NON BANKING FINANCIAL INSTITUTION by DIVYA A S

NON BANKING FINANCIAL INSTITUTION









Submitted By
Divya.A.S
1st Semester MBA
ICM – IMK


ABSTRACT

Non banking financial institutions are companies that do not accept deposits or handle accounts like traditional banks but provide all other form of services like loans, share trading accounts, investment banking etc. Since they are not banks but still provide financial services they are called Non Banking financial Companies (NBFC's). Non-banking financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank. The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI). Non-Banking Finance Companies (NBFCs) are performing a significant role in our financial sector. They have the reach and flexibility in tapping resources and they offer avenues for investment returns to investors. They provide retail services to small and medium business, road transport operators and others, and above all they constitute an important link between banks and the users of financial services. NBFCs have emerged as significant players in the financial sector in the last decade and have shown that they constitute an important component of diversified financial markets.














CONTENTS



1. Introduction
2. Financial Institution
2.1 Banking & non Banking Institution
2.2 Classification of Non Banking Financial Institution
3. Environment of Non Banking Financial Institution
4. Objectives & Structure of NBFI
5.Industry Attractiveness
6. NBFI Services
7. Trends of NBFI
8. Conclusion










1. INTRODUCTION

A company which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is a non-banking financial company Since they are not banks but still provide financial services they are called Non Banking financial Companies (NBFC's).

The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI).In order to achieve its targets, the inner control organized inside the non-banking financial institutions must be structured and stressed as organizing and functioning, NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships.
Non-bank institutions provide different services. They act as suppliers of loans and credit facilities, supporting investments in property, trading money market instruments funding private education, etc. The non-banking financial institutions take an extremely important place inside the financial market and therefore play an appreciable role in the economy

Non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market.NBFIs are important to strengthen the financial system for rapid economic development of the country









2. FINANCIAL INSTITUTION
A financial institution is an institution that provides financial services for its clients or members.The most important financial service provided by financial institutions is acting as financial intermediaries. Most financial institutions are highly regulated by government bodies. Broadly speaking, there are three major types of financial institution
1. Deposit-taking institutions that accept and manage deposits and make loans (this category includes banks, credit unions, trust companies, and mortgage loan companies);
2. Insurance companies and pension funds; and
3. Brokers, underwriters and investment funds
Financial institutions provide service as intermediaries of the capital and debt markets. They are responsible for transferring funds from investors to companies, in need of those funds. The presence of financial institutions facilitate the flow of money through the economy. To do so, savings are pooled to mitigate the risk brought to provide funds for loans. Such is the primary means for depository institutions to develop revenue.

2.1 BANKING & NONBANKING INSTITUTIONS

A Bank is an organization that accepts customer cash deposits and then provides financial services like bank accounts, loans, share trading account, mutual funds etc.

Non banking financial institutions are companies that do not accept deposits or handle accounts like traditional banks but provide all other form of services like loans, share trading accounts, investment banking etc. Since they are not banks but still provide financial services they are called Non Banking financial Companies (NBFC's) .Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 and is engaged in the business of loans and advances, acquisition of shares/stock/bonds/debentures/securities issued by Government or local authority or other securities like marketable nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, sale/purchase/construction of immovable property. A company which has its principal business of receiving deposits under any scheme or arrangement or any other manner, or lending in any manner is a non-banking financial company (Residuary Non-banking Company).

