBFC Companies:
1. Asset Finance Company (AFC): An Asset Finance Company is a company which is a financial institution carrying on as its principal business the financing of physical assets such as automobiles, tractors, lathe machines, generator sets, earthmoving, and material handling equipment, moving on own power and general purpose industrial machines.
2. Investment Company: An Investment Company is any company that is a financial institution carrying on as its principal business the acquisition of securities (shares/bonds/other financial securities).
3. Loan Company: Loan Company is any company that is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.
4. Infrastructure Finance Company: Infrastructure Finance Company is a non-banking finance company that deploys at least 75% of its total assets in infrastructure loans, has a minimum Net Owned Funds of Rs. 300 crore, maintains a minimum credit rating of “A” or equivalent with a Capital to Risk Asset Ratio of 15%.
5. Systemically Important Core Investment Company: Systemically Important Core Investment Company is an NBFC with an asset size of over 100 crores, accepts public funds, and is involved in the business of acquisition of shares and securities subject to fulfillment of certain conditions.
6. Infrastructure Debt Fund: Infrastructure Debt Fund is a company registered as NBFC to facilitate the flow of long-term debt into infrastructure projects. Infrastructure Debt Funds raise resources through the issue of Rupee or Dollar denominated bonds of minimum 5 years maturity. Only Infrastructure Finance Companies can sponsor such companies.
7. NBFC: Micro Finance Institution: Micro Finance Institution is a non-deposit-taking NBFC that is engaged in microfinance activities.
8. NBFC Factor: NBFC Factor is a non-deposit-taking NBFC engaged in the principal business of factoring.
Looking into the features of various NBFCs, ‘Non-Banking Financial Company – Micro Finance Institution (NBFC-MFI) will suit Mr. Rakesh as this 1 is for carrying business of providing microfinance in the rural areas.
What do you understand by ‘Housing Finance Company (HFC)’? What are the basic registration requirements of such companies?
Housing Finance Company (HFC):
Meaning: The Housing Finance Company in the form of Non-Banking Financial Company which is registered under the Companies Act, 1956/2013 and engaged in the principal business of financing of acquisition or construction of houses that includes the development of plots of lands for the construction of new houses.
Registration: Apart from registration under the Companies Act, 2013, Housing Finance Company (HFC) also requires registration with the National Housing Bank Act, 1987 for commencing or carrying on the business of housing finance.
Conditions for Housing Finance Company- In terms of Section 29A of the National Housing Bank Act, 1987, no Housing Finance Company shall commence or carry on the business of a housing finance institution without
(a) Obtaining a certificate of registration from National Housing Bank issued under Chapter V of the said Act, and
(b) Having the net owned fund of ₹ 10 Crore or such other higher amount, as the National Housing Bank may, by notification, specify.
Housing Finance Company cannot conduct the business of housing finance without obtaining a Certificate of Registration from NHB. The conduct of business without obtaining a certificate of registration is an offense punishable under the provisions of the National Housing Bank Act, 1987. NHB can also file applications for winding up of such HFC, u/s 33B of the said Act.
Different categories of HFCs registered with NHB: HFCs are categorized in terms of the type of liabilities, by NHB, into Deposit and Non-Deposit accepting HFCs and are issued Certificate of Registration accordingly.
With reference to Asset Reconstruction Company, answer the following:
(i) Who regulates the Asset Reconstruction Companies in India?
(ii) What functions are performed by Asset Reconstruction Companies (ARCs)?
(iii) What are the objectives of such companies?
Governing law: Asset Reconstruction Company (Securitization Company/Reconstruction Company) is a company registered u/s 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002.
Regulator: It is regulated by RBI as a Non-Banking Financial Company (u/s 45-I(f)( iii of RBI Act, 1934).
Exemption to ARC: RBI has exempted ARCs from the compliances of sections 45-IA, 45-IB & 45-IC of the RBI Act, 1934. ARC functions like an AMC within the guidelines issued by RBI.
Functions of ARC: As per RBI Notification ARC performs the following functions:
- Acquisition of financial assets
- Change or takeover of management/sale or lease of business of the borrower
- Rescheduling of debt
- Enforcement of security interest
- Settlement of dues payable by the borrower
Objectives of Asset Reconstructions Companies:
(a) NPA management: Asset Reconstructions companies are created to manage and recover Non-Performing Assets acquired from the banking system.
