Discuss briefly the regulatory framework governing the Non-Banking Finance Companies (NBFC) in India.
(a) Regulated by 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.
(b) Governing Chapter: 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 Reserve Bank of India Act, 1934.
(c) 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.
(d) Benefit: 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 Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, and chit business.|
|Demand deposit||Banks can accept terms deposits posits as well as demand deposits.||NBFCs can accept only term de¬posit but not demand deposits.|
|Payment & settlement system.||Banks form part of the payment settlement 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||Banks provide a variety of services transaction services.||NBFCs do not facilitate trans-action services.|
|Reserve ratios||Banks are required to maintain reserve ratios with RBI.||NBFCs are not required to maintain reserve ratios with RBI.|
|Deposit Insurance||Available||Not available|
Write a short note on Asset Finance Company (AFC)
An AFC is a company that is a financial institution carrying on as its principal business the financing of physical assets which supports the productive or economic activity of the organization to be financed.
Such type of NBFC may finance a large number of assets such as
- Lathe machines,
- Generator sets,
- Earthmoving and material handling equipment,
- Moving on own power and
- General-purpose industrial machines.
Principal business for this purpose is defined as aggregate of financing real or physical assets supporting economic activity and income arising there-from is not less than 60% of its total assets and total income respectively.
The asset finance companies can either be deposit-taking or non-deposit-taking.
What are the regulations relating to the acceptance of deposits by non-banking financial companies conferred under chapter III B of the Reserve Bank of India Act, 1934? [Dec. 2019 (4 marks)
Some of the important regulations relating to acceptance of deposits by NBFCs are as under:
- Term of Deposit: The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and a maximum period
of 60 months. They cannot accept deposits repayable on demand.
- Interest Rate: NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The interest may be paid or compounded at rests not shorter than monthly rests.
- Incentives/gifts: NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.
- Credit rating: NBFCs should have a minimum investment-grade credit rating.
- Deposit Insurance: The deposits with NBFCs are not insured.
- Guarantee by RBI: The repayment of deposits by NBFCs is not guaranteed by RBI.
- Disclosures: Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.
What do you mean by a Non-Banking Financial Company? Enumerate the powers of the Reserve Bank of India vested in the RBI Act for regulating and supervising the Non- Banking Financial Companies. [Dec. 2018 (4 Maries)]
(a) Meaning of NBFC: Non-Banking Financial Company (NBFC):
- is a company registered under the Companies Act, 1956/2013;
- engaged in the business of loans and advances, acquisition of shares, stocks, bonds, debentures, and securities issued by Government or local authority or other marketable securities of a like nature;
- engaged in the business of leasing, hire-purchase, insurance business, and chit business.
NBFC does not include any institution whose principal business is that of:
- Agriculture activity,
- Industrial activity,
- Purchase or sale of any goods or providing any services and
- Sale/purchase/construction of the immovable property.
(b) Power of RBI for regulation and supervision of NBFC
1. The Reserve Bank has been given the powers under the RBI Act, 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business.
2. The regulatory and supervisory power of the Reserve Bank of India is as under:
- Ensure healthy growth of NBFC’s
- Issue certificate of registration and prescribe net owned fund for NBFC’s
- Regulate or prohibit the issue of prospectus or advertisements soliciting deposits of money by NBFC’s
- Determine the policy for NBFC’s
- Call for information and issue directions to NBFC’s
- Prevent the affairs of any NBFC being conducted in a manner detrimental to the interest of the depositors or in a manner prejudicial to the interest of the NBFC.
‘Non-Banking Financial Companies’ are akin to that of banks, but they differ from banks in certain cases. Explain. [June 2019 (4 Marks)]
(a) Meaning of NBFC:
- A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act,
- Engaged in the business of loans and advances, acquisition of shares/stocks/bonds/ debentures /securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business
- It does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities), or providing any services and sale/purchase/construction of the immovable property.
(b) Similarity between NBFC and Bank: NBFCs are doing functions similar to banks. NBFCs lend and make investments and hence their activities are akin to that of banks;
(c) Difference between NBFC and bank
There are a few differences as given below:
- NBFC cannot accept demand deposits.
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on themselves.
- The deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks.
State the requirements for registration of Non-Banking Finance Company with Reserve Bank of India under the Reserve Bank of India Act, 1934 [Dec. 2019(4 Marks each)]
(a) In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial Company can commence or carry on the business of a non-banking financial institution without obtaining a certificate of registration from the Reserve Bank of India. There are various broad categories of NBFC’s which can apply to and be registered with the RBI.
(b) However, for applying for registration, the NBFC should comply with the following:
- It should be a company registered under the Companies Act, and
- It should have a minimum net-owned fund.
Write a short note on Capital Requirements ‘Systemically Important Core Investment Company’
(a) Meaning: “Systemically important Core Investment Company (CIC- ND-SI)” means a core investment company having total assets of not less than ₹ 100 crores either individually or in aggregate along with other CICs in the Group and which raises or holds public funds.
(b) Capital Requirements for ‘Systemically Important Core Investment Company (CIC-ND-SI):
Adjusted Net Worth of a CIC-ND-SI should at no point of time be less than 30% of its aggregate risk-weighted assets on the balance sheet and risk-adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year prescribed under the Core Investment Companies (Reserve Bank) Directions, 2016.
(c) Directions: Such NBFC needs to comply with Core Investment Companies (Reserve Bank) Directions, 2016.