DIFFERENCE BETWEEN BANK AND NON-BANKING FINANCIAL
INSTITUTION
The difference between a bank and a non-banking financial institution (NBFI) is that
(a) A bank interacts directly with customers while an NBFI interacts with banks and governments
(b) A bank indulges in a number of activities relating to finance with a range of customers, while an NBFI is mainly concerned with the term loan needs of large enterprises
(c) A bank deals with both internal and international customers while an NBFI is mainly concerned with the finances of foreign companies
(d) A bank’s man interest is to help in business transactions and savings/ investment activities while an NBFI’s main interest is in the stabilization of the currency.
(e) A bank can accept demand deposits, but an NBFC cannot accept demand deposits; (demand deposits are funds deposited at a depository institution that are payable on demand immediately or within a very short period like your current or savings accounts).
(f) NBFC is not a part of the payment and settlement system and as such cannot issue cheques to its customers whereas a bank can issue cheques to its customers.
(g) Deposit insurance facility of DICGC (Deposit Insurance and Credit Guarantee Corporation) is not available for NBFC depositors unlike in case of banks.
2.2 CLASSIFICATION OF NON BANKING FINANCIAL INSTITUTIONS
Non-Banking Financial Companies (NBFCs) broadly fall into three categories, viz.
(i) NBFCs accepting deposits from the public;
(ii) NBFCs not accepting/holding public deposits; and
(iii) Core investment companies (i.e., those acquiring shares / securities of their group / holding / subsidiary companies to the extent of not less than 90 per cent of total assets and which do not accept public deposit).
Depending upon their nature of activities, non- banking finance companies can be classified into the following categories:
1. Development finance institutions
2. Leasing companies
3. Investment companies
4. Modaraba companies
5. House finance companies
6. Venture capital companies
7. Discount & guarantee houses










3. ENVIRONMENT OF NON BANKING FINANCIAL INSTITUTION

A banking license is a prerequisite for a financial institution that wants to provide banking services, such as taking deposits from the general public.Non-bank financial companies (NBFCs) are financial institutions that provide banking services without meeting the legal definition of a bank, i.e. one that does not hold a banking license. Operations are, regardless of this, still exercised under bank regulation. However this depends on the jurisdiction, as in some jurisdictions, such as New Zealand, any company can do the business of banking, and there are no banking licenses issued.
The working and operations of NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Reserve Bank of India Act, 1934 (Chapter III B) and the directions issued by it under the Act.
As per the RBI Act, a 'non-banking financial company' is defined as:-
a. a financial corporation which is a company,
b. a non-banking institution which has as its principal business, the receiving of deposits under any scheme or arrangement or in any other manner or lending in any manner,
c. Such other banking institution or class of such institution as the RBI may, with previous approval of the Central Government and by notification in official gazette, specify.
Under the Act, it is mandatory for a NBFC to get itself registered with the RBI as a deposit taking company. This registration authorizes it to conduct its business as an NBFC.



The types of NBFCs registered with the RBI are:-
 Equipment leasing company: - is any financial institution whose principal business is that of leasing equipments or financing of such an activity.
 Hire-purchase Company: - is any financial intermediary whose principal business relates to hire purchase transactions or financing of such transactions.
 Loan Company: - means any financial institution whose principal business is that of providing finance, whether by making loans or advances or otherwise for any activity other than its own (excluding any equipment leasing or hire-purchase finance activity).
 Investment Company: - is any financial intermediary whose principal business is that of buying and selling of securities.
The above type of companies may be further classified into those accepting deposits or those not accepting deposits.
Now, these NBFCs have been reclassified into three categories:-
 Asset Finance Company (AFC)
 Investment Company (IC) and
 Loan Company (LC). Under this classification, 'AFC' is defined as a financial institution whose principal business is that of financing the physical assets which support various productive/economic activities in the country.

Certain category of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Housing Finance Companies, Insurance Company holding a valid Certificate of Registration issued by IRDA , Nidhi companies etc.

Housing Finance Companies are regulated by National Housing Bank; Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Companies are regulated by the respective State Governments and Nidhi, either by RBI (Reserve Bank of India) or the SEBI (Securities and Exchange Board of India) or both.























4.OBJECTIVES AND STRUCTURE OF NON-BANKING FINANCIAL INSTITUTIONS

The inner control of a non-banking financial institution can be defined as being a ceaseless process to which the board council participates, as well as the managers, the staff, by which is given a reasonable endurances to attain the following targets: the development of activity in conditions of efficiency; the supply of credible information, relevant, complete and timely to the structures implied in taking decisions inside the non-banking financial institution with the legal framework and the proper regulations.

In order to achieve its targets, the inner control organized inside the non-banking financial institutions must be structured and stressed as organizing and functioning, on at least the following elements: the recognition of role and responsibility of the board of directors as well as the managers of non-banking financial institution; identification and evaluation of significant risks; activities of control and separation of responsibilities; information and communication between the functional structures of non-banking financial institution; monitor zing and correction of deficiencies.

