UNIVERSITY OF MUMBAI

PROJECT ON

NON BANKING FINACIAL COMPANY

BACHELOR OF COMMERCE

(BANKING & INSURANCE)

SEMESTER – V

(2017-18)

SUBMITTED BY

ROLL NO

1018

PROJECT GUIDE

PROF. (Ms.)

NANDINI JAGANNARAYAN

HINDI VIDYA PRACHAR SAMITI’S

RAMNIRANJAN JHUNJHUNWALA COLLEGE

GHATKOPAR (WEST) MUMBAI – 400 086

 CERTIFICATE

This is to certify that Miss POOJA BHARTI MANOJKUMAR JAISWAR a bonafide

student of B.Com Banking and Insurance Semester V (2017-18) has successfully completed the

project on “NON BANKING FIANCIAL COMPANY” under the guidance of Prof. (Ms.)

Nandini Jaganarayan

Principal

Dr. Usha Mukundan Seal of the College

Project Guide / Internal Examiner

Prof. (Mrs.):

Course Co-ordinator

External Examiner

Prof.

Date:

1
 DECLARATION

I, POOJA BHARTI MANOJKUMAR JAISWAR of the student of B.Com (Banking &

Insurance) Sem.V (2017-18) hereby declare that have completed the project on “NON

BANKING FINACIALCOMPANY”.

The information submitted is true and original to the best of my knowledge.

Signature of Student

Name of the Student: POOJA BHARTI MANOJKUMAR JAISWAR

Roll No. : 1018

2
 ACKNOWLEDGEMENT

I would like to express my sincere gratitude to the Almighty for having showered his immense
blessing on me and has enabled to complete this research work.

I would also like express my heartfelt gratitude to our Principal Dr. Usha Mukundan, who has
given me opportunity to conduct this study.

My guide also deserves sincere thanks that she has given me her guidance throughout the
project and made it a success.

My parents have been a backbone to me in completing this Project and my friends who
extended their constant support during my study also deserve heartfelt thanks.

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 INDEX

SR. NO. TOPIC PAGE NO.

Introduction of Non-banking financial company

 Meaning
5
01  Significance of nbfc in India
 Future of nbfc
 Basic for comparison
Historical background
 James committee
02  Chakravarty committee 12
 Narsimham committee
 khan committee
Role of nbfc
15
03  Importance of nbfc
 B) objective of nbfc
Classification of nbfc
04  Nbfc and Mfi 25
 Types of nbfc

05 Evolution of regulation of nbfc 30

Asset Liability Composition

 Role of nbfc in capital market
06 33
 Role of nbfc in vehicle financing
 Role of nbfc in infrastructure
Case study
07  Reliance capital 41
 Mahindra and Mahindra financial service

08 Conclusion 57

Bibliography 58

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 CHAPTER I

INTRODUCTION

A Non-Banking Financial Company (NBFC) is a company registered under the

Companies Act, 1956 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 but 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 immovable
property.

A non-banking institution which is a company and has principal business of receiving

deposits under any scheme or arrangement in one lump sum or in installments by way of
contributions or in any other manner, is also a non-banking financial company (Re-
Financial activity as principal business is when a company’s financial assets constitute
more than 50 per cent of the total assets and income from financial assets constitute more
than 50 per cent of the gross income. A company which fulfils both these criteria will be
registered as NBFC by RBI.

The term 'principal business' is not defined by the Reserve Bank of India Act. The
Reserve Bank has defined it so as to ensure that only companies predominantly engaged
in financial activity get registered with it and are regulated and supervised by it.

Hence if there are companies engaged in agricultural operations, industrial activity,

purchase and sale of goods, providing services or purchase, sale or construction of
immovable property as their principal business and are doing some financial business in a
5
small way, they will not be regulated by the Reserve Bank. Interestingly, this test is
popularly known as 50-50 test and is applied to determine whether or not a company is
into financial business.Duary Non-banking Company).

NBFCs lend and make investments and hence their activities are akin to that of banks;
however there are a few differences as given below:

In NBFC cannot accept demand deposits.

ii. NBFCs do not form part of the payment and settlement system and cannot issue
cheques drawn on itself.

iii. Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is
not available to depositors of NBFCs, unlike in case of banks. Another important point of
distinction amidst these two is that while banks take part in the country’s payment
mechanism, non-banking financial companies are not involved in such transactions.

6
Significance of NBFCs in India
NBFCs have come to be regarded as important financial intermediaries particularly
for the small-scale and retail sectors with the growing importance assigned to financial
inclusion.

In the multi-tier financial system of India, importance of NBFCs in the Indian financial
system is much discussed by various committees appointed by RBI in the past and RBI
has been modifying its regulatory and supervising policies from time to time to keep pace
with the changes in the system. NBFCs are an integral part of the Indian financial system,
enhancing competition and diversification in the financial sector, spreading risks
specifically at times of financial distress and have been increasingly recognized as
complementary of banking system at competitive prices.

The Banking sector has always been highly regulated, however simplified sanction
procedures, flexibility and timeliness in meeting the credit needs and low cost operations
resulted in the NBFCs getting an edge over banks in providing funding. NBFCs have
been pioneering at retail asset backed lending, lending against securities, microfinance,
etc. and have been extending credit to retail customers in under-served areas and to
unbanked customers.

Why are Non-Banking Financial Companies important?

The NBFC sector has grown considerably in the last few years despite the
slowdown in the economy. As of March 2013, it accounted for 12.5% of the country’s
Gross Domestic Product (GDP) – a measure of the size of the economy. This is up from
8.4% in March 2006. However, this only counts NBFCs with assets more than Rs 100
crore. “If the assets of all the NBFCs below Rs 100 crore are reckoned, the share of
NBFCs’ assets to GDP would go further,” Bhaskar said in his speech.

Growth:

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In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most
years between 2006 and 2013. On an average, it grew 22% every year. Even when the
country’s GDP growth slowed to 6.3% in 2011-12 from 10.5% in 2010-11, the NBFC
sector clocked a growth of 25.7%. This shows, it is contributing more to the economy
every year.

Profitability

NBFCs are more profitable than the banking sector because of lower costs. This helps
them offer cheaper loans to customers. As a result, NBFCs’ credit growth – the increase
in the amount of money being lent to customers – is higher than that of the banking
sector. Credit grew an average 24.3% per year for NBFCs as against 21.4% for banks.
This shows that more customers are opting for NBFCs.

Infrastructure Lending

NBFCs contribute largely to the economy by lending to infrastructure projects, which are
very important to a developing country like India. But they require large amount of funds,
and earn profits only over a longer time-frame. As a result, these are riskier projects. This
deters a lot of banks from lending to infrastructure projects. In the last few years, NBFCs
have contributed more to infrastructure lending than banks. NBFCs lent over one third or
35.8% of their total assets to infrastructure sector as of March 2013. In contrast, banks
lent only 7.6%.

Promoting inclusive growth

NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance
projects of small-scale companies, which is important for the growth in rural areas. They
also provide small-ticket loans for affordable housing projects. All these help promote
inclusive growth in the country.

8
 Future prospects of NBFC sector
a. NBFCs have been playing a very important role both from the macroeconomic
perspective and the structure of the Indian financial system.
b. NBFCs are the perfect or even better alternatives to the conventional Banks for
meeting various financial requirements of a business enterprise.
c. They offer quick and efficient services without making one to go through the
complex rigmarole of conventional banking formalities.
d. However to survive and to constantly grow, NBFCs have to focus on their core
strengths while improving on weaknesses.
e. They will have to be very dynamic and constantly endeavor to search for new
products and services in order to survive in this ever competitive financial market.
f. RBI has been reviewing the existing NBFC guidelines and has proposed certain
changes in the guidelines which could prove to have a significant impact on the
NBFC space.

9
 BASIS FOR COMPARISON
Meaning

An NBFC is a company that provides banking services to people without holding a bank
license. Bank is a government authorized financial intermediary that aims at
providing banking services to the general public. Covered under the RBI’s banking
regulations, these are the companies that provide banking facilities without meeting the
lawful definition of a bank. They are characteristically restricted from taking deposits
from the public but other banking services like loans, credit facilities, TFCs, retirement
planning, trading in money markets are provided by these institutions. There are
numerous such institutions operating across the country and millions of customers are
getting benefited by these.

Key Differences between NBFC and Bank

Meaning

An NBFC is a company that provides banking services to people without holding a bank
license. Bank is a government authorized financial intermediary that aims at
providing banking services to the general public.

The difference between NBFC and bank can be drawn clearly on the following
grounds:

A government authorized financial intermediary that aims at providing banking services

to the general public is called the bank. An NBFC is a company that provides banking
services to people without holding a bank An NBFC is incorporated under the Indian
Companies Act, 1956 whereas a bank is registered under Banking Regulation Act, 1949.

NBFC is not allowed to accept such deposits which are repayable on demand. Unlike
banks, which accepts demand deposits.

