NBFCs and Micro Finance Module 1

Module 1
Evolution of Financial Services–Indian Financial System– Formal Financial System and Informal Financial
System– Financial Institutions- Banking Companies- Difference between Banks and NBFCs

EVOLUTION OF FINANCIAL SERVICES IN INDIA

Financial Services means all those services that are provided in monetary or financial terms where the
essential commodity is money. These services include banking, purchases, venture capital, leasing, insurance,
mutual funds, stock broking etc.

Earlier in the 1960’s, the banking services in India included merchant banking that was followed by insurance and leasing
finances in the 1970s. Later on, the mutual funds, discounting, credit rations, venture capitals came into existence and were
trending till 1990. Post liberalization in 1990, deposits, dematerialization, paperless tracking, online trading, foreign investors
investing in the capital market, and booking of buildings were the contemporary issues till 2002.
Currently, there is a lot of evolution in the Indian financial sector as it is converting to dynamism, with the
emergence of the primary equity market, the process of demonetization, the concept of internet banking and e-
brokerage etc.

However, the RBI is worried about facing 6 important issues in the Indian financial sector. They are credit
crunches, market abuse, and the regime of the senior persons, macro-politics, changing culture and shifting
borders

India has a diversified financial sector undergoing rapid expansion, both in terms of strong growth of
existing financial services firms and new entities entering the market. The sector comprises commercial banks,
insurance companies, non-banking financial companies, co-operatives, pension funds, mutual funds and other
smaller financial entities. The banking regulator has allowed new entities such as payments banks to be created
recently thereby adding to the types of entities operating in the sector. However, the financial sector in India is
predominantly a banking sector with commercial banks accounting for more than 64 per cent of the total assets
held by the financial system.

The Government of India has introduced several reforms to liberalise, regulate and enhance this industry.
The Government and Reserve Bank of India (RBI) have taken various measures to facilitate easy access to finance
for Micro, Small and Medium Enterprises (MSMEs). These measures include launching Credit Guarantee Fund
Scheme for Micro and Small Enterprises, issuing guideline to banks regarding collateral requirements and setting
up a Micro Units Development and Refinance Agency (MUDRA). With a combined push by both government
and private sector, India is undoubtedly one of the world's most vibrant capital markets. In 2017,a new portal
named 'Udyami Mitra' has been launched by the Small Industries Development Bank of India (SIDBI) with the
aim of improving credit availability to Micro, Small and Medium Enterprises' (MSMEs) in the country. India has
scored a perfect 10 in protecting shareholders' rights on the back of reforms implemented by Securities and
Exchange Board of India (SEBI).

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FINANCIAL SERVICES OFFERED BY BANKS

1. Individual Banking—Banks typically offer a variety of services to assist individuals in managing their
finances, including:
 Checking accounts
 Savings accounts
 Debit & credit cards
 Insurance
 Wealth management
2. Business Banking—Most banks offer financial services for business owners who need to differentiate
professional and personal finances. Different types of business banking services include:
 Business loans
 Checking accounts
 Savings accounts
 Debit and credit cards
 Merchant services (credit card processing, reconciliation and reporting, check collection)
 Cash management (payroll services, deposit services, etc.)
3. Digital Banking—The ability to manage your finances online from your computer, tablet, or smartphone is
becoming more and more important to consumers. Banks will typically offer digital banking services that
include:
 Online, mobile, and tablet banking
 Mobile check deposit
 Text alerts
 e-Statements
 Online bill pay
4. Loans—Loans are a common banking service offered, and they come in all shapes and sizes. Some common
types of loans that banks provide include:
 Personal loans
 Home equity loans
 Home equity lines of credit
 Home loans
 Business loans

Commercial banks are the heart of our financial system. They hold the deposits of millions of persons,
governments and business units. They make funds available through their lending and investing activities to
borrowers - individuals, business firms, and governments. In doing so, they facilitate both the flow of goods and
services from producers to consumers and the financial activities of governments. They provide a large portion
of our medium of exchange and they are the media through which monetary policy is effected. These facts
obviouly add up to the conclusion that the commercial banking system of the nation is important to the functioning
of its economy. Commercial banks playa very important role in our economy; in fact, it is difficult to imagine
how our economic system could function efficiently without many of their services. They are the heart of our
financial structure, since they have the ability, in cooperation with the Reserve Bank of India, to add to the money
supply of the nation and create additional purchasing power. Banks' lending, investments and related activities
facilitate the economic processes of production distribution and consumption. The major task of banks and other
financial institutions is to act as intermediaries, channelling savings into investment and consumption: through
them, the investment requirements of savers are reconciled with the credit needs of investors and consumers. If
this process of transference is to be carried out efficiently, it is absolutely essential that the banks are involved.
Indeed, in performing their tasks, they realise important economies of scale: the savings placed at their disposal
are employed in numerous and large transactions adapted to the specific needs of borrowers.
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In this way, they are able to make substantial cost savings for both savers and borrowers, who would
otherwise have to make individual transactions with each other. However, there is more to these economies of
scale than just the cost aspect.

Introduction to Indian Financial System

The financial system of a country is an important tool for economic development of the country, as it helps in
creation of wealth by linking savings with investments. It facilitates the flow of funds form the households (savers)
to business firms (investors) to aid in wealth creation and development of both the parties.

The financial system of a country is concerned with:

 Allocation and Mobilization of savings

 Provision of funds
 Facilitating the Financial Transactions
 Developing financial markets
 Provision of legal financial framework
 Provision of financial and advisory services

According to Robinson, the primary function of a financial system is “to provide a link between savings and
investment for creation of wealth and to permit portfolio adjustment in the composition of existing wealth”

A Financial System consists of various financial Institutions, Financial Markets, Financial Transactions, rules and
regulations, liabilities and claims etc.

Features of Financial System:

 It plays a vital role in economic development of a country

 It encourages both savings and investment
 It links savers and investors
 It helps in capital formation
 It helps in allocation of risk
 It facilitates expansion of financial markets
 It aids in Financial Deepening and Broadening

Structure of Indian Financial System/Components of Indian Financial System:

(1) Financial Institutions – Financial institutions are intermediaries of financial markets which facilitate
financial transactions between individuals and financial customers.

It simply refers to an organization (set-up for profit or not for profit) that collects money from individuals and
invests that money in financial assets such as stocks, bonds, bank deposits, loans etc. There can be two types of
financial institutions:

• Banking Institutions or Depository institutions – These are banks and credit unions that collect money from
the public in return for interest on money deposits and use that money to advance loans to financial customers.

• Non- Banking Institutions or Non-Depository institutions – These are brokerage firms, insurance and mutual
funds companies that cannot collect money deposits but can sell financial products to financial customers.
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Financial Institutions may be classified into three categories:

• Regulatory – It includes institutions like SEBI, RBI, IRDA etc. which regulate the financial markets and protect
the interests of investors.

• Intermediaries – It includes commercial banks such as SBI, PNB etc. that provide short term loans and
other financial services to individuals and corporate customers.

• Non – Intermediaries – It includes financial institutions like NABARD, IDBI etc. that provide long-term loans
to corporate customers.

(2) Financial Markets – It refers to any marketplace where buyers and sellers participate in trading of assets such
as shares, bonds, currencies and other financial instruments. A financial market may be further divided into capital
market and money market. While the capital market deals in long term securities having maturity period of more
than one year, the money market deals with short-term debt instruments having maturity period of less than one
year.

(3) Financial Assets/Instruments – Financial assets include cash deposits, checks, loans, accounts receivable,
letter of credit, bank notes and all other financial instruments that provide a claim against a person/financial
institution to pay either a specific amount on a certain future date or to pay the principal amount along with
interest.
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(4) Financial Services – Financial Services are concerned with the design and delivery of financial instruments
and advisory services to individuals and businesses within the area of banking and related institutions, personal
financial planning, leasing, investment, assets, insurance etc.

It involves provision of a wide variety of fund/asset based and non-fund based/advisory services and includes all
kinds of institutions which provide intermediate financial assistance and facilitate financial transactions between
individuals and corporate customers.

