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Non Banking Financial Company.
Non Banking Financial Company.
C H A P T E R -II
F IN A N C IA L COM PANIES
transfer the savings o f surplus units to deficit units; hence, they can play a vital role in
the economy o f the country. They help in monetizing the economy and transferring
unproductive financial assets into productive assets. In fact, the nature and diversity o f
a country^.
The activities o f financial institutions are different from the activities o f non-
institutions deal with financial assets such as deposits, loans, securities and so other
financial assets. O n the other hand non-financial business organizations deal with real
assets such as machinery, equipment, stocks o f goods, real estate and so on. The
various groups.^
They are:
a) Regulatory;
b) Intermediaries;
c) Non-intermediaries; and
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d) Others;
investors. They lend money as well as mobilize savings. Their liabilities are
associated with savers, while their assets are related with investors or borrowers.
The distinction between banks and non-banking financial institutions is mainly in the
nature o f the liabilities o f the two and in the structure o f their assets.
deposits but in case o f N B F C s , demand deposits do not ordinarily form the part o f
liabilities. So the term ‘nidhi’ will be an exception in this respect. Since demand
‘money’, it is the degree o f ‘money ness’ o f the liabilities o f the two types o f
institutions which constitutes a major difference between the two From the assets
side, it may be said that banking institutions hold a wide variety ranging from short
term and medium-term to long-term credits and they also use different types o f credit
instruments like overdrafts, cash credits, bills, etc. On the other hand, the assets o f
their operations mainly to the financing o f transport operators and consumer credit
while housing finance companies make loans for housing purpose. Sometimes, the
differences are not demarcated as the banks are also m aking advances in fields like
transport and consumer credit. But banking institutions have special power to
services and they can create deposits. Banking institutions, subject to legal reserve
requirements, can advance credit by creating claims against themselves while non
banking institutions can lend only out o f resource put at their disposal by the savers ^
financialization and this phenomenon has been noticed when structural reforms have
exchange rate, financial sector and monetary & fiscal policy. The process o f financial
intermediation supports increasing capital accumulation through the
Therefore, the gains to the real sector o f the economy depend on how efficiently the
financial institutions and a wide range o f financial instruments. There is no doubt that
there has been a considerable widening and deepening o f the Indian financial system,
particularly in the last two decades. The extension o f banking and other financial
achievement. A s the demand for financial services grows, India needs to encourage
financial services and play an important role in providing credit to the unorganized
sector and to small borrowers at the local level. A s a sequel o f the previous
discussions one question necessarily arises: What is meant by the term non-banking
financial com pany? From the following discussions one can easily understand the
same.
Meaning ofNBFC
Non-banking finance company (N B F C ) is a business entity whether
incorporated under the Companies Act, 1956 or not which devotes its resources in
providing to society the financial services o f various descriptions which are distinct
financial companies (N B F C s) are those companies and institutions, which accept non-
worth mentioning in this respect. According to Section 45-1 o f Reserve Bank o f India
(ii) a non-banking institution which is a company and which has its principal
(iii) such other non- banking institution or class o f such institutions as the bank
I f we examine the above definition then we find that the definition uses two
expressions are also defined by the R B I Act, 1934. The close relationships between
the two expressions are also necessary to understand the meaning o f non-banking
financial company.
Financial Institution has been defined under clause(c) o f section 45-1 o f the
R B I Act, 1934. Financial Institution means any non-banking institution which carries
nature,
(iii) Letting or delivering o f any goods to a hirer under hire purchase agreement
1972);
capacity, o f chits or kuries as defined in any law which is for the time
monies in any other way, to persons from whom monies are collected or to
any other person, but does not include any institution, which carries on as
(c) the purchase or sale o f any goods (other than securities) or the
The clause (e) o f the section 45-1 o f the R B I Act, 1934 has been defined
society. The definition is looking at every detail as it starts with the word “means”.
The definition is very simple and envisages only three kinds o f entities as non
banking institution as evident from the definition. This means that other forms o f
Sim ply financial institution means any non-banking institution i.e, company
(i) Extending financial assistance in the form o f loans and advances. This activity
o f clause (c) o f section 2 o f the Industrial Development Bank o f India Act, 1964 (18
o f 1964).
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investment companies.
(iii) Delivering o f goods under hire purchase agreement. This covers hire purchase
finance companies.
banking companies.
(vi) Clause (vi) o f the definition envisages on agreement where money is collected
from certain people under some mode then prizes are awarded from the
definition o f ‘prize chit’ as provided in the Prize Chits and M oney Circulation
hire purchase or installment sales to its customers, it will not become a financial
institution. M ore precisely stated that the above-mentioned entities principal business
is not providing money by hire purchase or installment method. Here the principal
definition.