10
Foreign Investments up to 100% is allowed in NBFC. On the other hand, only banks of
the private sector are eligible for foreign investment, and that would be not more than
74%.

Banks are an integral part of payment and settlement cycle while NBFC, is not a part of
the system.

It is mandatory for bank maintain reserve ratios like CRR or SLR. As opposed to NBFC,
which does not require to maintain reserve ratios.

The deposit insurance facility is allowed to the depositors of banks by Deposit Insurance
and Credit Guarantee Corporation (DICGC). Such facility is unavailable in the case of
NBFC.

Banks create credit, whereas NBFC is not involved in the creation of credit.

Banks provide transaction services to the customers, such as providing overdraft facility,
the issue of traveler’scheque, transfer of funds, etc. Such services are not provided by
NBFC.

11
 Chapter II

Historical background

The Reserve Bank of India Act, 1934 amended on 1st December, 1964 by Reserve Bank
Amendment Act, 1963. In this new 'Chapter III-B' introduced to Regulate 'Deposit
Accepting' NBFCs.

Different types of Committees to Review existing framework of NBFCs

JAMES COMMITTEE (1975)

In early 1970s Government of India asked Banking Commission to Study the

Functioning of Chit Funds and Examining activities of Non-Banking Financial
Intermediaries. In 1972, Banking Commission recommended Uniform Chit Fund
Legislation to whole country.

Reserve Bank of India prepared Model Bill to regulate the conduct of chit funds and
referred to study group under the Chairmanship of James S. Raj. In June 1974, study
group recommended ban on Prize Chit and other Schemes. Directed the Parliament to
enact a bill which ensures uniformity in the provisions applicable to chit funds
throughout the country. Parliament enacted two acts. Prize Chits and Money Circulation
Schemes (Banning) Act, 1978 and Chit Funds Act, 1982

CHAKRAVARTY COMMITTEE

During Planning Era, Reserve Bank of India tried best to 'Manage Money' and evolve
'Sound Monetary' system but no much appreciable success in realizing social objectives
of monetary policy of the country. In December 1982, Dr. Manmohan Singh, Governor
of RBI appointed committee under the Chairmanship of 'Prof. Sukhamoy Chakravarty' to
review functioning of monetary system in India. Committee recommended assessment of
links among the Banking Sector, the Non-Banking Financial Institutions and the Un-

12
Organized sector to evaluate various instruments of Monetary and Credit policy in terms
of their impact on the Credit System and the Economy.

NARSIMHAM COMMITTEE

From the 1991 India economic crisis to its status of third largest economy in the world by
2011, India has grown significantly in terms of economic development. So has its
banking sector. During this period, recognizing the evolving needs of the sector, the
Finance Ministry of Government of India (GOI) set up various committees with the task
of analyzing India's banking sector and recommending legislation and regulations to
make it more effective, competitive and efficient. Two such expert Committees were set
up under the chairmanship of M. Narasimham. They submitted their recommendations in
the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the
Narasimham Committee-II (1998) Report. These recommendations not only helped
unleash the potential of banking in India, they are also recognized as a factor towards
minimizing the impact of global financial crisis starting in 2007. Unlike the socialist-
democratic era of the 1960s to 1980s, India is no longer insulated from the global
economy and yet its banks survived the 2008 financial crisis relatively unscathed, a feat
due in part to these Narasimham Committees.

KHAN COMMITTEE

Khan was the Chairman of the RBI Internal Group on Rural Credit and Microfinance,
which is popularly known as the Khan Committee. ... Its report, also popularly referred to
as "Khan Committee Report" considered various structural issues impinging on the
development of a deep corporate bond market in India.

13
New deposit norms:

The new deposit taking norms for non-bank finance companies will be announced later
this week, Jalan said. The CM Vasudeva task force on NBFCs had earlier recommended
delinking of deposit raising from credit rating of the companies. RBI opposed the move
in regard to large companies.

Riding piggyback on CAMEL

The Reserve Bank of India has initiated the CAMEL rating for all commercial banks in
the country. This rating system will also apply to non-banking finance companies and
financial institutions. According to RBI deputy governor SP Talwar, this system will rate
the capital adequacy, asset quality, management, earnings and liquidity of the banks and
finance companies. While the rating will be applicable to banks and financialinstitutions
on an annual basis and to NBFCs on a bi-annual basis. The rating will initially be used
only for internal evaluation by the RBI. The ratings will not be made public

14
 Chapter III

ROLE OF NBFC
Role of NBFCs (Non-Banking Financial Companies) | NBFCs are better placed than
Banks to serve Small Business:

NBFCs focused on serving low income families and Micro, Small and Medium
Enterprises (MSMEs) have been playing a very important role in promoting financial
inclusion by providing loan products to these credit starved sectors. These NBFCs have
the expertise to reach out to non-corporate enterprises even when banks are unable to.
NBFCs have the ability and skill sets to assess the risk appetite of these customers and
build relationships with them.

However, the aspirations of the financially excluded low income families and MSMEs
sectors have increased and they want to improve their economic situation by accessing
credit and deposit products. These needs have been addressed largely by the NBFCs who
are best suited to end the Financial Exclusion of these low income families and enable
them to enter financial mainstream. NBFCs act in a complementary and supplementary
manner to Banks in serving low income families and MSMEs.

NBFCs are simpler organizations focused on serving low income families and MSME
sector with deep domain expertise in the limited financial products they offer.

NBFCs employs people from the same socio-economic sector that their customers are i.e.
low income families & MSMEs. Their employee compensation level is less than the
compensation of Bank employees. NBFCs employees can not only relate to and serve
these customers well, they are also able to better judge the credit risk of the customer.

15
NBFCs employees deal with their customers directly and often at customers place of
work or home. Their credit assessment and quality of service therefore is significantly
better, and the operations are corruption free.

Because of their deep domain knowledge, close relationship with MSME customers the
NBFCs are more flexible and innovative than Banks.

The risk profile of NBFCs is better and loan loss experience much lower than the bank’s
exposure to low income families & MSMEs.

IMPORTANT OF NBFC

Important points that we have to know about Non-Banking Financial Companies (NBFC)
was given here, which will be more helpful for the candidates those who are preparing for
the upcoming exams.

Non – Banking Financial Companies (NBFC):

1).Non-Bank Financial Companies (NBFCs) are financial institutions that provide

banking services without meeting the legal definitions of a bank

2).The NBFC is a financial institution which carries out the following operations as their
principle business

· Hire purchase finance

· Housing finance

· Investment

· Loan

· Equipment leasing

1 HIRE PURCHASE

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 Hire purchase is an agreement whereby a person hires goods for a period of time by
paying instalments, and can own the goods at the end of the agreement if all instalments
are paid. Hire purchase agreements usually last between 2 and 5 years, the most common
last 3 years

Hire purchase agreements are a type of credit, most commonly used by people to
purchase goods such as cars, or large household appliances. Under a hire purchase
agreement, the creditor remains the legal owner of the goods until you have repaid the
sums due under the agreement.

Hire purchase is arranged by the car dealer, but brokers also offer this service. The rates
are often very competitive for new cars, but less so for used cars. The loan is secured
against the car, which is why you can't own it until you've made your last payment.
Hirepurchase is a credit purchase. The price under hire-purchase system is paid in
instalments. The goods are delivered in the possession of the purchaser at the time of
commencement of the agreement. Hire vendor continues to be the owner of the goods till
the payment of last instalment

2 Housing finance

Housing finance is a broad topic, the concept of which can vary across continents,
regions and countries, particularly in terms of the areas it covers. ... “The purpose of a
housing finance system is to provide the funds which home-buyers need to purchase their
homes.

Housing finance is a broad topic, the concept of which can vary across continents,
regions and countries, particularly in terms of the areas it covers. For example, what is
understood by the term “housing finance” in a developed country may be very different
to what is understood by the term in a developing country.

The International Union for Housing Finance, as a multinational networking

organization, has no official position on what the best definition of housing finance is.
17
However, the selection of quotes below is offered as a snapshot of what housing finance
as a topic covers:

“Housing finance brings together complex and multi-sector issues that are driven by
constantly changing local features, such as a country’s legal environment or culture,
economic makeup, regulatory environment, or political system”

In addition, the concept of housing finance and housing finance systems has been
evolving over time. Looking at definitions from the mid-1980s, we see that housing
finance was defined primarily in terms of residential mortgage finance:

“The purpose of a housing finance system is to provide the funds which home-buyers
need to purchase their homes. This is a simple objective, and the number of ways in
which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of
countries, largely as a result of government action, very complicated housing finance
systems have been developed. However, the essential feature of any system, that is, the
ability to channel the funds of investors to those purchasing their homes, must remain.”

1. Money committed or property acquired for future income.

2. Two main classes of investment are (1) Fixed income investment such as bonds, fixed
deposits, preference shares, and (2) Variable income investment such as business
ownership (equities), or property ownership. In economics, investment means creation of
capital or goods capable of producing other goods or services. Expenditure on education
and health is recognized as an investment in human capital, and research and
development in intellectual capital. Return on investment (ROI) is a key measure of an
organization's performance.