(b) Separate Entity to recover bad debts: Banks and financial institutions with a large proportion of their bad loans or Non-Performing Assets can sell to a separate entity Le. Asset Reconstruction Company.
(c) Recovery of Dues: Then Asset Reconstruction Companies recover a sum through attachment, liquidation, etc.
(d) Clean Books: They help banks in making clean their books by reducing Non-Performing Assets.
(e) Profit Making: Asset Reconstruction Companies are also making a profit by buying Non-Performing Assets at a lower price.
‘Asset Reconstruction Companies are created to manage and recover Non-Performing Assets’ – Comment referring to the functions and benefits of Asset Reconstruction Companies. [Dec. 2019 (4 Marks)]
As per RBI Notification No. DNBS.2/CGM(CSM)-2003, dated April 23,2003,
Asset Reconstruction Company (ARC) performs the following functions:
- Acquisition of financial assets
- Change or takeover of management/sale or lease of business of the borrower
- Rescheduling of debt
- Enforcement of security interest
- Settlement of dues payable by the borrower
The benefits of incorporating an ARC are as under:
- Banks can focus better on managing the core business including providing new business opportunities for the ARC.
- Restoration of depositor and investor confidence by ensuring the lender’s financial health.
- It will help in building industry expertise in loan resolution and re-structuring management besides serving as a catalyst for important legal reforms in bankruptcy procedures and loan collection.
- ARCs play an important role in developing capital markets through secondary asset instruments.
What are Micro Finance Institutions?
MFIs are financial institutions working towards the upliftment of the needy and underprivileged section of society by providing short-term loans to set up their own venture. They take a minimum or very calculated risk and fund the interested borrowers to help them get trained, set up, and run a small-scale business. Microfinance institutions apart from giving financial help also educate people about the current market trends and help them compete in the present market.
These financial institutions usually do not make any guarantee or ask for any kind of collateral from the borrower to lend money. This is where these institutions stand out from the traditional banking organizations. While banks are quite reluctant about lending money to the poor unemployed crowd considering them as high-risk components, MFIs are specially dedicated to providing all the necessary financial help to this section of society.
These organizations not only take the risk of funding them but also work with them to ensure that the offered money gets utilized appropriately. They contribute in every possible way to uplift the underbanked section and make them financially independent.
Types of MFIs in India: MFIs operate in a number of forms and shapes § in India. Though each of them has a different formation and work nature, f they all provide financial help to the needy section of the society in the form of loans and other financial products.
Here are the details of the various types of MFIs in India:
- JLG or Joint Liability Group
- SHG or Self Help Group
- The Grameen Bank Model
- Rural Co-operatives
Write a short note on Characteristics of Micro Finance Institutions
There are a number of features that make Micro Finance Institutions different from formal banking organizations.
Here are some of the key features of the MFIs in India:
- Low Income Group: These institutions offer loans to individuals who belong to the low-income group.
- The loans that are offered by these institutions are of small amounts and are known as microloans.
- Security: No collateral for a loan is required.
- Short Period: MFIs provide loans to the borrowers for a short period, once they repay the loan they can again opt for another one.
- Transaction cost is low.
- Loan for Business: MFIs give loans to people who want to start up a business of their own without any security or collateral.
- The repayment frequency of the microloans offered by MFIs is high and the borrower needs to repay the amount at quick intervals.
- Self Employment: In most cases, the loans are provided by these organizations for income-generation purposes.
“Concept of self-help group” is the most exciting discovery in the context of Microfinance. Explain the terms and features of microfinance [Dec. 2019 (4 Marks Each)]
NABARD has defined microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with the only qualification that
- transactions value is small and
- customers are poor.”
The Indian microfinance scene is dominated by SHGs and their linkage with banks. This has helped in the empowerment of women and the eradication of property among people with low income.
Microfinance provides a greater menu of options whereby the small loan can be garnered not just from external sources but also through self-mobilization, by way of saving and sale of assets.
The biggest flexibility in the case of microfinance is the lack of any physical collateral, even in the case of a loan from the bank.
The characteristics of MFI’s may be summarised as under:
- The size of the loan given by the MFI is small.
- The repayment period is short.
- MFI can mobilize resources both from internal and external sources.
- No collateral for a loan is required.
- The purpose of the end-use of loans is flexible.