Whether permission of RBI is necessary in case of acquisition by Systemically Important Core Investment Company of other Core Investment Company if the acquisition does not result in a change in management?
Acquisition/Transfer of Control of Systemically Important Core Investment Company (CIC-ND-SI): A systemically important CIC, shall require a prior written permission of the RBI for the following:
- Any takeover or acquisition of control of CIC, which may or may not result in a change of management.
- Any change in the shareholding of CIC, including progressive increases over time, results in the acquisition/transfer of shareholding of 2696 or more of the paid-up equity capital of the CIC. However, prior approval shall not be required in case of any shareholding going beyond 26% due to buyback of shares/reduction in capital where it has the approval of a competent Court. The same is to be reported to the RBI not later than 1 month from its occurrence.
- Any change in the management of the CIC results in a change in more than 30% of the directors, excluding independent directors. However, prior approval shall not be required in the case of directors who get re-elected on retirement by rotation.
- CICs shall continue to inform the RBI regarding any change in their directors/management not later than 1 month from the occurrence of any change.
State the provisions relating to registration of the Systemically Important Non-Deposit taking Company and Deposit taking Company under the relevant directions issued by the Reserve Bank of India.
Registration: In exercise of the powers conferred under section 45-IA( 1 )(b) of the RBI Act, 1934 and all the powers enabling it in that behalf, the RBI, has specified? 200 lakhs as the Net Owned Fund (NOF) for a non-banking financial company to commence or carry on the business of the non-banking financial institution, except wherever otherwise a specific requirement as to NOF is prescribed by the RBI.
A non-banking financial company holding a Certificate of Registration issued by the RBI and having net owned fund of less than? 200 lakhs, may continue to carry on the business of the non-banking financial institution if such company achieves net owned fund of? 200 lakhs before April 1, 2017.
It will be incumbent upon such NBFCs, the NOF of which currently falls j below? 200 lakhs, to submit a statutory auditor’s certificate certifying compliance with the prescribed levels by the end of the period as given above.
NBFCs failing to achieve the prescribed level within the stipulated period shall not be eligible to hold the Certificate of Registration as NBFCs.
As a part of Corporate Governance, each ‘Applicable NBFC’ has to constitute some committees. Explain the role of each such committee.
Constitution of Committees of the Board:
1. Audit Committee: All applicable NBFCs shall constitute an Audit Committee, consisting of not less than 3 members of its Board of Directors. The Audit Committee constituted u/s 177 of the Companies Act, 2013 shall be the Audit Committee for this purpose.
The Audit Committee shall have the same powers, functions, and duties as laid down in Section 177 of the Companies Act, 2013.
The Audit Committee must ensure that an Information System Audit of the internal systems and processes is conducted at least once in two years to assess operational risks faced by the applicable NBFCs.
2. Nomination Committee: All applicable NBFCs shall form a Nomination Committee to ensure the fit and proper status of proposed/existing directors.
The Nomination Committee shall have the same powers, functions, and duties as laid down in Section 178 of the Companies Act, 2013.
3. Risk Management Committee: To manage the integrated risk, all applicable NBFCs shall form a Risk Management Committee, besides the Asset Liability Management Committee.
State to whom the provisions of Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit-Taking Company (Reserve Bank) Directions, 2016 shall apply? [Dec. 2018 (4 Marks)]
The provisions of Non-Banking Financial Company – Systemically Important Non-Deposit taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 shall apply to the following:
- Every Systemically Important Non-Deposit taking Non-Banking Financial Company (NBFC-ND-SI) registered with the RBI under the provisions of the RBI Act, 1934.
- Every Deposit-taking Non-Banking Financial Company (NBFC-D) registered with the RBI under the provisions of the RBI Act, 1934.
- Every NBFC-Factor registered with the RBI u/s 3 of the Factoring Regulation Act, 2011 and having an asset size of ₹ 500 Crores and above.
- Every Infrastructure Debt Fund – Non-Banking Finance Company (IDF-NBFC) registered with the RBI under the provisions of the RBI Act, 1934.
- Every Non-Banking Finance Company – Micro Finance Institutions (NBFC-MFIs) registered with the RBI under the provisions of the RBI Act, 1934 and having an asset size of ₹ 500 Crores and above.
- Every Non-Banking Finance Company – Infrastructure Finance Company (NBFC-IFC) registered with the RBI under the provisions of the RBI Act, 1934 and having an asset size of ₹ 500 Crores and above.
What are the reporting requirements for non-banking financial companies?
Deposit accepting NBFCs are required to submit the following returns/ documents to the RBI:
- NBS-1 Quarterly returns on deposits in First Schedule.
- NBS-2 Quarterly return on Prudential Norms.
- NBS-3 Quarterly return on Liquid Assets
- NBS-4 Annual return of critical parameters by a rejected company holding public deposits.
- NBS-5 This return stands withdrawn.
- Audited Balance sheet and Auditor’s Report by NBFC accepting public deposits.
- Branch Information Return.
Returns to be submitted by NBFCs-ND-SI:
- NBS-7 Quarterly statement of capita! funds, risk-weighted assets, risk asset ratio, etc., for NBFC-ND-SI.
- Monthly Return on Important Financial Parameters of NBFCs-ND-SI.
- ALM returns such as:
- Statement of short term dynamic liquidity in format ALM [NBS- ALMl] – Monthly
- Statement of structural liquidity in format ALM [NBS-ALM2] – Half-yearly
- Statement of Interest Rate Sensitivity in format ALM [NBS-ALM3] – Half-yearly
- Branch Information return.