3 Loan

Written or oral agreement for a temporary transfer of a property (usually cash) from its
owner (the lender) to a borrower who promises to return it according to the terms of the

18
agreement, usually with interest for its use. If the loan is repayable on the demand of the
lender, it is called a demand loan. If repayable in equal monthly payments, it is an
installment loan. If repayable in lump sum on the loan's maturity (expiration) date, it is a
time loan. Banks further classify their loans into other categories such as consumer,
commercial, and industrial loans, construction and mortgage loans, and secured and
unsecured loans.

4. Equipment leasing

1. Written or implied contract by which an owner (the lessor) of a specific asset (such as
a parcel of land, building, equipment, or machinery) grants a second party (the lessee) the
right to its exclusive possession and use for a specific period and under specified
conditions, in return for specified periodic rental

A lease is in essence an extended rental agreement under which the owner of the
equipment allows the user to operate or otherwise make use of the equipment in exchange
for periodic lease payments. In leasing terminology, the owner is the lessor, the user is
the lessee.

2. An FMV lease is basically a lease where you make monthly rental payments in
exchange for the right to access and use the equipment. At the end of the lease, you
typically have the option to purchase the equipment at its fair market value (as
determined by the leasing company), renew the lease, or return the equipment.

3).According to the RBI (Amendment Act) 1997, a NBFC is an institution which can be
defined as Housing finance is a broad topic, the concept of which can vary across
continents, regions and countries, particularly in terms of the areas it covers. ... “The
purpose of a housing finance system.Financial institution which is a company. A non-
banking institution which has its principle business as the receiving of deposits

19
4).The Reserve Bank of India (Amendment Act) 1997 demands compulsory registration
with the RBI of all the NBFCs irrespective of their public deposits for commencing and
carrying out business

5).Norms to be followed by the NBFCs operating in India They should maintain a portion
of their deposits in liquid assets They should create Reserve Fund and transfer20% of
profit after tax annually to the fund No NBFC can carry on business without obtaining a
Certificate of Registration (COR) from the RBI A new NBFC seeking registration with
the RBI should satisfy the entry point norm ofRs. 2 crores as the minimum Net Owned
Fund (NOF)

6).Based on theirLiability StructureNBFCs are divided into 2 categories as follows

Category

A– NBFCs accepting public deposits (NBFCs-D)

Category

B– NBFCs not accepting public deposits (NBFCs-ND)

7).NBFCs operating in India fall under the following categories based on their businesses

5. Hire Purchase

Finance Company – a company which carries on hire purchase transactions as its

principle business where loans for purchase of goods and services are provided under an
installment plan Housing Finance Company – a company which provides finance for
acquisition of houses and plots. It also helps in construction of houses and development
of plots Investment Company a company which carries out acquisition of securities as its
principle business. They provide finance mainly to companies associated with business
organizations

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Loan Company

A small partnership company which obtain funds in the form of deposits from the public
and give loans to wholesale, retail traders, small scale industries and self-employed
individuals

Equipment leasing company

A company which lease out equipment or provide finances for leasing business. They
raise fund from other companies, banks and the financial institutions in addition to their
NOF

Mutual Benefit Finance Company

Any company that comes under theSection 620A of theCompanies Act 1956. The main
source of funds are share capital and deposits from their members and public

Chit Fund Company

A company which collects subscriptions from the public periodically and in turn
distributes the same as prizes back to them. These companies are governed by Chit Fund
Act 1982

Some important NBFCs operational in India are as follows

HDFC– established in 1977 provides mortgages, life Insurance, mutual funds and Micro
Finance

Power Finance Company – established in 1986 provides financial consulting, investment

banking and loan management

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Reliance Capital – 1986 – provides asset management, insurance, broking and
distribution, commercial finance and provides finance for infrastructure projects,
corporate finance, mutual funds and investment banking

Rural Electricity Corp. – 1969 – provides investment and private banking and asset
management

Shree Ram Transport Finance – 1974 – provides consumer vehicle finance, city union
finance and micro finance

Bajaj Holdings – 2007 – Asset management, loans and micro finance

M& M financial – 1991 – financial services, micro finance and asset managementtual
funds

Infrastructure Development Finance Company – 1997

OBJECTIVE OF NBFC

Main objects of NBFC Company

1. To carry on the business or businesses of a holding and investment company, and to

buy, underwrite and to invest in and acquire and hold shares, stocks, debentures,
debenture stock, bonds, obligation or securities of companies or partnership firms or body
corporates or any other entities whether in India or elsewhere either singly or jointly with
any other person(s), body corporate or partnership firm or any other entity carrying out or
proposing to carry out any activity whether in India or elsewhere in any manner including
but not limited to the following:

a. To acquire any such shares , stocks, debenture, debenture stock, bonds, obligation or
securities by original subscription, exchange or otherwise and to subscribe for the same
either conditionally or otherwise, to guarantee the subscription thereof issued or

22
guaranteed by any government, state, public body, or authority, firm, body corporate or
any other entity or persons in India or elsewhere.

b. To purchase or acquire, hold, trade and further to dispose of any right, stake or
controlling interest in the shares, stocks, debentures, debenture stock, bonds, obligation or
securities of companies or partnership firms either singly or jointly with any other
person(s), body corporate or partnership firm carrying out or proposing to carry out any
activity in India or in any other part of the world.

c. To invest and deal with the moneys of the Company not immediately required in such
manner as may from time to time be determined and to hold or otherwise deal with any
investment made.

d. To facilitate and encourage the creation, issue or conversion of debentures, debenture

stock, bonds, obligation, shares, stocks, and securities, and to act as trustees in connection
with any such securities, and to take part in the conversion of business concerns and
undertakings into companies.

2. To give any guarantee in relation to the payment of any debentures, debenture stock,
bonds, obligation or securities.

3. To subscribe for, conditionally or unconditionally, to underwrite issue on commission

or otherwise take, hold, deal in, and convert stocks, shares and securities, of all kinds, and
to enter into partnership, or into any arrangement for sharing profits, union of interest,
reciprocal concession or co-operation with any person, partnership, or organize
companies, syndicates, or partnerships of all kinds, for the purpose of acquiring and
undertaking any property and liabilities of this company, or of any other company or of
advancing, directly or indirectly, the object thereof, or for any other purpose which this
company may think expedient.

4. To lend and advance money and assets of all kinds or give credit on any terms or mode
and with or without security to any individual, firm, body corporate or any other entity (
23
including without prejudice to the generality of the foregoing any holding company,
subsidiary or fellow subsidiary of , or any other company whether or not associated in
any way with, the company ), to enter into guarantees, contracts of indemnity and surety
ship of all kinds, to receive money on deposits or loan upon any terms, and to secure or
guarantee in any manner and upon any terms the payment of any sum of money or the
performance of any obligation by any person, firm or company (including without
prejudice to the generality of the foregoing any holding company, subsidiary or fellow
subsidiary of , or any other company associated in any way with, the company )

5 To borrow and raise money in any manner for the purpose of any business of the
company or of any company in which the company is interested and to secure the
repayment of any money borrowed, raised or owing by mortgage, charge, standard
security, lien or other security upon the whole or any part of the Company’s property or
assets (whether present or future).

6 To transact or carry on all kinds of agency business, and in particular in relation to the
investment of money, the sale of property and the collection and receipt of money.

7. To Purchase or otherwise acquire, and to sell, exchange, surrender, lease, mortgage,

charge, convert, turn to account, dispose of , and deal with property and rights of all
kinds, and in particular, mortgages, debentures, produce, concessions, options, contracts,
patents, licenses, stocks, shares, bonds, policies, book debts, business concerns, and
undertakings and claims, privileges, and chooses in action of all kinds.

8. To carry on activities of leasing and /or hire-purchase. A Non-Banking Financial

Company (NBFC) is a company registered under the Companies Act, 1956 of India,
engaged in the business of loans and advances, acquisition of shares, stock, bonds hire-
purchase, insurance business or chit business but does not include any institution whose
principal business includes agriculture, industrial activity or the sale, purchase or
construction of immovable property.

24
 Chapter IV

CLASSIFICATION OF

NBFC AND MFI IN INDIA

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]] and the directions
issued by it.

MFI

Micro Finance Institutions, also known as MFIs, a microfinance institution is an

organization that offers financial services to low income populations. Almost all give
loans to their members, and many offer insurance, deposit and other services. A great
scale of organizations are regarded as microfinance institutes. They are those that offer
credits and other financial services to the representatives of poor strata of population
(except for extremely poor strata). MFIs go for NBFC licenses

An Increasing number of microfinance institutions (MFIs) are seeking non-banking

finance company (NBFC) status from RBI to get wide access to funding, including bank
finance.