Functions of Indian Financial System

 It bridges the gap between savings and investment through efficient mobilization and allocation of surplus
funds
 It helps a business in capital formation
 It helps in minimizing risk and allocating risk efficiently
 It helps a business to liquidate tied up funds
 It facilitates financial transactions through provision of various financial instruments
 It facilitate trading of financial assets/instruments by developing and regulating financial markets

Importance of Indian Financial System

 It accelerates the rate and volume of savings through provision of various financial instruments and
efficient mobilization of savings
 It aids in increasing the national output of the country by providing funds to corporate customers to expand
their respective business
 It protects the interests of investors and ensures smooth financial transactions through regulatory bodies
such as RBI, SEBI etc.
 It helps economic development and raising the standard of living of people
 It helps to promote the development of weaker section of the society through rural development banks
and co-operative societies
 It helps corporate customers to make better financial decisions by providing effective financial as well as
advisory services
 It aids in Financial Deepening and Broadening:

Financial Deepening – It refers to the increase in financial assets as a percentage of GDP

Financial Broadening – It refers to increasing number of participants in the financial system.

Financial Intermediaries/Intermediaries in Indian Financial System

 Commercial Banks
 Cooperative Banks
 Regional Rural Banks
 Development Banks
 Non-banking Financial Companies
 Mutual Fund companies
 Insurance Companies

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Significance and Definition

The term financial system is a set of inter-related activities/services working together to achieve some
predetermined purpose or goal. It includes different markets, the institutions, instruments, services and
mechanisms which influence the generation of savings, investment capital formation and growth.

The Organisation of the Financial System in India The Indian financial system is broadly classified into two broad
groups: i) Organised sector and (ii) unorganised sector. "The financial system is also divided into users of financial
services and providers. Financial institutions sell their services to households, businesses and government. They
are the users of the financial services. The boundaries between these sectors are not always clear cut. In the case
of providers of financial services, although financial systems differ from country to country, there are many
similarities. (i) Central bank (ii) Banks (iii) Financial institutions (iv) Money and capital markets and (v) Informal
financial enterprises.

 Organised Indian Financial System The organised financial system comprises of an impressive network of
banks, other financial and investment institutions and a range of financial instruments, which together function
in fairly developed capital and money markets. Short-term funds are mainly provided by the commercial and
cooperative banking structure. Nine-tenth of such banking business is managed by twenty-eight leading banks
which are in the public sector. In addition to commercial banks, there is the network of cooperative banks and
land development banks at state, district and block levels. With around two-third share in the total assets in the
financial system, banks play an important role. Of late, Indian banks have also diversified into areas such as
merchant banking, mutual funds, leasing and factoring. The organised financial system comprises the following
sub-systems: 1. Banking system 2. Cooperative system 3. Development Banking system (i) Public sector (ii)
Private sector 4.Money markets and 5. Financial companies/institutions.
 Unorganised Financial System On the other hand, the unorganised financial system comprises of relatively less
controlled moneylenders, indigenous bankers, lending pawn brokers, landlords, traders etc. This part of the
financial system is not directly amenable to control by the Reserve Bank of India (RBI). There are a host of
financial companies, investment companies, chit funds etc., which are also not regulated by the RBI or the
government in a systematic manner. However, they are also governed by rules and regulations and are, therefore
within the orbit of the monetary authorities.
 The Banking System The structure of the baking system is determined by two basic factors – economic and
legal. The Development of the economy and the spread of banking habit calls for increasing banking services.
The demand for these banking services affects the banks' structure and organisation. National objectives and
aspirations result in government regulations, which have a profound influence on‟ the banking structure. These
regulations are basically of two types. First, regulations which result in the formation of new banks to meet the
specific needs of a group of economic activities. Secondly, legislation that affects the structure by means of
nationalisation, mergers or liquidation.

Commercial banking

Evolution Enhancement of the RBI Act 1935 gave birth to scheduled banks in India, and some of these
banks had already been established around 1881. The prominent among the scheduled banks is the Allahabad
Bank, which was set up in 1865 with European management. The first bank which was established with Indian
ownership and management was the Oudh Commercial Bank, formed in 1881, followed by the Ayodhya Bank
in 1884, the Punjab National Bank in 1894 and Nedungadi Bank in 1899. Thus, there were five Banks in
existence in the 19th century. During the period 1901-1914, twelve more banks were established, prominent
among which were the Bank of Baroda (1906), the Canara Bank (1906), the Indian Bank (1907), the Bank of
India (1908) and the Central Bank of India (1911).
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Thus, the five big banks of today had come into being prior to the commencement of the First World War. In
1913, and also in 1929, the Indian Banks faced serious crises. Several banks succumbed to these crises. Public
confidence in banks received a jolt. There was a heavy rush on banks. An important point to be noted here is
that no commercial bank was established during the First World War, while as many as twenty scheduled banks
came into existence after independence - two in the public sector and one in the private sector. The United Bank
of India was formed in 1950 by the merger of four existing commercial banks. Certain non-scheduled banks
were included in the second schedule of the Reserve Bank. In view of these facts, the number of scheduled
banks rose to 81. Out of 81 Indian scheduled banks, as many as 23 were either liquidated or merged into or
amalgamated with other scheduled banks in 1968, leaving 58 Indian schedule banks.

FORMAL AND INFORMAL FINANCIAL SYSTEMS

Access to finance is the ability of individuals or enterprises to obtain financial services, including credit, deposit,
payment, insurance, and other risk management services. Accumulated evidence has shown that financial access
promotes growth for enterprises through the provision of credit to both new and existing businesses. It benefits
the economy in general by accelerating economic growth, intensifying competition, as well as boosting demand
for labour. Financial services may be provided by a variety of financial intermediaries that are part of the financial
system. A distinction is made between formal and informal providers of financial services, which is based
primarily on whether there is a legal infrastructure that provides recourse to lenders and protection to depositors.

Specialized Non bank financial institutions Formal system of finance is licenced by the Central bank. Commercial
and development banks. Rural banks, post bank, savings and loan companies, savings and loan companies. Large
businesses government Large rural enterprises, salaried workers, small and medium enterprises. INFORMAL
Informal system of finance is not licenced by the Central bank. Savings collectors, savings and credit associations
and moneylenders. The principal clients who do informal finance are either self-employed or poor people.

FORMAL FINANCIAL SYSTEM/SECTOR

Formal financial institutions often ignore small farmers, lower income households, and small-scale enterprises
in favour of large scale, well-off, literate clientele who can satisfy their stringent loan conditions. Complex
administrative services procedures are beyond the knowledge and understanding of the rural masses and small
savers. Formal financial institutions do not mobilize rural savings or small scale deposits. Formal sector of
institutions are selective regarding their clients, so as to avoid clients who make only small deposits. Loan
application procedures are very complex and needs reading and writing skills so that a file on the borrower maybe
established. The transaction costs are high and the repayment costs are low. The formal sector regularly has
loanable funds available. The formal sector keeps written records on the activities of the clients.

INFORMAL FINANCIAL SYSTEM/SECTOR

The informal financial sector provides savings and credit facilities for small scale farmers in rural areas,
and the lower-income households and small-scale enterprises in urban areas. The procedures of the informal
schemes are usually simple and straight forward as they emanate from local cultures and customs they are easily
understood by the population. The informal sector mobilises rural savings and small savings from low income
urban households. Informal groups operate on the days which are convenient for their members. Informal sector
associations accept any amount of regular savings, even the most modest sums which a saver can afford to set it
aside.
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The financial techniques on which such informal groups are based lend themselves to the management of a large
number of small savings. Transaction costs are low and repayment costs are high. The interest paid on the deposits
in informal sector compares favourably with that paid in the formal sector, thus providing an incentive for rural
and small urban households to save.

The informal financial sector provides savings and credit facilities for small scale farmers in rural areas,
and the lower-income households and small-scale enterprises in urban areas. The procedures of the informal
schemes are usually simple and straight forward as they emanate from local cultures and customs they are easily
understood by the population. The informal sector mobilises rural savings and small savings from low income
urban households. Informal groups operate on the days which are convenient for their members. Informal sector
associations accept any amount of regular savings, even the most modest sums which a saver can afford to set it
aside. The financial techniques on which such informal groups are based lend themselves to the management of
a large number of small savings. Transaction costs are low and repayment costs are high. The interest paid on the
deposits in informal sector compares favourably with that paid in the formal sector, thus providing an incentive
for rural and small urban households to save.