ACTORS IN ORGANIZING AND DEVELOPMENT OF INTERNAL CONTROL

In order to achieve its accomplishment, the inner control inside non-banking financial institution must run daily and permanently. There are more factors implied in this action, from the respective institution, namely:

Execution staff of the institution.
The executive staffs make the specific operations for their jobs and represent the first link from the chain of internal system of control, by means that these have the obligation to effectuate a certain type of operation by obeying some rules, procedures and internal standards. The staffs analyze every operation which has been made and realize a firm form of control, namely its own activity self-control. The informatics systems of the non-banking financial institution must be created so as to allow to each employee to accomplish a minimum self-control of their own activities, not to allow the effectuation of some operations without supervision and to be able to supply alert notifications when strange operations occur.

The control staff
The control staff has in the responsibility the effectuation of inner control on different organizing steps. The control made by these is in fact a subsequent control affected on certain patterns that have to be representative for the activities subject to control. The control staff activities consisted in verifying and establishing if the operations made were within the framework of legal regulations and the internal norms, if it is assured the efficiency and rentability of activities, in identifying the weak parts of the development of activities, and to evaluate the possible risks whom the activity is subject to, to realize the formalization of the findings and assurance of the information of management structures until the level of board of directors of the respective non-baking
institution.

The managers
The managers of the organizing structures of the institution have the responsibility to assure the conditions to realize an internal efficient control, to perform by these of some operations of supervision and control, to identify the possible risks, to acknowledge the internal control and to adopt some measures to strengthen the control, remedy the deficiencies, administration of minor risks and of those significant and the prevention of producing or development of some activities or operations which are not according to the legal and internal procedures and rules.



The Audit Committee
The audit committee is made by means of realizing the attributions mentioned above.

The Committee of risks administration
The Committee of risks administration is made to accomplish the responsibilities that are due to them, according to the proper regulations of functioning.

The Board of Directors
Board of Directors is the supreme authority of decision and management of the whole activity of a non-banking financial institution, including that referring to the internal control. An efficient internal control is a real support in accomplishment of and efficient administration of a non-banking financial institution.
Features of NBFCs regulations which the depositor may note at the times of investment
 They are allowed to accept/renew public deposits for a minimum period of 12 months and maximum period of 60 months.
 They cannot accept deposits repayable on demand.
 They cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time.
 They cannot offer gifts/incentives or any other additional benefit to the depositors.
 They should have minimum investment grade credit rating.
 Their deposits are not insured.
 The repayment of deposits by NBFCs is not guaranteed by RBI.
 NBFCs (except certain AFCs) should have minimum investment grade credit rating.
 There are certain mandatory disclosures about the company in the Application Form issued by the company soliciting deposits
All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits. The NBFCs accepting public deposits should have minimum stipulated Net Owned Fund and comply with the Directions issued by the Bank.
Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Leasing, Hire-Purchase, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds. Prudential Norms Directions are applicable to these companies also