Exemptions granted to NBFCs engaged in microfinance activities

The Task Force on Supportive Policy and Regulatory Framework for Microfinance set up
by NABARD in 1999 provided various recommendations. Accordingly, it was decided to
exempt NBFCs which are engagedin micro financing activities, licensed under Section 8
of the Companies Act, 2013, and which do not accept public deposits, from the purview
of Sections 45-IA (registration), 45-IB (maintenance of liquid assets) and 45-IC (transfer
of profits to the Reserve Fund) of the RBI Act, 1934.

25
MFIs & SHG-Bank linkage program. In a joint fact-finding study on microfinance
conducted by the Reserve Bank of India and a few major banks, the following
observations were made;

Some of the microfinance institutions (MFIs) financed by banks or acting as their

intermediaries or partners appear to be focusing on relatively better banked areas,
including areas covered by the SHG-Bank linkage programme. Competing MFIs were
operating in the same area, and trying to reach out to the same set of poor, resulting in
multiple lending and overburdening of rural households.

Many MFIs supported by banks were not engaging themselves in capacity building and
empowerment of the groups to the desired extent. The MFIs were disbursing loans to the
newly formed groups within 10–15 days of their formation, in contrast to the practice
obtaining in the SHG – Bank linkage programme, which takes about six to seven months
for group formation and nurturing. As a result, cohesiveness and a sense of purpose were
not being built up in the groups formed by these MFIs.

Banks, as principal financiers of MFIs, do not appear to be engaging them with regard to
their systems, practices and lending policies with a view to ensuring better transparency
and adherence to best practices. Many cases, no review of MFI operations were
undertaken after sanctioning the credit facility.

MFIs of India

Forbes magazine named seven microfinance institutes in India in the list of the world's
top 50 microfinance institutions. Bandhan, as well as two other Indian MFIs—
Microcredit Foundation of India (ranked 13th) and Saadhana Micro Finance Society
(15th) – have been placed above Bangladesh-based Grameen Bank (which along with its
founder Mohammed Yunus, was awarded the Nobel Prize). Besides Bandhan, the
Microcredit Foundation of India and Saadhana Micro fin Society, other Indian entries

26
include Grameen Koota (19th), Sharada's Women's Association for Weaker Section
(23rd), SKS Microfinance Private Ltd (44th) and Asmitha Micro fin Ltd (29th).

Criticisms

Recently, microfinance has come under fire in the state of Andhra Pradesh due to
allegations of MFIs using coercive recollection practices and charging usurious interest
rates.These charges resulted in the state government's passing of the Andhra Pradesh
Microfinance Ordinance on October 15, 2010. The Ordinance requires MFIs to register
with the state government and gives the state government the power, sue moto, to shut
down MFI activity. A number of NBFCs have been affected by the ordinance, including
sector heavyweight SKS Microfinance.

Types of Nbfc

Investment Company (IC)

The main business of these companies is to deal in securities.

Loan Companies (LC)

The main business of such companies is to make loans and advances (not for assets but
for other purposes such as working capital finance etc.)

Infrastructure Finance Company (IFC)

A company which has net owned funds of at least Rs. 300 Crore and has deployed 75%
of its total assets in Infrastructure loans is called IFC provided it has credit rating of A or
above and has a CRAR of 15%.

Systemically Important Core Investment Company (CIC-ND-SI)

A systematically important NBFC (assets Rs. 100 crore and above) which has deployed
at least 90% of its assets in the form of investment in shares or debt instruments or loans
in group companies is called CIC-ND-SI. Out of the 90%, 60% should be invested in
27
equity shares or those instruments which can be compulsorily converted into equity
shares. Such companies do accept public funds.

Infrastructure Debt Fund (IDF-NBFC)

A debt fund means an investment pool in which core holdings are fixed income
investments. The Infrastructure Debt Funds are meant to infuse funds into the
infrastructure sector. The importance of these funds lies in the fact that the infrastructure
funding is not only different but also difficult in comparison to other types of funding
because of its huge requirement, long gestation period and long term requirements.

In India, an IDF can be set up either as a trust or as a company. If the IDF is set up as a
trust, it would be a mutual fund, regulated by SEBI. Such funds would be called IDF-MF.
The mutual fund would issue rupee-denominated units of five years’ maturity to raise
funds for the infrastructure projects.

If the IDF is set up as a company, it would be an NBFC; it will be regulated by the RBI.
The IDF guidelines of the RBI came in September 2011. According to these guidelines,
such companies would be called IDF-NBFC.

An IDF-NBFC is a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores
or more and which invests only in Public Private Partnerships (PPP) and post
commencement operations date (COD) infrastructure projects which have completed at
least one year of satisfactory commercial operation and becomes a party to a Tripartite
Agreement.

Non-Banking Financial Company – Micro Finance Institution (NBFC-

MFI)

NBFC-MFI is a non-deposit taking NBFC which has at least 85% of its assets in the form
of microfinance. Such microfinance should be in the form of loan given to those who
have annual income of Rs. 60,000 in rural areas and Rs. 120,000 in urban areas. Such

28
loans should not exceedRs. 50000 and its tenure should not be less than 24 months.
Further, the loan has to be given without collateral. Loan repayment is done on weekly,
fortnightly or monthly installments at the choice of the borrower.

Non-Banking Financial Company – Factors (NBFC-Factors)

Factoring business refers to the acquisition of receivables by way of assignment of such

receivables or financing, there against either by way of loans or advances or by creation
of security interest over such receivables but does not include normal lending by a bank
against the security of receivables etc.

An NBFC-Factoring company should have a minimum Net Owned Fund (NOF) of Rs. 5
Crore and its financial assets in the factoring business should constitute at least 75
percent of its total assets and its income derived from factoring business should not be
less than 75 percent of its gross income.

Shadow banks in India

Do we have shadow banks in India? The answer is yes. It is yes, because we have
financial institutions which accept deposits and extend credit like banks, but we do not
call them shadow banks; we call them the Non-Banking Finance Companies (NBFCs).
Are they in fact shadow banks? No, because these institutions have been under the
regulatory structure of the Reserve Bank of India, right from 1963 i.e. 50 full years before
the developed west is doing so.

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 Chapter V

Evolution of regulation of NBFCs in India

In the wake of failure of several banks in the late 1950s and early 1960s in India, large
number of ordinary depositors lost their money. This led to the formation of the Deposit
Insurance Corporation by the Reserve Bank, to provide guarantee to the depositors.
(Later by adding a credit guarantee element, it became the DICGC). While this provided
the necessary safety net for the bank depositors, the Reserve Bank did note that there
were deposit taking activities undertaken by non-banking companies. Though they were
not systemically as important as the banks, the Reserve Bank initiated regulating them, as
they had the potential to cause pain to their depositors. Later in 1996, in the wake of the
failure of a big NBFC, the Reserve Bank tightened the regulatory structure over the
NBFCs, with rigorous registration requirements, enhanced reporting and supervision.
Reserve Bank also decided that no more NBFC will be permitted to raise deposits from
the public. Later when the NBFCs sourced their funding heavily from the banking
system, it raised systemic risk issues. Sensing that it can cause financial instability, the
Reserve Bank brought asset side prudential regulations onto the NBFCs. BIS central
bankers.

NBFCs of India

The definition of the term “NBFC” entails a very wide meaning. NBFCs include not just
the finance companies that the general public is largely familiar with; the term also
entails wider group of companies that are engaged in investment business, insurance, chit

Fund, nidhi, merchant banking, stock broking, alternative investments, etc. as their
principal of business. Today I would be concentrating only on those NBFCs that are
under the regulatorypurview of the Reserve Bank. Traditionally, India has had a bank-
dominated financial sector. Even so, there havealways been NBFCs. These were in early

30
times small family run businesses for depositsacceptance and lending activities. Even
today, the sector may be “small” as compared to banking sector with a total asset size of
just around 14 percent of that of scheduledcommercial banks (other than RRBs).
However, there is no denying that the sector hasgrown tremendously over the years in
size, form and complexity, with some of the NBFCs

Operating as conglomerates having business interests spread to sectors like

insurance,broking, mutual fund and real estate. Concomitant with the above,
interconnectedness andsystemic importance of the NBFC sector also have increased.