NON BANKING FINANCIAL COMPANIES

Non-banking financial companies (NBFCs) are financial institutions that offer various banking services,
but do not have a banking license. Generally, these institutions are not allowed to take deposits from the public,
which keeps them outside the scope of traditional oversight required under banking regulations. NBFCs can offer
banking services such as loans and credit facilities, retirement planning, money markets, underwriting and merger
activities.

They are responsible for providing financial services but are not regulated by a national or international governing
body and do not hold a full-fledged license for conducting operations. The financial services offered by NBFCs
include disbursement of loans and advances, acquisition of stocks, shares or bonds etc

They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector,
delivering credit to the unorganized sector and to small local borrowers. In India, despite being different from
banks, NBFC are bound by the Indian banking industry rules and regulations.

A Bank is an establishment, office, and a company, which deals in money. A bank receives money in deposit
accounts of its customers on certain conditions in different type of deposit accounts. The conditions of these
accounts differ from the nature of accounts

DIFFERENCE BETWEEN BANKS AND NBFC ‘S

 NBFC cannot accept demand deposits;

 NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself
 NBFC cannot issue Demand Drafts like banks
 Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors
of NBFCs, unlike in case of banks.
 While banks are incorporated under banking companies act, NBFC is incorporated under company act of 1956

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 The NBFCs are allowed to accept/renew public deposits for a minimum period of 12 months and maximum
period of 60 months. They cannot accept deposits repayable on demand. The deposits with NBFCs are not
insured. The repayment of deposits by NBFCs is not guaranteed by RBI.
 NBFC fixed deposits are generally rated by the rating agencies in the country. On the other hand the fixed
deposit of banks are not rated by the rating agencies.
 Bank fixed deposits are insured, while NBFC fixed deposits are not insured.In fact, if there is a default of Rs
1 lakh and less the Deposit Insurance and Credit Guarantee Corporation of India pays the insurance amount
on a bank deposit.
 NBFC defaults on its payments, you would lose your principal and insurance amount, which is why you should
opt for highly rated safe fixed deposits only. Also, another thing worth mentioning is that NBFCs tend to offer
higher interest rates as compared to bank deposits.
 As far as lending is concerned banks tend to target corporates as well as retailers. On the other hand NBFCs
are more geared towards the retail sector.
 Banks tend to frequently issue credit cards of different types depending on the needs of the customers,
while NBFCs do not.
Rating is another key difference between banks and NBFCs. For example, the deposits of NBFCs are rated,
while the deposits of banks are not. The latter is considered as very safe, while the former is not. One also
needs to remember that the deposits from Non-Banking Finance Company are not guaranteed while that of
banks are. It is a good idea to hence check the ratings of NBFCs before you invest. In general the good quality
ones are AAA rated, which ensures the safety and timely payment of interest and principal amount. Hence, do
check the same before investing.

FINANCIAL INSTITUTIONS
(Refer previous notes)

BANKING COMAPNY
Meaning of Banking Company:

A Bank is an establishment, office, and a company, which deals in money. A bank receives money in
deposit accounts of its customers on certain conditions in different type of deposit accounts. The conditions of
these accounts differ from the nature of accounts.

In deposit accounts banks also pay interest to its customers as per the nature and conditions of the account. A
bank also lends money to its customers as per decided guideline. Although no statuary definition of a bank is
given anywhere but as per section 5(c) of Banking Regulation Act 1949 a “Banking Company” means any
company which transacts the business of a Banking Company in India.

The term has been further elaborated under section 5(B) of the said Act which says. The Banking means the
accepting for the purpose of lending or investment, of deposits of money from the public, repayable on demand
or otherwise, and withdrawable able by cheque, draft, pay order or otherwise.

One thing is very important to understand that any Bank functioning in India is bound to obey the rules of the
Reserve Bank of India. A better care of the customers is taken by all banks is ensured by the Reserve Bank of
India. As such the Reserve Bank of India keeps an attentive eye on the functioning of banks in India and also
takes corrective steps whenever required to protect the interest of each banking customer.

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The Role of Banks is Co-related with their functions. The functions of banks are always based on the frame work
of banking regulations act of 1949 prescribes banking as acceptance for the purpose of lending or investment
deposits of money from the public repayable on demand or otherwise and withdrawals by cheques, drafts or
otherwise.

The functions of any Banking Company can be divided into two parts the main functions and the allied functions.
The main function as already stated above is accepting money as deposits and lending and investing such
deposited money. Although banks accept deposits from public but each bank is free to formulate their own
schemes of deposits to attract maximum number of customers in order to be able to mobilize maximum deposits
(the raw material) of banking industry.

They are also free to fix the rate of interest on deposits (except Saving account deposited which is same and fixed
by RBI for all banks) depending on the individual policy of accepting deposits by each bank which is always
based on the basis of cost of funds for each bank. Accordingly each bank prepares its own schemes for mobilizing
deposits but all such schemes are subject to

Another main function of banks is to provide loans. It may be for Industries, trade, Retail business, Agriculture,
Housing Finance, Education or for personal needs of customers. Like deposits banks also prepare different kind
of schemes to attract more and more borrowers but each scheme is required to be framed within banking
regulations.

While accepting deposits banks commit to pay interest on deposit accounts as per rules of payment of interest.
Likewise while lending money banks also charge interest on loans as per scheme of specified type of loans the
details of types of loans is discussed in the relevant part of this book.

In addition to main functions of accepting deposits and lending banks also performs many type of other functions
which can be nomenclature as Non-fund based functions like issuing of Letter of Credits, Letter of Bank
guarantees, Safe custody vaults. Locker Facilities, issuing of credit worthy certificate, collection of cheques, bills,
Local taxes, Agency functions for Govt. and local bodies, collection of payments for govt. agencies. And so on.
The list not exhaustive.

PRODUCTS AND SERVICES OFFERED BY BANKING COMPANY:

In brief we may sum up the products and services offered by banking company:

1. Deposits like Current Account, Saving Account, Term or Fixed Deposits, Recurring Deposits, PPF
Accounts and all other deposit accounts.
2. Payment Services: such as pension, payment orders, remittances by way of Demand Drafts and wire
services.
3. Banking services related to Government transactions.
4. Demand accounts, equity, government bonds.
5. Indian currency notes exchange facility.
6. Collection of cheques, Safe Custody services, Safe deposit locker facility.
7. Loans and Overdrafts.
8. Foreign Exchange services including money changing.
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9. Third party insurance and investment products.

10. Card products including Credit Cards, Debit Cards, ATM Cards etc.

Whatever functions a bank performs is subject to restrictions and controls as provided under the Banking
Regulations Act 1949.

FORMS OF BUSINESS OF BANKING COMPANY:

In addition to the business of banking, a banking company may engage in any one or more of the following
forms of business, namely:

(a) The borrowing, raising, or taking up of money; the lending or advancing of money either upon or without
security; the drawing, making, accepting, discounting, buying, selling, collecting and dealing in bills of exchange,
hundies, promissory notes, coupons, drafts, bills of lading, railway receipts, warrants, debentures, certificates,
scrips and other instruments and securities whether transferable or negotiable or not; the granting and issuing of
letters of credit, traveller’s cheques and circular notes; the buying, selling and dealing in bullion and specie; the
buying and selling of foreign exchange including foreign bank notes; the acquiring, holding, issuing on
commission, underwriting and dealing in stock, funds, shares, debentures, debenture stock, bonds, obligations,
securities and investments of all kinds; the purchasing and selling of bonds, scrips or other forms of securities on
behalf of constituents or others, the negotiating of loans and advances; the receiving of all kinds of bonds, scrips
or valuables on deposit or for safe custody or otherwise; the providing of safe deposit vaults; the collecting and
transmitting of money and securities;

(b) Acting as agents for any Government or local authority or any other person or persons; the carrying on of
agency business of any description including the clearing and forwarding of goods, giving of receipts and
discharges and otherwise acting as an attorney on behalf of customers, but excluding the business of a managing
agent or secretary and treasurer of a company;

(c) Contracting for public and private loans and negotiating and issuing the same;