From the above discussion we can infer a conclusion whether the business
It appears that some o f the activities o f the financial institutions and the
NBFCs are common to both the definitions. Hence, the NBFC can be termed as a
financial institution for all practical purposes. RBI has announced that in order to
identify an NBFC, it w ill consider both the assets and the income pattern as evidenced
from the last audited balance sheet o f a company. The company w ill be treated as an
NBFC i f its financial assets are more than 50 percent o f its total assets (netted o ff by
intangible assets) and income from financial assets should be more than 50 percent of
the gross income. Both these tests are required to be satisfied as the determining
factor for principal business o f a company.
Further, NBFC has been defined under clause (xi) o f paragraph 2(1) o f Non-
Banking Financial Companies Acceptance o f Public Deposits (Reserve Bank)
Directions, 1998 as under
I. NBFC General,
‘NBFC General’ has been defined earlier and as a passing reference the
definition o f MNBCs and RNBCs is given below:
Meaning of MNBC:- ,
In the field o f NBFCs, there are certain NBFCs whose activities, not defined
under NBFC Acceptance o f Public Deposit (Reserve Bank) Directions, 1998, are
covered under Miscellaneous Non-Banking Companies (Reserve Bank) Directions,
1977.
i. MNBCs which carry business o f the type o f described in para 2(1) o f the
MNBCs (Reserve Bank), Directions, 1997 in the State o f Jammu and
Kashmir; and
ii. The MNBCs which carry any type o f business referred to in sub-para (2) to (4)
o f para 2 o f the Directions.
The definitions which are given under MNBCs in the state o f J & K, para 2(1)
o f the Directions is as ''^:-
i. Collecting whether as a promoter, foreman, agent or in any other capacity,
monies in one lump-sum or in installments by way o f contributions or
subscriptions or by sale o f units, certificates or other instruments or in any
other manner or as membership fees or admission fees or service charges
to or in respect o f any savings mutual benefit, thrift or any other scheme or
arrangement by whatever name called and utilizing the monies so collected
or any part thereof or the income accruing from investment or other use of
such monies for all or any o f the following purposes.
Directions, 1977 or, as the case may be, the Miscellaneous Non-banking Companies
(Reserve Bank)
Directions, 1977, is not —
(i) an equipment leasing company;
(ii) a hire- purchase finance company;
(iii) a housing finance company;
(iv) an insurance company;
(v) an investment company;
(vi) a loan company;
(vii) a mutual benefit financial company, and
(viii) miscellaneous non-banking company.
Equipment Leasing
Lease is a financial system which was innovated by the Americans. Lease
Financing is very ancient, dates back to 1400 B.C. in the Phoenician Civilization era
particularly around the Western Coast o f the Mediterranean Sea. In India, Mr. Farouk
Irani started the first leasing company, appropriately named, First leasing company o f
India Ltd in 1973. At present there are about 500 leasing companies operating in India
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installments at a given rate o f interest. The ownership o f the assets passes to the
purchaser only on payment o f final installment
Section 2(C) o f the Hire Purchase Act, 1972, defines hire purchase
agreement as “ hire purchase agreement means an agreement under which goods are
let on hire and under which the hirer has an option to purchase them in accordance
with the terms o f the agreement under which-
a. possession o f goods is delivered by the owner thereof to a person on
condition that such person pays the agreed amount in periodical
installments,
b. the property in goods is to pass to such person on the payment o f the
last o f such installments, and
c. such person has a right to terminate the agreement at any time before
the property so passes.
From the above definition it is clear that, hire purchase is a hiring
agreement like leasing and there is a close relationship between the two. Only the
difference is, in case o f lease, the lessee (hire) may not necessarily be given any
option to purchase the goods on the expiry o f the lease. Ownership remains vested to
the lessor (owner) throughout the lease agreement. But in case o f hire purchase, the
ownership is transferred to the hirer upon the payment o f final installment.
their own accommodation. After the industrial revolution people try to take shelter in
and around urban areas. This obviously led to high demand for dwelling units. To fill
the gap between the demand and supply o f housing units, Government constituted
different land development and house building authorities. In that situation if a
person wants to buy a house but he does not possess sufficient money, what w ill he
do? He must search for some body (entity / person) who is willing to extend financial
assistance to the person so that he can fu lfill his long demand. In that situation
Housing Finance Companies (HFCs) originated in the field o f finance business.
Meaning of HFCs
A housing Finance Company is a Company incorporated in India which
transacts the business o f providing long term finance for housing. We know that in
our country NBFCs are governed by the RBI but HFCs are regulated by the National
Housing Bank (NHB) Act, 1987.Sections 30 and 31 o f the National Housing Bank
Act, 1987 confer powers on the National Housing Bank in dealing with HFCs. The
NHB has issued Direcfions applicable to HFCs in 1989 known as Housing Finance
Companies (NHB) Directions, 1989
National Housing Bank has issued a draft Memorandum o f Association for the
HFCs. As per the Memorandum o f Association the main objects are:--
(i) The finance should be long-term,
(ii) The borrower can be a person/ company / association o f person /
society / corporation,
(iii) The loan can be with or without any interest.