NBFCs being financial intermediaries are engaged in the activity of bringing thesaving
and the investing community together. In this role they are perceived to be playing a
complimentary role to banks rather than competitors, as it is a known fact that majority of
thepopulation in the country do not yet have access to mainstream financial products and

Services including a bank account and therefore the country needs institutions beyond
banks for reaching out in areas where banks’ presence may be lesser. Thus NBFCs
especially those catering to the urban and rural poor namely NBFC-MFIs and Asset
Finance Companies have a complimentary role in the financial inclusion agenda of the
country. Further, some of the big NBFCs via; infrastructure finance companies are
engaged in lending exclusively to the infrastructure sector and some are into factoring
business, thereby giving fillip to the growth and development of the respective sector of
their operations. Thus NBFCs have also carved niche business areas for them within the
financial sector space and are also popular for providing customized products like second
hand vehicle financing, mostly at the doorstep of the customer. In short, NBFCs bring the
much needed diversity to the financial sector thereby diversifying the risks, increasing
liquidity in the markets thereby promoting financial stability and bringing efficiency to
the financial sector. At the same time, their growing size and interconnectedness also
raise concerns on financial stability. Reserve Bank’s endeavor in this context has been to
streamline NBFC regulation, address the risks posed by them to financial stability,

31
address depositors’ and customers’ interests, address regulatory arbitrage and help the
sector grow in a healthy and efficient manner. Some of the regulatory measures include
identifying systemically important non-deposit taking NBFCs as those with asset size of
100 crore and above and bringing them under stricter prudential norms (CRAR and
exposure norms), issuing guidelines on Fair Practices Code, aligning the guidelines on
restructuring and securitization with that of banks, permitting NBFCs-ND-SI to issue
perpetual debt instruments etc.

NBFCs as components of the financial sector a broad picture of the role of NBFCs and
the interconnectedness they have in the financial sector can be gauged from the details
given below:

General

The total number of NBFCs as on March 31, 2014 are 12,029 of which deposit taking
NBFCs are 241 and non-deposit taking NBFCs with asset size of 100 crore and above are
465, non-deposit taking NBFCs with asset size between 50 crore and 100 crore are 314
and those with asset size less than 50 crore are 11009. As on March 31, 2014, the average
leverage ratio (outside liabilities to owned fund) of the NBFCs-ND-SI stood at 2.94, 4
BIS central bankers’ speeches

Return on assets (net profit as a percentage of total assets) stood at 2.3%, Return on
equity (net profit as a percentage of equity) stood at 9.22 % and the gross NPA as a
percentage of total credit exposure (aggregate level) stood at 2.8%.

32
 Chapter VI

Asset liability composition

Liabilities* of the NBFC sector

Owned funds (23% of total liabilities), debentures (32%), bank borrowings (21%),
deposit (1%), Borrowings from Financial Institutions (1%), Inter-corporate borrowings
(2%), Commercial Paper (3%), other borrowings (12%), and current liabilities &
provisions (5%).

Assets* of the NBFC sector

Loans & advances (73% of total assets), investments (16%), cash and bank balances
(3%), other current assets (7%) and other assets (1%). The data pertains to only reported
deposit taking NBFCs and those non-deposit taking NBFCs with asset size of100 crore
and above. All figures are as on end March, 2014.

Role of NBFCs in financial inclusion

Financial inclusion has been defined as the “provision of affordable financial services” to
those who have been left unattended or under-attended by formal agencies of the
financial system. These financial services include “payments and remittance facilities,
savings, loan and insurance services”. Micro finance has been looked upon as an
important means of financial inclusion in India. Microfinance is not just provision of
micro credit but also other services in small quantities to the poor i.e. providing essential
financial services to the poor in an affordable way. Financial Inclusion also is aiming at
the same by providing the poor with not only deposit accounts or credit but also
insurance and remittance facility. As articulated by the Committee on Comprehensive
Financial Services for Small Businesses and Low Income Households (More Committee)
in its report, on both Financial Inclusion (defined as the spread of financial institutions

33
and financial services across the country) and Financial Depth (defined as the percentage
of credit to GDP at various levels of the economy) the overall situation remains very poor
and, on a regional and sectorial basis, very uneven. BIS central bankers’.

While the Reserve Bank’s model for financial inclusion is essentially bank-led, we
believe that non-bank entities do have space to partner banks in the financial inclusion
initiatives. We have enabled non-bank entities as Business Correspondents of banks to
achieve the larger goal of financial inclusion. Since September 2010, MFIs that are
bankSHGs, Trusts, Societies or Section 25 companies have been permitted to become
Banking Correspondents (BCs). At the same time several non-bank entities on their own
are part and parcel of this greater goal, for e.g. NBFC-MFIs that form the significant part
of the MFI sector have deeper reach in the rural areas.

NBFC-MFIs do not formally figure in the bank led model of financial inclusion but they
by their wider and deeper reach can be catalysts in providing the necessary handhold to
the poor borrowers to gain access to essential financial services. While the new banks
that are being envisaged would definitely give fillip to the country’s financial inclusion
initiatives, juxtaposing the humungous task of complete financial inclusion against it also
brings to focus the need for exploring alternative ways to achieve the goal. The More
Committee has observed that each of the channels, be they large National Banks, regional
cooperative banks, or Non-Banking Financial Companies (NBFCs) have a great deal of
continuing value to add by focusing on its own differentiated capabilities and accomplish
the national goals of financial inclusion by partnering with others that bring
complementary capabilities to bear on the problem.

Role of NBFCs in capital market

Investment activity of NBFC sector comprises around 16% of their total assets.These
constitute mainly investments in capital market. There are specialized NBFCs that are
exclusively engaged in capital market investment i.e. trading in securities. These NBFCs
therefore help in giving liquidity to the capital market. Further, NBFCs also lend to
34
investors for investing in capital market. Regulatory challenges in this regard might come
in the form of probable overheating of the market, which could be addressed through
appropriate regulatory measures including enhanced disclosures.

Role of NBFCs in factoring

Factoring as defined in the Factoring Regulation Act, 2011 involves acquisition of

receivables (by a Factor) thereby getting entitled to undivided interest on the receivables
or financing against the security interest over any receivables but does not include credit
facilities provided by a bank in its ordinary course of business against security of
receivables. Subsequent to the notification of the Factoring Regulation Act by the
Government, Reserve Bank formed a new category of NBFCs called NBFC-Factors and
issued directions to them. NBFC-Factors are almost exclusively engaged in providing
factoring service. Factoring service which is perceived as complimentary to bank finance
is expected to enable the availability of much needed working capital finance for the
small and medium scale industries especially those that have good quality receivables but
may not be in a position to obtain enough bank finance due to lack of collateral or credit
profile. By having a continuous business relationship with the Factor in place, small
traders, industries and exporters get the advantage of improving the cash flow and
liquidity of their business as also availing ancillary services like sales ledger accounting,
collection of receivables, credit protection etc.

Factoring helps them to free their resources and have a one stop arrangement for various
business needs enabling smooth running of their business. The Reserve Bank has recently
also taken the initiative of mooting a “Trade Receivables and Credit Exchange” for
financing of Micro, Small and Medium Enterprises, which is under development stage.
The exchange will bring together the MSMEs, the Factors and the corporate buyers under
one platform whereby MSME’s bills against large companies can be accepted
electronically and auctioned so that MSMEs are paid promptly. The objective is to build
a suitable institutional infrastructure which will not only enable an efficient 6 BIS central

35
bankers’ speeches and cost effective factoring / reverse factoring process to be put in
place, but also ensure sufficient liquidity is created for all stakeholders through an active
secondary market for the same.

Role of NBFCs in vehicle financing / second hand vehicle financing

Talking about the niche sectors that NBFCs cater to, vehicle financing especially second
hand vehicles need special mention. Certain NBFCs that are classified as Asset Finance
Companies have gained expertise in this segment and play a significant role in providing
a livelihood to customers who are drivers. From the Reserve Bank’s side, to encourage
the productive activity that these NBFCs are engaged in, we have accorded certain
additional dispensations to them in the form of enhanced bank credit, higher exposure
norm ceiling and provision of ECB under automatic route for leasing related to
infrastructure.

Role of NBFCs in infrastructure financing

Infrastructure Finance Companies and Infrastructure Debt Funds are NBFCs exclusively
into financing the infrastructure sector. Some of these companies have asset books
running to lakhs of crores of rupees and are experts in long term project financing.
Recognizing their significance, the Reserve Bank has given special dispensations in the
form of enhanced bank credit, higher exposure norm ceiling and provision of ECB under
automatic route for on-lending to infrastructure sector. The asset liability pattern
however, is a matter of concern in the case of IFCs as these are lending long term against
comparatively shorter term liabilities.

The regulatory challenges

So, you may wonder, if the NBFCs are performing such a wonderful service to the
economy, by being partners in financial inclusion, providing niche financing in the areas
like infrastructure, factoring, asset financing, etc. what is the concern that the Reserve
Bank can have? Why have you indicated in the title for this oration “Regulatory
36
Challenges”, you may ask me. Let me explain. The need for regulating the financial
institutions arise primarily because of the high leverage with which they operate that can
cause financial instability, the asset liability mismatch which can pose serious risks to the
investors and depositors, and their capacity to engender havoc to the real sectors of the
economy. Traditionally, regulation of banks has assumed greater importance than that of
their non-banking counterparts. One reason, of course, is that protection of depositors has
been traditionally an important mandate of banking supervisors.