(d) The effecting, insuring, guaranteeing, underwriting, participating in managing and carrying out of any issue,
public or private, of State, municipal or other loans or of shares, stock, debentures, or debenture stock of any
company, corporation or association and the lending of money for the purpose of any such issue;

(e) Carrying on and transacting every kind of guarantee and indemnity business;

(f) Managing, selling and realising any property which may come into the possession of the company in
satisfaction or part satisfaction of any of its claims;

(g) Acquiring and holding and generally dealing with any property or any right, title or interest in any such
property which may form the security or part of the security for any loans or advances or which may be connected
with any such security;

(h) Undertaking and executing trusts;

(i) Undertaking the administration of estates as executor, trustee or otherwise;

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(j) Establishing and supporting or aiding in the establishment and support of associations, institutions, funds,
trusts and conveniences calculated to benefit employees or ex- employees of the company or the dependents or
connections of such persons; granting pensions and allowances and making payments towards insurance;
subscribing to or guaranteeing moneys for charitable or benevolent objects or for any exhibition or for any public,
general or useful object;

(k) The acquisition, construction, maintenance and alteration of any building or works necessary or convenient
for the purposes of the company;

(l) Selling, improving, managing, developing, exchanging, leasing, mortgaging, disposing of or turning into
account or otherwise dealing with all or any part of the property and rights of the company;

(m) Acquiring and undertaking the whole or any part of the business of any person or company, when such
business is of a nature enumerated or described in this sub- section;

(n) Doing all such other things as are incidental or conducive to the promotion or advancement of the business of
the company;

(o) Any other form of business which the Central Government may, by notification in the Official Gazette, specify
as a form of business in which it is lawful for a banking company to engage.

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Module 2
History of Non-Banking Financial Companies– Classification of Non-Banking Companies –Classification
of Activities of Non-Banking Finance Companies - Fund Based Activities – Fee Based Activities –
Concepts, Growth and Trends of Fee Based And Fund Based Activities.

HISTORY OF NBFC
We studied about banks, apart from banks the Indian Financial System has a large number of privately
owned, decentralized and small sized financial institutions known as Non-banking financial companies. In
recent times, the non-financial companies (NBFC's) have contributed to the Indian economic growth by
providing deposit facilities and specialized credit to certain segments of the society such as unorganized
sector and small borrowers. In the Indian Financial System, the NBFC's play a very important role in
converting services and provide credit to the unorganized sector and small borrowers.

NBFC's provide financial services like hire-purchase, leasing, loam, investments, chit-fund companies etc.
NBFC's can be classified into deposit accepting companies and non-deposit accepting companies. NBFC's
arc small in size and are owned privately. The NBFC,s have grown rapidly since 1990. They offer attractive
rate of return. They are fund based as well as service oriented companies. Their main companies are banks
and financial institutions. According to RBI Act 1934, it is compulsory to register the NBFC's with the
Reserve Bank of India.

Non-banking Financial Institutions carry out financing activities but their resources are not directly
obtained from the savers as debt Instead, these institutions mobilize the public savings for rendering other
financial services including investment. All such Institutions are financial intermediaries and when they
lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions.

Non-Banking Financial Companies constitute an important segment of the financial system NBFCs are the
intermediaries engaged in the business of accepting deposits and delivering credit. They play very crucial
role in channelizing the scare financial resources to capital formation.

NBFCs supplement the role of the banking sector in meeting the increasing financial need of the corporate
sector, delivering credit to the unorganized sector and to small local borrowers. NBFCs have mom flexible
structure than banks. As compared to banks, they can take quick decisions, assume greater risks and tailor-
make their services and charge according to the needs of the clients. Their flexible structure helps in
broadening the market by providing the saver and investor a bundle of services on a competitive basis.

The Reserve Bank of India Act, 1934 was amended on lot December, 1964 by the Reserve Bank
Amendment Act, 1963 to include provisions relating to non-banking institutions receiving deposits and
financial institutions. It was observed that the existing legislative and regulatory framework required further
refinement and improvement because of the rising number of defaulting NBFCs and the need for an
efficient and quick system for Redreasal of grievances of individual depositors. Given the need for
continued existence and growth of NBFCs, the need to develop a framework of prudential legislations and
a supervisory system was felt especially to encourage the growth of healthy NBFCs and weed out the
inefficient ones. With a view to review the existing framework and address these shortcomings, various
committees were formed and reports were submitted by them Some of the committees and its
recommendations are given hereunder,

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1. James Raj Committee (1974)

The James Raj Committee was constituted by the Reserve Bank of India in 1974. After studying the various
money circulation scheme which were floated in the country during that time and taking into consideration
the impact of such schemes on the economy, the Committee after extensive research and analysis had
suggested for a ban on Prize chit and other schemes which were causing a great loss to the economy. Based
on these suggestions, the Prize Chits and Money Circulation Schemes (Banning) Act, 1978 was enacted

2. C Shah Committee (1992):

The Working Group on Financial Companies constituted in April 1992 i.e. the Shah Committee set out the
agenda for reforms in the NBFC sector. This committee made wide ranging recommendations covering,
inter-alia entry point norms., compulsory registration of large sized NBFCs, prescription of prudential
norms for NBFCs on the lines of banks, stipulation of credit rating for acceptance of public deposits and
more statutory powers to Reserve Bank for boater regulation of NBFCs.

3. Khan Committee (1995):

This Group was set up with the objective of designing a comprehensive and of effective supervisory
framework for the non-banking companies segment of the financial system.

4. Narasimhan Committee (1991)

This committee was Monad to examine all aspects relating to the structure, organization & functioning of
the financial system.

DEFINITION OF NBFC

Non-Banking Financial Company has been defined as:

(i) A non-banking institution, which is a company and which has its principal business the receiving of
deposits under any scheme or lending in any manner.

(ii) Such other non-banking institutions, as the bank may with the previous approval of the central
government and by notification in the official gazette, specify.

Non-banking Financial Institutions carry out financing activities but their resources are not directly
obtained from the savers as debt Instead, these Institutions mobile the public savings for rendering other
financial services including investment. All such Institutions arc financial intermediaries and when they
lend, they are known as Non-Banking Financial Intermediaries (NBFIs) or Investment Institutions:

 Unit Trust Of India.

 Life Insurance Corporation (LIC).
 General Insurance Corporation (GIC)

CLASSIFICATION OF NBFC
This classification is in addition to the present classification of NBFCs into deposit-taking and Non-deposit
taking NBFCs. Depending on the nature their major activity, the non-banking financial companies can be
classified into the following categories, they are:
(1) Equipment leasing companies.
(2) Hire-purchase finance companies.

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(3) Housing finance-companies.
(4) Investment companies.
(5) Loan companies.
(6) Mutual Fund Benefit Companies.
(7) Chit fund companies.
(8) Residuary companies.

1. Equipment leasing company

Equipment leasing company means any company which is carrying on the activity of leasing of equipment,
as its main business, or the financing of such activity.
Finance leasing: In finance leasing, the producer of the capital equipment sells the equipment to the leasing
company, then the leasing company leases it to the final user of the equipment. Hence, there are three
parties in finance leasing. The leasing company acts as a middleman between the producer of equipment
and the user of equipment.

2. Hire purchase Company

Hire purchase finance company means any company which is carrying on the main business of financing,
physical assets through the system of hire-purchase. It is a less risky business because the goods purchased
on hire purchase basis serve as securities fill the installment on the loan is paid.
The problem of recovery of loans does not occur in most cases, as the borrower is able to pay back the loan
out of future earnings through the regular generation of funds out of the asset purchased.

3. Housing finance Company

A housing (mane company means any company which is carrying on its main business of financing the
construction or acquisition of houses or development of land for housing purposes.
The ICICI and the Canara Bank took the lead to sponsor housing finance Housing Development
Corporation Ltd. and the Canfin Homes Ltd. All the information about the Housing finance companies, is
available with the National Housing Bank. Housing finance companies also have compulsorily to register
themselves with the Reserve Bank of India. National Housing bank is the apex institution in the field of
homing. It promotes homing finance institutions, both on regional and local levels.

4. Investment Company
Investment Company means any company which is carrying on the main business of securities. Investment
companies in India can be broadly classified into two types:
Holding Companies: (i) In case of large industrial groups, there are holding companies which buy shares
mainly for the purpose of taking control over another institution.
Other Investment Companies:
(i) Investment companies are also known as Investment trust
(ii) Investment companies collect the deposits from the public and invest them in securities.