- Loans given are mostly group loans, trickling down to individuals.
- Transaction cost is low, due to group lending.
Write a short note on Characteristics of a Nidhi Company
NBFC: A Nidhi Company, is one that belongs to the non-banking finance sector and is recognized u/s 406 of the Companies Act, 2013. Core Business: Their core business is borrowing and lending money between their members.
Other Names: They are also known as Permanent Fund, Benefit Funds, Mutual Benefit Funds & Mutual Benefit Company.
Regulator: They are regulated by the Ministry of Corporate Affairs, Government of India, and are registered under the Companies Act, 2013.
Characteristics: Characteristics of a Nidhi Company may be summarized below:
- It is allowed to transact business only with its members and with nobody else. Hence, in case a person wishes to place a deposit with a Nidhi or borrow money from a Nidhi, he must first become a member (shareholder) of the Nidhi by subscribing to 10 equity shares or shares equivalent to ₹ 100.
- After the commencement of the Companies Act, 2013, no Nidhi shall issue preference shares.
- They are allowed to open branches subject to compliance with Rule 10 of the Nidhi Rules, 2014, but do not operate on a PAN India basis.
- They are incorporated as public companies with a minimum paid-up equity share capital of ₹ 5,00,000.
- Loans may be provided only to its members and should be fully secured.
- A director of a Nidhi shall be a member and shall hold office for a term up to 10 consecutive years on the Board of a Nidhi.
- Nidhi can declare dividends not exceeding 25% and any higher amount shall be specifically approved by the Regional Director.
- Nidhi shall adhere to the prudential norms for revenue recognition and classification of assets in respect of mortgage loans or jewel loans as provided in Rule 20 of the Nidhi Rules, 2014.
Explain the process of incorporation of Nidhi Companies.
Incorporation of Company:- For incorporation, the normal procedure for incorporating a public company is required to be complied with, such as obtaining the availability of name, faffing of MOA and AOA, and other related documents.
Object Clause: Care must be taken to see that the Objects Clause of the Memorandum should restrict itself to the object of cultivating the habit of thrift and savings amongst its members, receiving deposits from and lending to its members only for their mutual benefit and for other permitted purposes. The name of the company should end with the words “Nidhi Limited”.
Criteria as per Rules: After incorporation as a Nidhi, according to Rule 5 of the Nidhi Rules, 2014, every Nidhi shall ensure that it has:
(a) Not less than 200 members;
(b) Net Owned Funds of ₹ 10 lakh or more;
(c) Unencumbered term deposits of not less than 10% of the outstanding deposits; and
(d) Ratio of Net Owned Funds to deposits of not more than 1: 20.
Net Owned Funds: As per Rule 9, every Nidhi shall maintain Net Owned Funds of not less than ₹ 10 lakh or such a higher amount as the Central Government may specify from time to time.
Razavi and her six more relatives and friends want to incorporate a Nidhi Company. They seek your advice on the following issues with respect to the formation of the company:
(i) Whether Nidhi Company can be formed as a private company? Is there any specific law for the Nidhi Companies?
As per Rule 4 of the Nidhi Rules, 2014, a Nidhi to be incorporated under the Act shall be a public company, and hence Nidhi Company cannot be formed as a private company. Nidhi Companies are regulated by the Companies Act, 2013 read with Nidhi Rules, 2014.
Even though Nidhi Companies are regulated by the provisions of the Companies Act, 2013, they are exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations within members.
(ii) Whether the approval of the Reserve Bank of India (RBI) is required?
No RBI approval is necessary to register the company, as RBI has specifically exempted this category of NBFC in India to comply with its core provisions such as registration with RBI.
(iii) Whether Nidhi is allowed to raise funds through the issue of equity shares and preference shares?
As per Rule 6 of the Nidhi Rules, 2014, Nidhi shall not issue preference shares, debentures, or any other debt instrument by any name or in any form whatsoever. Thus, Nidhi Company can issue equity shares but cannot issue preference shares.
(iv) Whether Nidhi is allowed to carry on business other than the business of borrowing or lending in its own name?
As a practicing Company Secretary, advise with reference to the provisions of the Companies Act, 2013. [June 2019 (4 Marks)]
As per Rule 6 of the Nidhi Rules, 2014, Nidhi shall not carry on the business of chit fund, hire purchase finance, leasing finance, insurance, or acquisition of securities issued by any body corporate.