Banks are at the center of payment and settlement systems and monetary policy
transmission takes place through them. Banks play a critical role in credit intermediation
through maturity transformation, i.e. acceptance of short term liabilities and converting
them into long term assets viz. loans and advances. Along with economic value, this
function also creates potential liquidity risk. Moreover, banks also operate on a
significantly higher leverage compared to any other type of organizations which could
amplify their vulnerability. For all these reasons, banks are subject to a detailed and a
rigorous regulatory framework. Non-banks also have depositors; these depositors also
need some assurance about the safety of their funds. Non-banks also lend their resources
as loans and advances, thus carrying out credit intermediation through maturity
transformation and thereby creating liquidity risk. Further non-banks also operate on a
significantly higher leverage than an ordinary commercial institution. Thus, when non –
bank financial entities undertake bank-like functions, large risks are created which could
potentially be destabilizing for the entire system.

Moreover, the global financial crisis demonstrated many ways in which shadow BIS
central bankers’ speeches 7banking can have an impact on the global financial system,
both directly and through its interconnectedness with the regular banking system,
prompting the move to overhaul the regulation of shadow banking system. Like banks, a
leveraged and maturity-transforming shadow banking system can also be vulnerable to
“runs” and generate contagion, thereby amplifying systemic risk. Shadow banking can
also heighten pro-cyclicality by accelerating credit supply and asset price increases
37
during upswings and exacerbating fall in asset prices during downswings. These effects
were powerfully revealed during the global financial crisis in the form of dislocation of
asset-backed commercial paper (ABCP) markets, the failure of an originate-to-distribute
model employing structured investment vehicles (SIVs) and conduits, “runs” on MMFs
and a sudden reappraisal of the terms on which securities lending and repos were
conducted. Now you may say “Yes, we agree that the NBFCs need to be regulated. But,
why are you saying that there are challenges? Don’t you have the law enabling you to
regulate

Them?” Yes, we have the law. And it has evolved over the time. The challenges today
are as follows: First, there are law related challenges in there are a number of companies
that are registered as finance companies, but are not regulated by the Reserve Bank, ii.
There are unincorporated bodies who undertake financial activities and remain
unregulated, iii. There are incorporated companies and unincorporated entities illegally
accepting deposits, IV. There are entities who camouflage deposits in some other names
and thus illegally accepting deposits. The law as it stands today is inadequate to deal with
these issues. In order to correct these and initiate action against violations, we need to
bring in suitable amendments to the statutory provisions. Reserve Bank is working with
the government for such improvements in the law. Secondly, as the entities, especially
the unincorporated ones, can sprung in any nook and corner of the country and can
operate with impunity unnoticed, but endangering their customers’ interest, we need
arrangements and structured for effective market intelligence gathering. The Reserve
Bank is restructuring its organizational setup, especially in its regional offices, for
gathering market intelligence. Thirdly, empowering law and gathering intelligence by
themselves are not sufficient. Enforcement of the law is a challenge. This is primarily
because of the various agencies involved in regulating the non-banking financial
activities of entities. Right from the central government ministries like finance and
corporate affairs, agencies like CBI and FIU-IND, regulatory agencies like the Reserve
Bank, SEBI, the Registrar of Companies, the state government agencies like the police

38
and others, all have to share information and coordinate and cooperate to bring in an
effective, timely and unified enforcement of the law. The Reserve Bank’s State Level
Coordination Committees (SLCC) are being strengthened and a National level
Coordination Committee is also being considered. Fourthly, as was mentioned earlier,
world over there is an increasing demand that

Anise in India and the countdown follows:the shadow banks be brought under tighter
regulations. G-20 has already expressed it as a mission to be achieved by 2015. In our
case, bringing them under regulation is not the issue, as they already are. The challenge
for us is how differentially or how closely we should regulate the NBFCs? The demand
from the NBFC sector is that they should be subjected to light touch regulation. As
mentioned earlier, NBFCs were brought under regulatory ambit of the Reserve Bank
since 1963; we brought them under prudential regulatory framework since 1997.
Nevertheless, the NBFC sector came under pressure during the 2008 crisis due to the
funding inter-linkages among NBFCs, mutual funds and commercial banks. NBFCs-ND-
SI relied significantly on short term funding sources such as debentures (largely non -
convertible short term debentures), and CPs, which constituted around 56.8 percent of the
total borrowings of NBFCs-ND-SI as on September 30, 2008. These funds were used to
finance assets which were reportedly largely a mix of long term assets, including hire 8
BIS central bankers’ speeches purchase and lease assets, long term investments,
investment in real estate by few companies, and loans and advances. These mismatches
were created mainly as a business strategy for gaining from the higher spreads. However,
there were no fall back alternatives in cases of potential liquidity constraints. The ripple
effect of the turmoil in American and European markets led to liquidity issues and heavy
redemption pressure on the mutual funds in India, as several investors, especially
institutional investors, started pulling out their investments in liquid and money market
funds. Mutual funds being the major subscribers to CPs and debentures issued by
NBFCs, the redemption pressure on MFs translated into funding issues for NBFCs, as
they found raising fresh liabilities or rolling over of the maturing liabilities very difficult.

39
Drying up of these sources of funds along with the fact that banks were increasingly
becoming risk averse, heightened their funding problems, exacerbating the liquidity
tightness. The Reserve Bank undertook many measures, both conventional as well as un-
conventional, to enhance availability of liquidity to NBFCs’.

To conclude, I may say that the challenge therefore for the NBFC sector is to grow in
a prudential manner while not stopping altogether on financial innovations. The key lies
in having in place adequate risk management systems and procedures before entering into
risky areas. As for the regulator, it is the constant endeavor of Reserve Bank to enable
prudential growth of the sector, keeping in view the multiple objectives of financial
stability, consumer and depositor protection, and need for more players in the financial
market, addressing regulatory arbitrage concerns while not forgetting the uniqueness of
NBFC sector. The Bank presently is in the process of reviewing the regulatory
framework for NBFCs in the context of recent developments including the Nachiket
More Committee and others.

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 Chapter VII

Case study

Given below are the Top 2 Non-Banking Financial Company

1. RELIANCE CAPITAL

2. MAHINDRA AND MAHINDRA FINANCIAL SERVICES LIMITED

(MMFSL)

RELIANCE CAPITAL

Meaning

Established in the year 1986 by Dhirubhai Ambani, Reliance is one of the top companies
that provide financial services in the country. It is under the management of the Anil
Ambani Group. The major services provided are Asset Management, Commercial
Finance, Broking and Distribution and Insurance are some of the domains in which the
company operates. Mutual Fund, Life Insurance, Mortgage, Business Loan and Asset
Construction.

41
It has over 11,000 employees across all major Indian cities. The headquarters is located
in Mumbai. The total asset of the company is about 1.1 billion dollars. Established in the
year 1986 by Dhirubhai Ambani, Reliance is one of the top companies that provide
financial services in the country. It is under the management of the Anil Ambani Group.

The major services provided are Asset Management, Commercial Finance, Broking and
Distribution and Insurance are some of the domains in which the company operates.
Mutual Fund, Life Insurance, Mortgage, Business Loan and Asset Construction. It has
over 11,000 employees across all major Indian cities. The headquarters is located in
Mumbai. The total asset of the company is about 1.1 billion dollars.

Contents
1 History

2 Non-Banking Finance Company

3 Credit Rating

4 Operations

5 Reliance Nippon Life Asset Management

6 Reliance Nippon Life Insurance

7 Reliance General Insurance

8 Reliance Commercial Finance

9 Reliance Home Finance

10 Reliance Capital's Broking and Distribution Business

11 Reliance Asset Reconstruction

12 Major Deals

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History

OUR HISTORY. Reliance Capital Limited (RCL) was incorporated in year 1986 at
Ahmedabad in Gujarat as Reliance Capital & Finance Trust Limited. The name RCL
came into effect from January 5, 1995. In 2002, RCL shifted its registered office to
Jamnagar in Gujarat before it finally moved to Mumbai in Maharashtra, in 2006.

Reliance Capital Limited (BSE: 500111, NSE: RELCAPITAL) is an Indian diversified

financial services holding company promoted by Reliance Group.

Reliance Capital, a constituent of Nifty Midcap 50 and MSCI Global Small Cap Index, is
a part of the Reliance Group. It is amongst India’s leading and most valuable financial
services companies in the private sector. As on March 31, 2017, the net worth of the
company stood at Rs 16,548 crore, while its total assets as on the date stood at Rs 82,209
crore.

Reliance Capital has businesses in asset management, mutual funds, life insurance and
general insurance, commercial finance, home finance, stock broking, wealth management
services, distribution of financial products, private equity, asset reconstruction,
proprietary investments and other activities in financial services. The company operates
across India and has over 20 million customers and workforce of approximately 15, 595
as of May 1, 2017.

Anil Ambani, promoter of Reliance Group is the Chairman of Reliance Capital, while
Amitabh Jhunjhunwala is the Vice-Chairman and Anmol Ambani as the Executive
Director.

Chairman Anil Ambani during Reliance Group AGM at Mumbai in 2012.