5. Loan Company
A loan company means any company whose main business is to provide finance through loam and
advances. It does not include a hire purchase finance company or are equipment leasing company or a
homing finance company. Loan Company is also known as a Finance Company.
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Most of their loans are given without any security. Hence, they are risky. Due to this ream, the loan
company charges high rate of interest on its loans. Loans are generally given for short period of time but
they can be renewed.

6. Mutual benefit financial company

They are the oldest form of non-banking financial companies. A mutual benefit financial company means
any company which is notified under section 620A of the Companies Act, 1956. It is popularly known as
"Nidhis.

7. Chit fund Company

The chit fund schemes have a long history in the southern states of India. Rural unorganized chit funds may
still be spotted in may, southern villages. However, organized chit fund companies are now prevalent all
over India. The word is Hindi and refers to a small note or piece of something. The word passed into the
British colonial "lexicon" and is still used to refer to a small piece of paper, a child or small girl.

8. Residuary Non-Banking Company

The term "residue" means a small part of something that remains. As the meaning of the term shows. a
residuary company is one which does not fall in any of the above categories. The collection of deposits is
done at the doorsteps of depositors through bank staff, who is paid commission.
FUND BASED ACTIVITIES
The traditional services which come under fund based activities are;
a) Underwriting of or investment in shares, debentures. bond, etc. of new issues (primary markets
activities)
b) Dealing in secondary market activities.
c) Participating in money market instrument like commercial papers, certificate of deposits, treasury
bills, discounting of bills etc.
d) Involving in equipment's leasing, hire purchases, venture capital seeds capital
e) Dealing in foreign exchange market activities,

Fund based Limit:

Fund based limits can be categorized as, sources of actual finance. Here banks allocate certain fund towards
Me borrower or forwards certain credit to the borrower. Fund based limits consists of various lending
facilities:
1. Term Loans
2. Working Capital Term Loan
3. Cash credit/Overdraft
4. Discounting of bills
5. Pre shipment Credit
6. Export Packing Credit

1. Term Loans

Term Loam am generally taken to acquire capital asset. The repayment is in the form of either installments
(Actual + interest) or EMI. Repayment of Term Loan is through future earnings from the Capital Asset
acquired. The purpose of the term Ian is defined well in advance.

2 Working Capital Term Loan

When contribution to working capital has to be brought immediately, working capital term loans are used.
Generally organizations availing working capital limits under the second method of Financing use working
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capital term loan as a sourced quick finance. The interest rate applicable is around 1% higher than the cash
credit account. Working capital term loans are financed on the basis recommend by Tandon committee.

3. Cash Credit Facility:-

Cash Credit Facility is generally granted under the running account facility. Availed for maintenance of
inventory and day to day business activities; Cash Credit Facility, or CC limit is generally used to meet a
major part of working capital requirement.

4. Discounting Of Bills:-

A borrower obtains credit from banks against the bills he possess.. The bank here discounts the bill i.e.
purchases the bill after analyzing the credit worthiness of the drawer. The borrower gets discounted amount
of the bill. (Full amount of bill Discount charges of bank) Discounted amount of bill.

5. Pre- Shipment Credit

All credit facilities sanctioned to exporters for producing / manufacturing / processing/packing /

warehousing / shipping the goods for exports are termed as Pre -Shipment Credit. The credit limits for pre-
shipment advance arc considered simultaneously along with other facilities and it is generally made a sub-
limit within the overall cash credit limit sanctioned to the borrower. The assessment of working capital
requirement may be based upon the export orders on hand with the exporter besides his capacity to meet
that commitment.

6. Export Packing Credit:- Packing credit may be taken as equivalent to cash credit in domestic business
except that cash credit facility is sanctioned as a continuous/running facility whereas packing credit
advance is disbursed for a specific purpose to enable the exporter to meet a specific export obligation.
The procedure and techniques adopted by bank are same as other advances. The repayment of packing
credit advance can he only from the proceeds of the bills drawn under the export order/L/C against which
the pre-shipment advance was granted to the exporter by the bank. Packing credit advance will be treated as
a separate loan and no running account facility will be permitted. The repayment of packing credit account
will also be required to be done on separate loan account basis. Advance is granted for a period of 180 days
and if the export is not executed by that time, the export should be completed within 360 days. Quantum of
advances and interest rate structure is based on the commodity to be exported and the current PLR. The
packing credit may initially be clean at the time of disbursement; may be covered by hypothecation charge
over the raw material, semi-finished and finished goods later; hypothecation charge be convened to pledge
of finished goods meant for exports or may even be covered by document of title to goods (LR/RR) if the
goods are sent for shipment to a port city. ECGC Guarantee Most of the banks cover their packing credit
advances under Packing Credit.

Types of Fund Based Activities

1. Hire purchase
2. Venture capital
3. Working capital finance
4. Short term finance
5. Bill discounting
6. Buyer’s credit/ supplier’s credit
7. Export finance

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FEE BASED/NON FUND BASED ACTIVITIES

Non-Fund baud activities/services are those where funds are not involved and financial institution gets
income in the form of fee such as:-

 Commission on demand draft

 Guarantee/Letter of credit
 Managing capital issue (pre-issue A post issue management services)
 Advisory/Consultancy services
 Project preparation/appraisal/rearranging finance through projects from financial institutions -
Assisting in the process of getting clearances from Govt. bodies.

Modem activities/services provided by financial institutions are like advisory role in corporate
restructuring, acting as trustees for debenture rehabilitation and restructuring sick units, portfolio
management of large corporate risk.

1. Letter of credit
Letter of credit is a legal document issued by a buyer’s bank that upon presentation of required documents
payment would be made. Usually confirmed by the seller's bank, protection is given to the seller that
payment will be made if the goods are shipped correctly, following the conditions laid down when the LC
is opened or based on subsequent amendments and protection is given to the buyer that the goods will be
shipped before payment is made. The LC facility can be granted to the importers after assessing their
requirement/ credit worthiness/ financial strength and other parameters being to the satisfaction of the
Bank. China trust Commercial Bank can extend Import financing through Letters of Credit, which are well
accepted globally and are supported by a strong trade finance set-up. We are direct members of SWIFT and
have correspondent banking arrangements with many banks worldwide.

(The Society for Worldwide Interbank Financial Telecommunication (SWIFT) provides a network that
enables financial institutions worldwide to send and receive information about financial transactions in a
secure, standardized and reliable environment.)

2. Bank guarantees

Bank Guarantee is a contract to perform the promise or discharge the liability of a third person in case of
his default. China trust Commercial Bank sanctions Bank Guarantee limit to facilitate issue of guarantees
on behalf of its clients. Various types of guarantees offered are – financial, performance, bid bond, tenders,
customs, etc. Our guarantees are accepted by all government agencies including Customs, Excise,
Insurance Companies, Shipping Companies, all Capital Market Agencies such as NSE, BSE, ASE, CSE
etc. and all major corporates.

Document Collection

We have a full-fledged trade finance set-up catering to all your trade related requirements, which offers you
the following advantages:

1. Better turnaround time through timely processing of your documents

2. Facilitating faster payments
3. Lower cost
4. Excellent trade support
5. Arrangement of credit reports of overseas parties

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Specialized advice on international trade related issues as well as technical issues such as Exchange Control
requirements, RBI reporting, latest circulars and latest international developments.

THE TYPES OF FEE BASED ACTIVITIES

1. Issue Management

2. Portfolio Management

3. Loan/Lease Syndication

4. Corporate Counselling

5. Arranging Foreign Collaboration

6. Advising on Acquision or Mergers

7. Project Counselling

8. Advising on Capital Restricting.

1. Issue Management

The process of issue management is same as that of ordinary issue. It is, however, the duty of the Non-
Banking Financial Company to supply a complete set of services and must try to improve and develop the
process of marking the issues by which the network of the promoters will be extended.

2. Portfolio Management

Portfolio management implies the investment of funds taken from numbers/clients in various securities and
an adequate return should be given to them. The manager must be authorized by the Securities and
Exchange Board of India positively. The manager is, however, entitled to a fixed fee and not a variable one
depending upon the returns to the clients/members accordingly.