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Loan Company:-
Loan means money that an organization such as bank lends and somebody
borrows it. It is a kind o f debt representing in money form. Loan Company provides
loans for the business activity or for any other purpose against security or without
security.
The term ‘Loan Company’ means any company which is a financial
institution carrying on as its principal business the providing o f finance whether by
making loans or advances or otherwise for any activity other than its own but does not
include an equipment-leasing company or a hire purchase finance company
Investment Company-
Investment Company means any company, which is carrying on as its
principal business the acquisition o f securities. These companies perform their
functions in varied forms though the object ultimately is the prudent investment of
funds in securities on behalf o f their clients. These companies deal directly in both
primary and secondary capital market and invest accumulated funds in units o f mutual
funds and money market instruments.
manner^® The activities o f the company are to accept deposits form their members and
invest in their benefits.
The objectives o f the companies are:-
(i) To provide the guidelines to the members to save their hard earned money:
(ii) To invest their savings; and
(iii) To provide their loans to the needy members at a favorable rate o f return.
These companies usually maintain fixed capital base and their shares are
allotted to members who desire to take advantage o f the benefits and concession
offered by these companies for depositing or borrowing monies. These companies
never deal with outsiders and concentrate their activities among their members. They
provide various types o f financing scheme to the members, among these most
attractive scheme is recurring deposit scheme for different periods. These companies
grant loans to the members on security o f their recurring deposits.
venture capital’ and is implicit in this type o f investment, since certain ingredients
necessary for success are missing and must be added later
In India, the concept o f mutual fund may be traced back to 1964 when Unit
Trust o f India (UTI) was formed under Unit Trust o f India Act, 1963. Now, several
commercial banks are entered into the fields o f mutual funds viz, SBI Mutual Fund,
Can stock fund o f Canara Bank, Swarupushpa Mutual Fund o f Indian Bank and BOI
Mutual Fund o f Bank o f India Mutual Fund is a SEBI regulated NBFC and activity
under SEBI (Mutual Funds) Regulations, 1996. So in order to incorporate a Mutual
Fund Trust and company the organizer has to take approval o f SEBI under above-
mentioned Regulations.
From the above it is clear that NBFCs operating in India provide different
types o f fund-based activities. The different services which have been provided by the
NBFCs are compared to banks. But in the prevailing situation, subsequent to drastic
squeeze o f norms o f financial assistance, the NBFCs are looking forward to venture
into those service areas where there is shortage o f expertise at institutional level.
These are mainly corporate advisory and fee-based services in nature. Consultancy
services in the area o f finance cover capital restructuring and financial engineering,
project identification and project finance, loan syndication with banks financial
institution and other related sources. A brief discussion about these fee based services
o f NBFCs are given below:-
REFERENCES:-
1. Reserve Bank o f India Bulletin, October 1997, p-807.
2. Janies. S.Raj,(1975): “ Study on Non-banking Financial Institutions” ,
RBI Bombay, July 14, p-55.
3. Reserve Bank o f India Bulletin, July 1997, p-551.
4. Janies. S.Raj, op., cit .p-53.
5. Janies. S.Raj, op., cit .p-54.
6. Reserve Bank o f India Bulletin, July 1997, p-549.
7. Verma. J.C. (Dr.)(2001): Concepts, Practices and Procedures o f Non-
Banking Financial Companies, Bharat Law House Pvt. Ltd.,Nev^
Delhi, p-14.
8. A khan J.A., (1999): “ Role o f NBFCs in the financial system in India” ,
an un-published thesis, p-14.
9. Jyoti N & Gupta R,(1999): Practice Manual to Non-Banking Financial
Companies, Taxmann Allied Services Pvt. Ltd. New Delhi,, p-119.
10. Jyoti, N & Gupta, R,op, Cit ,p-120.
11. Jyoti N & Gupta R, op cit. p-121.
12. Statutory Guide for Non-Banking Financial Companies, An
Authorized Publication o f RBI, (2004): Taxmann Allied Services Pvt.
Ltd. New Delhi, pp-I-4 to5.
13. Reserve Bank o f India Bulletin, August 1997, p-589.
14. Jyoti N & Gupta R, op cit. pp-742-743.
15. Miscellaneous Non-Banking Companies ( RBI) Directions, 1977.
DNBC 39/ DG (H)-77, Dated 20.6.1997
16. Reserve Bank o f India Bulletin, February 1998, p-69.
17.Reserve Bank o f India Bulletin, July 1994, p-825.
18. Jyoti N & Gupta R, op cit. p-358.
19. Van Home, James. C. (2002): Financial Management and Policy,
Pearson Education,p-543.
20. Jyoti N & Gupta R, op cit. p-359.
21. Maheswari, S.N.(2004): Financial Management-Principles and
Practices, Sultan Chand & Sons, New Delhi, p. E-65.
22. Jyoti N & Gupta R, op cit. p-122.
23. RBI Bulletin, October 1997, p-809.
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