Reliance Capital Limited was incorporated in year 1986 at Ahmedabad in Gujarat as

Reliance Capital & Finance Trust Limited. The name Reliance Capital came into effect
from January 5, 1995.

43
In 2002, Reliance Capital Ltd shifted its registered office to Jamnagar in Gujarat before it
finally moved to Mumbai in Maharashtra, in 2006.

In 2006, Reliance Capital Ventures Limited merged with Reliance Capital and with this
merger the shareholder base of Reliance Capital rose from 0.15 million shareholders to
1.3 million. Reliance Capital entered the Capital Market with a maiden public issue in
1990 and in subsequent years further tapped the capital market through rights issue and
public issues. The equity shares were initially listed on the Ahmedabad Stock Exchange
and The Stock Exchange Mumbai.

Presently the shares are listed on The Stock Exchange Mumbai and the National Stock
Exchange of India.

Non-Banking Finance Company

Reliance Capital obtained its registration as a Non-banking Finance Company (NBFC) in

December 1998. Reliance Capital has since diversified its activities in the areas of asset
management; life and general insurance; commercial finance; stock broking; private
equity and proprietary investments; asset reconstruction; distribution of financial
products and other activities in financial services.

Credit Rating

Reliance Capital has a net debt equity ratio of 1.88 as of March 31, 2017. It is one of the
top most rated Indian financial institutions and enjoys the highest ratings of ‘A1+’ by
ICRA and CRISIL, for its short term borrowing program and ‘CARE AAA’ by CARE
for its long term borrowing program.

Operations

Reliance Capital offers a range of financial services in many business lines. The company
is one of the most diversified financial services firms in India with interests expanding

44
from asset management, insurance, commercial finance, broking, private equity to other
niche financial services.

The prominent businesses are as follows.

Reliance Nippon Life Asset Management

Reliance Nippon Life Asset Management - RNAM (formerly Reliance Capital Asset
Management Limited) is one of the largest asset manager in India and manages and
advises Rs. 3, 58,059 crore as per March, 2017, across mutual funds, pension funds,
managed accounts, alternative investments and offshore funds. RNAM is the only AMC
to have the mandate for fund management by EPFO, PFRDA and CMPFO.

RNAM is the asset manager of Reliance Mutual Fund (RMF) Schemes. SandeepSikka is
the Executive Director & Chief Executive Officer of RNAM. As per Mar’17, RMF
manages the highest assets from ‘beyond Top 15 cities’ category across all AMCs in the
Industry.

RNAM acts as the advisor for India focused Equity and Fixed Income funds in Japan
(launched by Nissay Asset Management) and Korea (Samsung Asset Management).
RNAM also manages offshore funds through its subsidiaries in Singapore and Mauritius
thereby catering to investors across Asia, Middle East, UK, US, and Europe

Reliance Nippon Life Insurance

Reliance Nippon Life Insurance Company is among the leading private sector life
insurance companies in India in terms of individual WRP (weighted received premium)
and new business WRP. The company is one of the largest non-bank supported private
life insurers with over 10 million policy holders, a strong distribution network of over
700 branches and over 75,000 advisors as on March 31, 2017. The company holds one of
the top Claim Settlement Ratios in the industry which stands at 95.21% as of March 31,
2017.

45
Ashish Vohra is the Executive Director & Chief Executive Officer of
RNLI.

Rated amongst the Top 4 Most Trusted Life Insurance Service Brands by Brand Equity‘s
Most Trusted Brands Survey 2016, the company’s vision is “To be a company people are
proud of, trust in and grow with; providing financial independence to every life we
touch.” With this in mind, Reliance Nippon Life caters to five distinct segments, namely
Protection, Child, Retirement, Saving & Investment and Health; for individuals as well as
Groups/Corporate entities.

In FY'16, post the enabling regulations, Nippon Life increased its stake in Reliance Life
from 26% to 49%, subsequent to the receipt of all regulatory approval. Nippon Life
Insurance, also called Nissay, with 25% market share is Japan's largest private life
insurer. The Company, with over 29 million policies in Japan, offers a wide range of
products, including individual and group life and annuity policies through various
distribution channels and mainly uses face-to-face sales channel for its traditional
insurance products. The company primarily operates in Japan, North America, Europe
and Asia and is headquartered in Osaka, Japan. It is ranked 114th in Global Fortune 500
firms in 2016.

Reliance Capita

Main article: Reliance General Insurance

Reliance General Insurance Company Limited is an Indian insurance company, part of

Reliance Capital Ltd. The firm has a 7.3% market share in private sector and has the
largest agency channel with over 24,500 agents. The CEO and Executive Director is
Rakesh Jain.

The company has strengthened and diversified its distribution network by forging
partnerships with major banks. Reliance General Insurance is an active participant in
various government crop Insurance schemes – including the Pradhan Mantri Atal Bima
46
Yojna and has insured over 3 million farmers under this financial inclusion initiative. The
total Gross Written Premium (GWP) for the year, ended March 31, 2017, was ₹40.07
billion (US$620 million). Reliance General Insurance (RGI) offers insurance solutions
for auto, health, home, property, travel, marine, commercial and other specialty products.

Reliance Commercial Finance

Reliance Commercial Finance is among the leading lenders in Indian non-banking

finance sector. The CEO and Executive Director of the company is Devang Moody.

The company has an operational presence of over 44 locations in India and an AUM of
16759 Cr. as on March 2017. Reliance Commercial Finance offers a wide range of
products which include Business Expansion Loans, Property Loans, Vehicle Loans,
Construction Equipment Loans, Infrastructure, Microfinance and Agriculture Loans. The
company had a loan book at ₹124.36 billion (US$2.1 billion) as on March 31, 2017, with
over 268278 customers (including Microfinance) across India.

Reliance Home Finance

Reliance Home Finance Limited is one of India's leading and most valuable financial
services companies in the private sector. Ravindra Sudhalkar is the CEO and Executive
Director of the company.

Reliance Home Finance Limited (RHF), a 100% subsidiary of Reliance Capital, provides
a wide range of solutions like home loans, LAP, Construction finance, and Affordable
housing loans. The company also provides property solutions' services that help
customers find their dream homes/property, along with financing. The company has a
strong distribution network with over 1,750 distributors serving over 33,300 customers
across 90 locations, through a hub and spoke model, across the country.

47
Reliance Capital's Broking and Distribution Business

Reliance Securities, the broking & distribution arm of Reliance Capital, is one of India’s
leading retail broking houses. B Gopkumar is the Chief Executive Officer and Executive
Director of its broking and distribution business. [28][29] It provides a varied customer
base with access to equities, derivatives, currency, IPOs, bonds, corporate FD’s and
wealth management solutions.

The Distribution business is a comprehensive financial services and solutions provider,

assisting customers with access to mutual funds, insurance products and other financial
products, with a pan India presence with approx. 80 branches.

Reliance Asset Reconstruction

Reliance Asset Reconstruction is the premier asset reconstruction company, principal

sponsor/shareholder of which is Reliance Group (through Reliance Capital). The AUM as
on March 31, 2017 stands at Rs. 1829 crore (previous year Rs.1488 crore).

Major Deals
Reliance Capital is known to have struck some of the biggest deals in the Indian financial
services sector.

In 2011, Reliance Capital sold 26% stake in its life insurance business - Reliance Life
Insurance - to Nippon Life Insurance (Nissay), amongst the world's largest life insurer
with an AUM of over 600 billion. The transaction was completed at Rs. 3,062 crore for
26 per cent stake, valuing Reliance Life Insurance at $2.6 billion.

48
This was the largest deal in the insurance sector in India. Recently, the government of
India has announced 49% foreign holding in Indian insurance firms, up from the 26%
holding allowed earlier.

In 2012, Nippon Life Insurance bought 26% stake in Reliance Capital Asset Management
for Rs. 1,450 crore, making it the biggest inward stake buy in the mutual fund industry.
The deals were lauded in the Indian financial services sector in India by analysts. Value
Research, a major financial research firm lauded this strategic stake sale by Reliance
Capital to Nippon Life Insurance in two of its businesses.

Industry players also believe that such high value and credible deals struck by Reliance
Capital has helped increase the valuations of the Indian financial services space in the
prolonged global economic slowdown and after the Lehman triggered financial crisis.

Reports indicate that Reliance Capital is also planning to sell 26% stake in its general
insurance business - Reliance General Insurance - at an appropriate time.

India's leading financial daily Economic Times wrote, since Reliance General Insurance
is one of the leading players, the proposed stake sale is expected to generate handsome
capital gains for Reliance Capital. The de-leveraging of the balance sheet and ongoing
restructuring should help Reliance Capital conserve capital and generate better return
ratios. A leaner company will also mean that it will be able to grow faster when the
business environment turns favorable once again.

After the recent announcement by Finance Minister Arun Jaitley to increase investment
limit for foreigners in Indian insurance sector to 49%, Espirito Santo said Reliance
Capital is going to benefit the most from the decision due to its successful presence in
both life and general insurance and ability draw appropriate valuation from foreign
partners due to its diversified strength and last mile reach in financial services sector in
India.