3. Loan/Lease Syndication

When a company finds it difficult to procure funds who has some problems, weakness and is not able to get
various services, these firms appear in the picture and act as an intermediary between the institution and the
company as well In this particular case, NBFC, can play a very prominent role for procuring funds and
assist them in various ways, can supply the necessary services for those clients. They can act as a broker
and their fees must be comparable with the fees charged by the Chattered Accountant firms.

4. Corporate Counselling

The corporate counselling is an attractive fee based service. At the time of diversification, expansion and
development, a medium size company needs the service of an expert relating to the above for which they
seek the advice from various institutions.

5. Arranging Foreign Collaboration

As a result of the liberalization relating to industry and capital market by the Government of India, the
companies are employing their resources which they acquire by issuing shares via primary capital route and
as such, are interested for good projects relating to either export oriented project or import substitution
projects. NBFC must contain such data and keep the information relating to the latest technology from
them who have already acquired earlier along with the result.
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6. Advising on Acquisition or Mergers

In order to consolidate the firm and to form a new one or to enjoy the benefits of economies of large scale,
many companies are interested to amalgamate. NBFC should pay the proper attention in this field.

7. Project Counselling

It is practically coming from the concept of corporate counseling in Project Management. If the client
desires to invest his resources on long term basis to any project and is ready to invest such funds
accordingly as per guidelines presented by the consultant company, the same task can be performed by the
NBFC accordingly. Better result can be achieved if these companies form an informal association.

8. Advising on Capital Restricting.

For the purpose of fresh issue, the companies have to present and prepare their Balance Sheet in a healthy
form. NBFC can supply the necessary service for the purpose on various matters by giving their valued
advices and instructions, e.g., capital structuring/restricting, so that the financial health of the enterprise
through the Balance Sheet would be looked better. Since, it is a fee based service it will, no doubt, earn a
lucrative amount.

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MODULE 3

Sources of Finance- Functions -Investment Policies of Non Baking Financial Institutions in India- RBI
Guidelines on NBFCs- Products offered by different NBFCs in India Features of these Financial Products

SOURCES OF FINANCE

Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital
loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations.
They are classified based on time period, ownership and control, and their source of generation. It is ideal to
evaluate each source of capital before opting for it.

Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a new
business. It is perhaps the toughest part of all the efforts. There are various capital sources, we can classify
on the basis of different parameters.

Having known that there are many alternatives to finance or capital, a company can choose from.
Choosing the right source and the right mix of finance is a key challenge for every finance manager. The
process of selecting the right source of finance involves in-depth analysis of each and every source of fund.
For analyzing and comparing the sources, it needs the understanding of all the characteristics of the
financing sources. There are many characteristics on the basis of which sources of finance are classified.
On the basis of a time period, sources are classified as long-term, medium term, and short term. Ownership
and control classify sources of finance into owned capital and borrowed capital. Internal sources and
external sources are the two sources of generation of capital. All the sources of capital have different
characteristics to suit different types of requirements.

According to Time Period: Sources of financing a business are classified based on the time period for
which the money is required. The time period is commonly classified into following three:
1. Long Term
2. Medium Term
3. Short Term

According To Ownership and Control: Sources of finances are classified based on ownership and control
over the business. These two parameters are an important consideration while selecting a source of funds for
the business. Whenever we bring in capital, there are two types of costs – one is the interest and another is
sharing ownership and control. Some entrepreneurs may not like to dilute their ownership rights in the
business and others may believe in sharing the risk.

Owned Capital Borrowed Capital

Equity Capital Financial institutions,

Preference Capital Commercial banks or

Retained Earnings The general public in case of debentures.

Convertible Debentures

Venture Fund or Private Equity

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According to Source of Generation:

Based on the source of generation, the following are the internal and external sources of finance:
Internal Sources External Sources

Retained profits Equity

Reduction or controlling of working capital Debt or Debt from Banks

All others except mentioned in

Sale of assets etc. Internal Sources

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Internal Sources

The internal source of capital is the capital which is generated internally by the business. These are as
follows:
The internal source of funds has the same characteristics of owned capital. The best part of the internal
sourcing of capital is that the business grows by itself and does not depend on outside parties. Disadvantages
of both equity capital and debt capital are not present in this form of financing. Neither ownership dilutes
nor does fixed obligation / bankruptcy risk arise.

External Sources
An external source of finance is the capital generated from outside the business. Apart from the internal
sources of funds, all the sources are external sources of capital.
Deciding the right source of funds is a crucial business decision taken by top-level finance managers. The
wrong source of capital increases the cost of funds which in turn would have a direct impact on the
feasibility of project under concern. Improper match of the type of capital with business requirements may
go against the smooth functioning of the business. For instance, if fixed assets, which derive benefits after 2
years, are financed through short-term finances will create cash flow mismatch after one year and the
manager will again have to look for finances and pay the fee for raising capital again.

FUNCTIONS OF NBFC’S

Non Banking Financial Company also known as NBFC company, functioning as per the Indian Companies
Act, giving loans and advances to the public. An NBFC company can acquire shares, stocks, bonds,
debentures and securities from Government as well as local authority or any other marketable securities.
Marketing securities are considered to be leasing, hire purchase, insurance brokerage, chit fund etc. An
NBFC Company mainly accepts deposits in various schemes -it may be a lump-sum amount or multiple
installments in order to roll their business active.
Though NBFC company lend and make investments with public just like what a commercial banks do, there
are some apparent restrictions to them issued by RBI mainly as given below;

1. NBFC company should keep away from accepting demand deposits from any sources.
2. NBFC company can't issue cheques drawn on itself.
3. NBFC Company can't form part of the payment and settlement system.
4. Depositors of a NBFC company cannot have facilities like deposit insurance scheme.

RBI REGULATIONS

1. During the course of its operations, the Company will strictly adhere to various guidelines as may be
stipulated by the Reserve Bank of India (RBI) from time to time. These guidelines will include: Non
Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 2007, as amended upto date.
Clarifications as may be issued from time to time by Reserve Bank of India.

2. The Company will also adhere to the provisions of the Companies Act, 2013. However being an
Investment Company, engaged in the business of acquisition of shares, stock, debentures or other securities,
the provisions of Section 186 of the said Act are not applicable to the Company.

3. Any statutory modifications in the Statutory guidelines / norms / clarifications/ regulations, or if there is
any change in any of the parameter(s) framed by the Board, then the parameter change mutatis
mutandis.(Mutatis mutandis is a Medieval Latin phrase meaning "the necessary changes having been made"
or "once the necessary changes have been made".)

4. All investment decisions of the Company shall be taken only at the meetings of the Board of Directors of
the Company. The Board of Directors of the Company, may however, delegate the said power to any
committee of directors, the managing director, the manager or the principal officer (hereinafter collectively
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referred to as the "delegate") of the Company. The said resolution of the Board shall specify the total amount
upto which the funds may be invested and the nature of the investments which may be made by the delegate.

The RBI Act regulates different types of NBFC'S under the provision of Chapter III- B and Chapter
III- C

i) Corporate NBFCs fall under Chapter III-B, and

ii)Uncorporate NBFCs fall under Chapter III-C

 REGISTRATION – In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every
NBFC should be registered with RBI to commence or carry on any business of non-banking financial
institution as defined in clause (a) of Section 45 I of the RBI Act, 1934.
 NET OWNED FUNDS- Under Section 45 I(a) of the RBI Act, 1934 NBFC should have a minimum
net owned fund of Rs 25 lakh to Rs 200 lakh
 MAINTENANCE OF ASSETS-The NBFCs are required to invest in India in approved securities
atleast 5% or higher percentage as specifiedby the RBI from time to time,of the outstanding deposits
at the close of the business.
 RESERVE FUND-Every NBFC must create a reserve fund to which atleast 20% of its net profit
must be transferred before the declaration of any dividend
 POWER OF REGULATION/PROHIBITION-The RBI can by general/special order regulate or
prohibit the issue by any NBI the issue of any prospectus or advertisement soliciting deposits of
money from the public
 POWER TO COLLECT INFORMATION FROM ANY NBI's-The RBI can issue direction to
NBIs to furnish information relating to/connected with deposits.
 POWER TO CALL FOR INFORMATION FROM FIs AND ISSUE DIRECTIONS-To regulate
the credit system, the RBI can ask for information from FIs relating to their business as well as
directions for the conduct of their business
 PENALTIES-If any prospectus/advertisement inviting deposit from the public, whoever willfully
makes a false statement in any material particular knowing it to be false or willfully omits to make a
material statement, would be punishable with imprisonment for a term up to three years and would
also be liable to a fine. Failure by a person to produce any book/account/other documents or to
furnish any statement/information/particulars is punishable with fine. The penalty imposed by the
RBI is payable within 30 days from the date on which the notice demanding payment is served on
the NBFC.