5. INDUSTRY ATTRACTIVENESS

Non-Banking Finance Companies (NBFCs) are performing a significant role in our financial sector. They have the reach and flexibility in tapping resources and they offer avenues for investment returns to investors. They provide retail services to small and medium business, road transport operators and others, and above all they constitute an important link between banks and the users of financial services. NBFCs have emerged as significant players in the financial sector in the last decade and have shown that they constitute an important component of diversified financial markets
Though the NBFC’s have been around for a long time, they have recently gained popularity amongst institutional investors, since they facilitate access to credit for semi-rural and rural India where the reach of traditional banks has traditionally been poor.
NBFC’s have also had a major impact in developing small business in rural India through local presence and strong customer relationships. Usually the loan officers in such NBFC’s know the end customer or have a strong ‘informal’ understanding of the credibility of the borrower and are able to structure their loans appropriately.
With the next wave of growth in India expected to come from the semi-rural and rural sector, the unique access of NBFC’s to these sector puts them in a great position to benefit from this growth. As evidence of their attractiveness, Goldman Sachs bought a 20% stake in Sriram Credit for 75 mUSD in Q1 2008. Credit Suisse is planning to take a majority stake in Bokdia Marketing and Finance (as reported in May 2008). Foreign Institutional Investors (’FII’) are also setting up their own NBFC’s in India to offer corporate banking and private banking operations. As an example, Societe Generale got approval for its NBFC launch in the country in October 2007. The French financial services group plans to strengthen its brand in India though NBFC’s.
Microfinance refers to the provision of financial services to low-income clients, including consumers and the self-employed The term also refers to the practice of sustainably delivering those services. There is a huge need for credit in the rural sector in India. Roughly 245 million people need 52 bUSD of microfinance credit. This includes small and marginal farmers, landless laborers, micro entrepreneurs in the rural and semi-urban areas. NBFC’s constitute almost 66% of the microfinance (MF) sector.
The key growth drivers in the microfinance sector are:
a. Need for broader suite of products: Products such as investment products, insurance products, retirement planning can be offered to the customer base
b. Regional diversification: The NBFC’s in this space are mostly concentrated in South India which is expected to grow in other regions.
c. Market consolidation and entry of FII: The smaller NBFC’s will get acquired and large FII’s (such as Fullerton) will come in and build franchising models to accelerate the quality and penetration of MF in rural areas.
On the flip side, there are some constraints in the microfinance sector such as lack of regulatory rules which are still evolving, lack of standardization, ability to attract quality human resources and an industry attitude that it is still a social enterprise versus for profit professional enterprises.
Lastly, in terms of recent investment activity, SKS microfinance (37.3 mUSD), Share Microfin (27.5 mUSD) and Spandana (12 mUSD) were financed in the last year. Additional NBFC’s such as Bandhan, Cashpor and Grameen Koota are looking actively for investments.

Infrastructure Finance Sector: During the economic boom of the 1990’s, the Govt. implemented many policies for infrastructure development with focus on roads, telecommunications, ports, and power. Special purpose vehicles (’SPV’) were formed to facilitate the credit demands of various projects. A majority of these were setup as NBFC’s. The Govt. also implemented public private partnerships (’PPP’).
As a perspective, during the period 1990-2006, 233 PPP projects were completed with total investment of 69 bUSD. The PPP investments grew from 0.6 bUSD in 1991 to 17.1 bUSD by 2006 .During the period 2007-2017 the levels of investment is expected to further accelerate fueled by the economic growth and the need to catch-up on infrastructure to facilitate this growth. During this period investment of roughly 1500 bUSD would be needed on power, roads and telecommunications.
The Govt. is setting up favorable policies to attract at least 50% of this investment from the private sector. The private NBFC’s are expected to become a major investment vehicle to funnel the private investment into the growing infrastructure sector in India.








6. NBFI SERVICES

Non-Banking Finance Companies (NBFCs) are performing a significant role in our financial sector. They have the reach and flexibility in tapping resources and they offer avenues for investment returns to investors. They provide retail services to small and medium business, road transport operators and others, and above all they constitute an important link between banks and the users of financial services. NBFCs have emerged as significant players in the financial sector in the last decade and have shown that they constitute an important component of diversified financial markets.
Non-bank institutions frequently acts as
• suppliers of loans and credit facilities,
• supporting investments in property,
• Trading money market instruments
• funding private education,
• wealth management such as Managing portfolios of stocks and shares
• retirement planning
• Advise companies in merger and acquisition
• Prepare feasibility, market or industry studies for companies
• Discounting services e.g., discounting of instruments







7.TRENDS OF NBFI
The non-banking financial institutions take an extremely important place inside the financial market and therefore play an appreciable role in the economy. Taking into account the specific nature of the operations that these operators are authorized to develop, it is necessary for their activity to be subject to an efficient internal control and also to be well-structured.

In order to ensure flow of term loans and to meet the credit gap, NBFIs have immense importance in the economy. In addition, non-bank financial sector is important to increase the mobilization of term savings and for the sake of providing support services to the capital market.NBFIs are important to strengthen the financial system for rapid economic development of the country









8. CONCLUSION
In India considerable growth has taken place in the Non-banking financial sector in last two decades. Over a period of time they are successful in rendering a wide range of services. They were initially intended to cater to the needs of savers and investors. NBFCs later on developed into institutions that can provide services similar to banks. Comprehensive regulation of the banking system and absence or relatively lower degree of regulation over NBFCs has been some of the main reasons for the growth momentum of the latter. The main reason for deposits with NBFCs is greater customer orientation and higher rate of interest offered by them as compared to banks.