49
Reliance Capital in July announced the merger of its global film and media services
business with Prime Focus to create an entity with a combined turnover of over Rs 1,800
crore. In the month of July 2017, it sold its 1% share in Paytm to China's Alibaba Group
for Rs 275 crore, making a profit of 2,600%.

50
Case Study

2 MAHINDRA AND MAHINDRA FINANCIAL SERVICES LIMITED (MMFSL)

Meaning

Mahindra and Mahindra Financial Services Limited (MMFSL) is one of the country’s top
rural NBFC. It was established in 1991 and has over 1000 branches in the country. Their
services include vehicle loans, home loans, gold loans, corporate loans, working capital
loans, etc. Mahindra Insurance Brokers Limited and Mahindra Rural Housing Finance
Limited are its two subsidiaries these subsidiaries offer insurance services and housing
financial services of premier quality. It has more than 3 million customers.

History

The Mahindra Finance journey started on January 1, 1991, as Maxi Motors Financial
Services Limited. They received the certificate of commencement of business on
February 19, 1991. On November 3, 1992, Mahindra Finance changed their name to
Mahindra & Mahindra Financial Services Limited. Mahindra Finance is registered with
the Reserve Bank of India as an asset finance, deposit taking NBFC.
51
In 1993 it commenced financing M & M Utility vehicles and in 1995 started its first
branch outside Mumbai, in Jaipur. Began financing Non M & M vehicles in 2002 and got
into the business of financing of Commercial Vehicles and Construction Equipment’s in
2009. 2011 was the year in which they had a Joint Venture with Rabobank subsidiary for
tractor financing in USA and consolidated the product portfolio by introducing Small and
Medium Enterprises (SME) financing.

Corporate Affairs

As of July 2016, Ramesh Eyre is the Vice Chairman & President of Mahindra Financial
Service Sector

Products and Services

Vehicle Financing

Vehicle Financing: Auto and utility vehicles, tractors, cars, commercial vehicles and
construction equipment Pre-owned vehiclancing. Loans for pre-owned cars, multi-utility
vehicles, tractors and commercial vehicle

SME Financing

Loans for varied purposes like project finance, equipment finance and working capital
finance.

Housing Finance

Finances, rural and semi-urban population to build self-sustaining houses, pukka houses
and ensure their uplift meant in society

Insurance Broking

Insurance solutions to retail customers as well as corporations through our [who?]

subsidiary Mahindra Insurance Brokers Limited

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Asset Management Company (Mutual Fund)

Launched in June 2016, it offers mutual fund products, whose NAV is around 1000 INR.
The MAMC started with an AUM of 1200 Million INR.

Mutual Fund distribution

Advises clients on investing money through AMFI certified professionals under the brand
Mahindra Finance Fin smart

Fixed Deposits

The MMFSL Fixed Deposit has a CRISIL rating of 'FAAA', indicating a high level of
safety

Subsidiaries

Mahindra Mutual Fund

Mahindra Asset Management Company Private Limited is a wholly owned subsidiary of

Mahindra and Mahindra Financial Services Limited (MMFSL). Mahindra AMC Pvt Ltd,
is the Investment Manager for Mahindra Mutual Fund. It started its operation in the first
week of July 2016, with an AUM of 1200 Million INR and its NAV is floating around
1000 INR

Mahindra Mutual Fund endeavors to offer a variety of mutual fund schemes pan India,
with special focus in rural and semi-urban areas.

Mahindra Insurance Brokers Limited

In FY 2012-13, the insurance broking subsidiary, Mahindra Insurance Brokers Limited

(MIBL) crossed the 8, 00,000 mark in terms of the policies served. The Company’s total
policies, at the end of 2012-13, stood at 8, 39,408 for both life and non-life retail business
lines. It reached a total of Rs. 600 Crores gross premium. The income increased by 85 per
cent from Rs. 46.6 Crores in 2011-12 to Rs. 86.3 Crores in 2012-13. During the year,
53
MIBL entered into a strategic partnership with Leapfrog Investments, world’s largest
investor in insurance for the underserved. Through its subsidiary company, Inclusion
Resources Private Limited, Leapfrog invested Rs. 80.4 Crores for a 15 per cent
shareholding in MIBL.

Mahindra Rural Housing Finance Limited

In FY 2012-13, Mahindra Rural Housing Finance Limited (MRHFL) disbursed loans

aggregating to Rs. 432.9 Crores, up from Rs. 266.8 Crores in the previous year. The
profit after tax for 2012-13 stood at Rs. 222.3 Crores, against Rs. 11.9 Crores in the
previous year. The outstanding loan portfolio, as on 31 March 2013, stood at Rs. 879.5
Crores.

Mahindra Business and Consulting Services Private Limited

Mahindra Finance’s wholly owned subsidiary, Mahindra Business & Consulting Services
Private Limited (MBCSPL), provides staffing services primarily to Mahindra Finance. It
also serves the subsidiaries (MIBL and MRHFL) and parent company (Mahindra &
Mahindra Limited). During the year, MBCSPL deputed 8,098 employees to these
companies. The Profit after Tax increased from Rs. 7.1 Lacs in 2011-12 to Rs. 173.8 Lacs
in 2012-13.

Social Initiatives

Mahindra Finance has engaged in various social initiatives to provide people with
education, healthcare facilities and reduce environmental footprint. Some of the
initiatives include

Lifeline Express

The Lifeline Express is a mobile hospital run on a train with five railway coaches. The
coaches are equipped with updated medical and surgical facilities to provide free, on-the-
spot diagnosis and treatment. It addresses the medical requirements of inhabitants from

54
India’s remote, rural corners that have scarce medical facilities. About 2,500 patients
suffering from disabilities like cleft lip, deafness, polio (for children under 14 years) and
cataract are treated on board. Mahindra Finance conducted its first ever solo journey of
the Lifeline Express at Puri (Odisha) from 24 September to 14 October 2012.

Mahindra Hariyali

Mahindra Hariyali is the tree plantation model at Mahindra Group. Mahindra Finance
partnered with schools, colleges, trusts, Government’s Forest Departments and old age
homes to spread our green agenda. They planted around 54,000 saplings across India. To
protect the environment, Mahindra Finance undertook various initiatives. By focusing on
optimum natural resource usage and reducing Greenhouse Gas emission. Mahindra
Finance has controlled consumptions of electricity, water and paper significantly. They
have also installed solar panels at various remote branches.

Other Social Initiatives

Mahindra Finance Organized Blood Donation camps in 2012-13 and collected 1,085
bottles of blood. This activity was a part of their banner of Employee Social Options
(ESOPS) along with various other social projects. They also donated funds to various
NGOs thus helping them in their purpose of buying ambulances.

Awards & Recognitions

BITS – Winner of Nasscom IT User Awards, 2012 Organized by NASSCOM

Ranked 14th in the Dream Companies to Work for Awards Organized by UTV
Bloomberg World HRD Congress Winner of Golden Peacock HR Excellence Awards
Organized by Institute of Directors

Silver Award for Best Corporate Website Organized by ABCI Awards in 2012

55
(Association of Business Communicators of India)Ranked 5th in the Financial Services
Sector and among the Top 50 companies having over 1,000 employees by Great Place to
Work Institute

Silver Award for Best Corporate Website

Ranked 10th in the prestigious Dun & Bradstreet's India's Top 500 Companies 2012

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 CHAPTER VIII

Conclusion
NBFC’s are mainly established to grant credit to the poor section of the society, whereas
the banks are chartered by the government to receive deposits and grant credit to the
public. The licensing regulations of a bank are more stringent than that of an NBFC.
Moreover, a bank cannot operate any business other than the banking business, but an
NBFC can operate such business. Covered under the RBI’s banking regulations, these are
the companies that provide banking facilities without meeting the lawful definition of a
bank. They are characteristically restricted from taking deposits from the public but other
banking services like loans, credit facilities, TFCs, retirement planning, trading in money
markets are provided by these institutions. There are numerous such institutions operating
across the country and millions of customers are getting benefited by these.

To conclude, I may say that the challenge therefore for the NBFC sector is to grown in
a prudential manner while not stopping altogether on financial innovations. The key lies
in having in place adequate risk management systems and procedures before entering into
risky areas. As for the regulator, it is the constant endeavor of Reserve Bank to enable
prudential growth of the sector, keeping in view the multiple objectives of financial
stability, consumer and depositor protection, and need for more players in the financial
market, addressing regulatory arbitrage concerns while not forgetting the uniqueness of
NBFC sector. The Bank presently is in the process of reviewing the regulatory
framework for NBFCs in the context of recent developments including the Nachiket
More Committee and others.

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 Bibliography

www.google.com

www.wikipedia.com

www.nbfc.com

www.reliance.com

http://www.investopedia.com

http://slideshare.com

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