The Regulatory and Supervisory objective is to:

 Ensure healthy growth of the financial companies;

 Ensure that these companies function as a part of the financial system within the policy
framework, in such a manner that their existence and functioning do not lead to systemic aberrations;
 The quality of surveillance and supervision exercised by the Bank over the NBFCs is sustained by
keeping pace with the developments that take place in this sector of the financial system.

Two aspects of NBFCs functioning

A) REGULATORY FRAMEWORK
B) SUPERVISORY FRAMEWORK

A) REGULATORY FRAMEWORK

 Ensure that NBFCs serve the financial system efficiently.

 Protect the interest of depositors.

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 The activities of NBFCs were being regulated by the provisions of Chapter III-B of the RBI Act,
1934 for over three decades. The emphasis of these regulations was, however, on the acceptance of
deposit by NBFCs mainly as an adjunct to monetary and credit policy.
 Entry norms for NBFCs and prohibition of deposit acceptance by unincorporated bodies engaged in
financial business.
 Compulsory registration, maintenance of liquid assets and creation of reserve fund.
 Power of the RBI to issue directions for NBFCs.

Basic Structure

 Comprehensive regulation and supervision of deposit taking NBFCs and limited supervision over
those not accepting public deposits.
 Prescription of prudential norms akin to those applicable to banks.
 Submission of periodical returns for the purpose of off-site surveillance
 Asset liability and risk management system for NBFCs
 Punitive action like cancellation of Certificate of Registration (CoR), prohibition from acceptance of
deposits and alienation of assets.

For Protection of Depositors'Interest

 Co-ordination with State Governments to curb unauthorized and fraudulent activities.

 Publicity for depositors' education and awareness, workshops / seminars for trade and industry
organizations

B) SUPERVISORY ASPECTS:

Reserve Bank of India has instituted a comprehensive supervisory mechanism

 On-site Inspection
 Off-site Surveillance System
 Market intelligence

ON-SITE INSPECTION:

It includes that an NBFC

1. Is complying with regulatory stipulation and supervisory guidelines

2. Has adequate capital and liquidity
3. Is being properly managed
4. Has adequate systems and controls in place

OFF-SITE SURVEILLANCE:

It includes to be an in house review and an analytical system based on receipt of various statutory returns
and other statements from the supervised entites at fixed intervals.

MARKET INTELLIGENCE:

It includes a system of capturing developments that takes place in the financial services sector through
various channels including press, electronic media and put the information to proper use with utmost
sensitivity so that RBI remains alert in its actions.

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PRODUCTS OFFERED BY NBFC’S IN INDIA

NBFCs offers a range of product and services which includes loans and advances, credit facilities,
saving and investment plans, acquisition of shares, stock, bonds hire-purchase, insurance business or chit
business and money transfer service. It also includes private education funding, retirement planning,
underwriting stocks and shares, trading in money markets, TFCs (Term Finance Certificate) and other
obligations. Apart from this, NBFCs also provide wealth management services such as handling portfolios
of stocks and shares and discounting services.

LIST OF MAJOR PRODUCTS OFFERED BY NBFCS IN INDIA

1. Funding for commercial vehicles

If you are considering a loan to expand your fleet size or need refinance of your existing loan or planning to
buy a used vehicle, NBFC’s will arrange the loan from banks through tie-ups at attractive rates based on
risk profile at a nominal charge that too only if the loan gets disbursed.
Types of loans arranged for Commercial Vehicles:

 New
 Used/Refinance/Re-purchase finance
 Balance Transfer

2. Funding of infrastructure assets

Infrastructure loan” means a credit facility extended by NBFCs to a borrower for exposure in the following
infrastructure sub-sectors: Transport, Energy, Water and sanitation, communication, social and commercial
infrastructure. IFC is a non-deposit accepting loan company which complies with the following:

1. A minimum of 75 per cent of the total assets of an IFC-NBFC should be deployed in infrastructure
loans;
2. The company should have minimum net-worth of Rs 300 crore,
3. The CRAR of of the company should be at 15% with Tier I capital at 10% and
4. The minimum credit rating of the company should be at 'A' or equivalent of CRISIL, FITCH, CARE,
ICRA, BRICKWORK or equivalent rating by any other accrediting rating agencies.

3. Retail finance

Retail finance is the offering of credit facilities or stage payments to suitable creditworthy customers.These
are generally good borrowers who temporarily do not meet the banks credit criteria primarily relating to a
level of vacancy in their commercial property or lack of presales in residential development.

4. Loan against shares

The Reserve Bank of India has prescribed norms for NBFC Loan against shares. This was done with a view
to tackling volatility in the capital market due to offloading of shares by NBFC.

NBFC Loan Against Shares( RBI Guidelines), The Reserve Bank of India has prescribed norms for NBFC
Loan against shares. Non-Banking Financial Companies (NBFCs) whose asset size is Rs 100 crore and
above have been forbidden to give more than 50 % of the value of shares pledged by the borrowers
with NBFCs.

When share prices fall down below a certain level, in such a case NBFCs sell the shares against which they
lend. Usually, with this, it results in sharp falls in a company’s stock.

6
NBFCs and Micro Finance Module 3

5. Funding of plant and machinery

It's tricky to assess the best way to purchase new machinery for your business. It’s a versatile form of
financing equipment used by many businesses – from large engineering firms to small parts manufacturers –
because it keeps costs down and naturally helps to improve your cash flow position over the long term.
Here’s more of the benefits of plant machinery finance:

 Immediate access to machinery you need

 Leasing options that suit how your firm trades
 Hire Purchase options for title ownership after the period
 Tax-efficient financing
 Options to upgrade or update
 Easier budgeting: fixed payments & fixed period
 Plant machinery finance
 Engineering machinery finance
 Finance for machine tools and other equipment

6. Project finance

Project finance is the financing of long-term infrastructure, industrial projects and public services using a
non-recourse or limited recourse financial structure. The debt and equity used to finance the project are paid
back from the cash flow generated by the project. The main sources include equity, debt and
government grants. Financing from these alternative sources have important implications on project's overall
cost, cash flow, ultimate liability and claims to project incomes and assets.

7. Unsecured personal loans

An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than
by any type of collateral. Because unsecured loans, sometimes referred to as signature loans or personal
loans, are obtained without the use of property as collateral, the terms of such loans, including approval and
receipt, are most often contingent on the borrower's credit score. Borrowers must generally have high credit
ratings to be approved for certain unsecured loans.

The banks and NBFCs offer unsecured personal loans ranging from Rs. 50 thousand to Rs. 20 lakhs.
Usually, personal loans are granted taking into consideration one's employment status, annual income and
repaying capacity.

8. Trade finance

Trade finance represents monetary activities related to commerce and international trade. Trade finance
includes lending, the issuance of letters of credit, factoring, export credit and insurance. Companies involved
with trade finance include importers and exporters, banks and financiers, insurers and export credit
agencies, and service providers.

9. Venture finance

Venture capital is a type of funding for a new or growing business. It usually comes from venture
capital firms that specialize in building high risk financial portfolios. The venture capital firm
gives funding to the startup company in exchange for equity in the startup.