How Payments Banks are different from regular Banks?
(a) Loans: A payments bank aims to further financial inclusion, especially through savings accounts and payments services. Accordingly, a payments bank is not allowed to give any form of a loan or issue a credit card, which is also a form of unsecured personal loan.
(b) Deposit Restriction: Even in the case of savings accounts, a payments bank has certain restrictions. Customers can open a savings account with deposits of only up to ₹ 1 lakh, which is also the maximum balance allowed. These banks currently offer interest rates similar to that being offered by regular banks. As per RBI guidelines, payment banks can’t accept fixed or recurring deposits.
(c) Cheque Book Facility: Savings accounts customers also do not have the checkbook facility at present. Current account holders will have this facility, though.
(d) Mobile App: Payments Bank account holders can also use the mobile banking app for checking balance, statements, bill payments, and online transfers.
Write a short note on Registration & Licensing of Payment Banks
The payments bank will be registered as a Public Limited Company under the Companies Act, 2013, and licensed u/s 22 of the Banking Regulation Act, 1949, with specific licensing conditions restricting its activities mainly to acceptance of demand deposits and provision of payments and remittance services.
It will be governed by the provisions of:
- Banking Regulation Act, 1949
- Reserve Bank of India Act, 1934
- Foreign Exchange Management Act, 1999
- Payment & Settlement Systems Act, 2007
- Deposit Insurance & Credit Guarantee Corporation Act, 1961
- Other relevant Statutes and Directives, Prudential Regulations, and other Guidelines/Instructions issued by RBI and other regulators from time to time.
The payments bank will be given scheduled bank status once it commences operations and if it found suitable as per Section 42(6)(a) of the RBI Act, 1934.
Payment Bank is a new model of banks conceptualized by the Reserve Bank of India. Elucidate. [Dec. 2018 (4 Marks)]
Payments banks is a new model of banks conceptualized by the Reserve Bank of India (RBI).
(a) Deposit Limit: These banks can accept a restricted deposit, which is currently limited to I lakh per customer and may be increased further.
(b) Interest: They can pay interest on these deposits just like a savings bank account. Both current accounts and savings accounts can be operated by such banks.
(c) Various Services: Payments banks can issue services like ATM cards, debit cards, net banking, third party transfers, and mobile banking and offer remittance services.
(d) Loans: These banks cannot grant loans or issue credit cards.
(e) Objective: The main objective to widen the spread of payment and financial services to small businesses, low-income households, migrant labor workforce in a secured technology-driven environment. With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country.
(f) Easy opening Account: To open a bank account and the application process of payments bank is made very easy as compared to other banks.
(g) Mobile App: These bank accounts can be opened instantly through their respective mobile apps just by providing details like the Aadhaar number with KYC verification.
(h) Most of the payment banks have a non-NBFC heritage and will use payment banks as a customer retention and acquisition mechanism.
Easy Finance Ltd. is willing to enter into the banking business via “Payment Bank”. The Board of directors of the Company seeks your advice with respect to the required criteria to be fulfilled by the company with respect to the following:
(i) Application for license
Keeping in view the guideline issued by the RBI, the answer to the given case is as follows:
Application for license: An application has to be filed with RBI in Form III u/s 22 of the Banking Regulation Act, 1949 for a license to commence banking business by a company incorporated in India and desire to commence Payment Bank business.
(ii) Minimum capital requirement
Minimum capital requirement: The minimum capital requirement is Rs. 100 Crore. For the first 5 years, the stake of the promoter should remain at least 40%.
(iii) Voting rights of shareholders
Voting rights of shareholders: The voting rights will be regulated by the Banking Regulation Act, 1949. The voting right of any shareholder is capped at 10%, which can be raised to 26% by RBI. Any acquisition of more than 5% will require approval of the RBI.
(iv) Services that can be undertaken by the bank [Dec. 2018 (4Marks)]
Services that can be undertaken by the bank: Payment Banks can accept a restricted deposit, which is currently limited to 1 Lakh per customer and may be increased further. They can pay interest on these deposits just like a savings bank account. Both current accounts and savings accounts can be operated by such banks. Payments banks can issue services like ATM cards, debit cards, net banking, third-party transfers, and mobile banking and offer remittance services. These banks cannot grant loans or issue credit cards.