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Presentation on non bank financial companies

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Presentation on non bank financial companies

  1. 1. Presentation on Non-bank financial companies (NBFCs) Presented by: Pankaj Bhatt
  2. 2. • 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. • According to the Reserve Bank of India, 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.
  3. 3. Banks Vs. Non-Banks • Both are Financial Intermediaries • Banks Can: – Maintain Demand Deposits (savings/current Accounts) – Form a Part of Payment and Settlement Mechanism • Non-banks Can – Accept only term Deposits – Does not form Part of Payment and Settlement Mechanism 3 "In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commerce or carry on any business of Non-bank financial institutions as defined in clause (a) of section 45 I of the RBI act 1934.
  4. 4. • Different types of NBFCs: There are different categories of NBFC's operating in India under the supervisory control of RBI. They are: 1. Non-Banking Financial Companies (NBFCs) 2. Residuary Non-banking Finance companies(RNBCs). 3. Miscellaneous Non-Banking Finance Companies (MNBCs) and 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. Peerless Financial Company is the example of RNBCs. Miscellaneous Non-Banking Financial Companies are another type of NBFCs and MNBC means a company carrying on all or any of the types of business as collecting, managing, conducting or supervising as a promoter or in any other capacity, conducting any other form of chit or kuri which is different from the type of business mentioned above and any other business similar to the business as referred above.
  5. 5. Types and Services provided by NBFCs: The Non-Banking Finance Companies operating in India fall in the following broad categories. (1) Hire Purchase services Hire purchase the legal term for a conditional sale contract with an intention to finance consumers towards vehicles, white goods etc. If a buyer cannot afford to pay the price as a lump sum but can afford to pay a percentage as a deposit, the contract allows the buyer to hire the goods for a monthly rent. If the buyer defaults in paying the installments, the owner can repossess the goods. HP is a different form of credit system among other unsecured consumer credit systems and benefits. Hero Honda Motor Finance Co., Bajaj Auto Finance Company is some of the HP financing companies.
  6. 6. (2) Investment Company means any company which carries on as its principle business the acquisition of securities. These types of companies are investment holding companies formed by business houses. As such they provide finance mainly to companies associated with these business houses. As compare to open-end investment companies or mutual funds/units trust, these investment companies are close end companies having a fixed amount of share capital. Almost all prominent industrial groups have their own investment companies. (3) Loan Company is a company which carries on as its principle business, the providing of finance whether by making loans or advances or otherwise for any activity other than its own. (This category excludes No.1 to No. 3 above categories). These types of companies are generally small partnership concerns which obtain funds in the form of deposits from the public and give loans to wholesale and retail traders, small scale industries and self-employed persons. These companies collect fixed deposits from the public by offering higher rates of interest and give loans to others at relatively higher rates of interest.
  7. 7. (4) Mutual Benefit Finance Company (i.e. Nidhi Company) means any company which is notified by the Central Government under section 620A of the Companies Act, 1956. The main sources of funds for nidhis are share capital, deposits from their members and deposits from the public. Nidhis give, loans to their members-for several purposes like marriages, redemption of old debts, construction and etc. The nidhis normally follow the easy procedures and offer saving schemes and make credits available to those whose credit needs remain unmet by his commercial banks. (5) Chit Fund Company is a company which collects subscriptions from specified number of subscribers periodically and in turn distributes the same as prizes amongst them. Any other form of chit or kuri is also included in this category. The chit fund companies operations are governed by the Chit Fund Act, 1982, which is administered by State Governments. Their deposit taking activities are regulated by the Reserve Bank. The chit fund companies enter into an agreement with the subscribers that everyone of them shall subscribe a certain amount in installments over a definite period and that every one of such subscriber shall in his turn, as determined by lot or by auction or by tender, be entitled to a prize amount.
  8. 8. (6) Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. (7) Housing Finance Company is a company which carries on as its principle business, the financing of the acquisition or construction of houses including the acquisition or development of plots of lands for construction of houses. These companies are supervised by National Housing Bank, which refinances housing loans by scheduled commercial banks, co-operative banks, housing finance companies and the apex co-operative housing finance societies. (8) Leasing Services A lease or tenancy is a contract that transfers the right to possess specific property. Leasing service includes the leasing of assets to other companies either on operating lease or finance lease. An NBFC may obtain license to commence leasing services subject to , they shall not hold, deal or trade in real estate business and shall not fix the period of lease for less than 3 years in the case of any finance lease agreement except in case of computers and other IT accessories. First Century Leasing Company Ltd., Sundaram Finance Ltd. is some of the Leasing companies in India.
  9. 9. Year Number of Registered NBFCs Number of NBFCs- D Number of NBFCsND-SI 2005 13,261 507 - 2006 13,014 428 149 2007 12,968 401 173 2008 12,809 364 189 2009 12,740 336 234 2010 12,630 308 260 Number of NBFCs registered with the RBI: The following table shows the number of NBFCs registered with the Reserve Bank of India and the trend of registration of companies as NBFC since the last decade. The table as given below also indicates registration of deposit accepting NBFCs of the total NBFCs registered with RBI.
  10. 10. Role of Non banking financial companies in India 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,”. • Growth: 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.
  11. 11. • 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. • Investment of surplus money in various profitable areas. • These institutions play a crucial role in extending credit to the countryside, thus preventing the concentration of credit risk in banks. In urban areas too, NBFCs focus on segments neglected by banks-non-salaried individuals, traders, transporters and stock brokers.
  12. 12. • Microfinance Microfinance is generally understood as the provision of financial services to low-income households. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients.
  13. 13. THANK YOU

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