7
 MODULE 4 (A)
Major Non-Banking Financial Companies
Operating In India- Trends- Legal frame work
1. The Top 10 NBFCs in India, 2018
Non-Banking Financial Companies (NBFC) are
establishments that provide financial services and
banking facilities without meeting the legal
definition of a Bank. They are covered under the
Banking regulations laid down by the Reserve Bank
of India and provide banking services like loans,
credit facilities, TFCs, retirement planning,
investing and stocking in money market. However
they are restricted from taking any form of
deposits from the general public. These
organizations play a crucial role in the economy,
offering their services in urban as well as rural
areas, mostly granting loans allowing for growth of
new ventures. NBFCs also provide a wide range of
monetary advices like chit-reserves and advances.
Hence it has become a very important part of our
nation’s Gross Domestic Product and NBFCs alone
count for 12.5% raise in Gross Domestic Product
of our country. Most people prefer NBFCs over
banks as they find them safe, efficient and quick in
assisting with financial requirements. Moreover,
there are various loan products available and there
is flexibility and transparency in their services.
There are a huge number of NBFCs operating in our
country but here’s a look at the current top 10
NBFCs in India.
Power Finance Corporation Limited
Finance Corporation Limited was founded in 1986
and is a Navratna Status company. Mukesh Kumar
Goel is the Chairman & Managing Director of the
company. Power Finance Corporation Limited is
known to provide financial assistance to different
power projects in the country. It supports
organizations involved in Power generation,
transmission and distribution. The company is also
listed in National Stock Exchange (NSE) and
Bombay Stock Exchange (BSE).
Shriram Transport Finance Company Limited
Transport Finance Company Limited focuses on
funding commercial and business vehicles, besides
others. The company was founded in 1979 and has
been offering funding services for Light Duty
Trucks, Heavy Duty Trucks, Mini Trucks, Passenger
Vehicles, Construction Vehicles and Farm
Equipments. The company’s specialisation is in
general insurance, mutual funds, common assets,
stock broking and general protection.
Bajaj Finance Limited
was founded in 2007 and is a unit of Bajaj Holdings
and Investments. It offers loans to doctors for
career enhancement, home loans, gold loans,
individual Loans, business and entrepreneur loans
and is an extremely popular finance company.
Apart from these, Bajaj Finserv also provides
services like wealth advisory, lending money and
general insurance. It has over 1400 branches
across the country with more than 20000
employees.
Mahindra & Mahindra Financial Services Limited
Mahindra Financial Services Limited (MMFSL) was
established in 1991 and has over 1000 branches,
and a customer base of over 3 million, all over the
country. MMFSL is one of the most renowned
organizations and has two affiliates offering
Insurance services and rural housing financial
services. It also specialises in offering gold
advances, vehicle advances, corporate advances,
home credits, working capital advances and much
more.
Muthoot Finance Ltd
Muthoot Finance Ltd is India’s first NBFC tracing
its history back to 1888, when it began as a small
lender from a village in Kerala. Muthoot Finance Ltd
sanctions loans only against pledge of gold
ornaments. It is a leader in India’s gold loan and
finance market. Besides financing gold
transactions, Muthoot Finance Ltd offers foreign
exchange services, money transfers, wealth
management services, travel and tourism services.
Gold coins are also sold at Muthoot Finance
Branches. The company has its headquarters in
Kerala, India, and operates over 4,400 branches
throughout the country. It is also the parent
company of Muthoot Housing Finance (India) Ltd,
which offers home loans.
HDB Finance Services
HDB Financial Services is operated by India’s
largest private sector HDFC Bank. It offers a
variety of secured and non-secured financial loans
through a network of more than 1,000 branches in
22 Indian states and 3 Union Territories. It provides
secured and unsecured loans, including personal
and business loans, doctor's loans, auto loans, gold
loans, new to credit loans, enterprise business
loans, consumer durables loans, construction
equipment loans, new and used car loans,
equipment loans, and tractor loans. The company
operates through Lending Business and BPO
Services segments. It is considered the fastest
growing NBFC in India today.
Cholamandalam
Cholamandalam Investment and Finance Company
Limited (Chola), was incorporated in 1978 as the
financial services arm of the Murugappa Group.
Chola started as an equipment financing company
and has surged ahead as a complete financial
services provider offering all kinds of services like -
vehicle finance, home loans, home equity loans,
SME loans, investment advisory services, stock
broking and a host of other financial services to
customers. Chola has 725 branches across India
with assets under management above INR 35,000
Crores.
Tata Capital Financial Services Ltd
Tata Capital Financial Services Limited is top of
India’s leading NBFCs. Established in 2007, it is a
subsidiary of Tata Sons Limited. TCFS describes
itseld as a one-stop financial service provider that
caters to the diverse needs of retail, corporate and
institutional customers across businesses. It is
registered with RBI as ‘Systemically Important
Non-Deposit Accepting Non-Banking Financial
Company (NBFC)’. Among the various products
offered by TCFS to individuals, families and
businesses, are commercial finance, infrastructure
finance, wealth management, consumer loans and
distribution and marketing of Tata Cards.
L & T Finance Limited
L & T Finance Limited is a strong player in the non
banking financial sector and was established in
1994. Headquartered in Mumbai, L & T offers
funding services to different sectors like trade,
industry, agriculture, Commercial Vehicle loans,
Individual Vehicle loans, and corporate and rural
loans. The company caters to more than 10 lakh
people. In 2010, L & T was awarded the “Company
of the year” in the Economic Times awards.
Aditya Birla Finance Ltd.
Aditya Birla Finance Limited, a part of the Aditya
Birla Financial Services, was incorporated in 1991
and is an ISO 9001:2008 certified NBFC. ABFL is
registered with RBI as a ‘systemically important
non-deposit accepting NBFC’ and it ranks among
the top five largest private diversified NBFCs in
India. It offers precise and customised solutions
across a wide range, from corporate finance to
commercial mortgage, and from capital markets to
structured finance.
2. Major trends of NBFC in India
Non-banking financial companies ("NBFC") have
undergone significant transformation over the past few
years. Liberalisation of the legal regime, increasing
digitisation and rising financial inclusion have given a
boost to innovation, growth and investment in the
financial sector.
Regulatory changes
Last year, the government liberalised the financial
services sector by permitting 100% foreign direct
investment in the financial sector under the automatic
route, subject to the relevant entity being regulated by
the Reserve Bank of India ("RBI") or other financial sector
regulators. Further, the benefit of the Securitisation and
Reconstruction of Financial Assets and Enforcement of
Security Interest Act 2002 was extended to 196 NBFCs
allowing such NBFCs to enforce security interests on
assets charged to them, without having to resort to
either judicial or arbitral authorities. Now, the
government is working towards harmonising the
regulations applicable to various categories of NBFCs to
facilitate ease-of-doing business in this sector. The
government is also taking actions towards a
technological revolution in this sector by implementing
an information technology framework and promoting
FinTech activities.
Operational innovation and growth
With the rising innovation and growth in the sector,
newer business models of NBFCs such as 'account
aggregators' and 'peer to peer lending platforms' ("P2P
Lending") are catching pace. To clarify, account
aggregator is a form of NBFC engaged in collecting and
providing information on a customer's financial assets,
in a consolidated, organised and retrievable manner.
Further, P2P Lending is a form of crowd-funding which
uses an online platform to match lenders with
borrowers to provide unsecured loans. RBI notified P2P
Lending platforms as NBFCs on 24 August 2017 and
recently issued the Master Directions to regulate the
P2P Lending platforms on 4 October 2017.
The NBFC sector is also seeing a surge of newer
structured products like Market and Credit Linked
Debentures wherein the principal investment of the
debenture holder is protected and the interest payment,
to be made at maturity, is linked to the performance of
an underlying Index or a stock.
Varied investment strategies
Over the years, NBFC sector has witnessed diverse
investment structures ranging from strategic
investments, private equity investments to debt funding
through NBFC route (including private equity funds
establishing their NBFC arms). Strategic investments
provide financial and operating synergy and help NBFCs
tap new markets and provide expertise in operations.
However, private equity investments provide capital
infusion which can be utilised for expansion purposes,
facilitate technology upgradation and also help in
enhancing corporate governance of NBFCs. Debt
funding through NBFCs is another investment strategy
whereby foreign investors set up or acquire NBFCs in
India and use such NBFCs to further lend or invest in
Indian companies through structured instruments such
as non-convertible debentures (which have an
advantage of protected downside and equity upside by
way of redemption premium or coupons). While, a
number of investments have been structured in such a
manner, there are divergent views in the market as to
whether such investments through structured
instruments could be subject to any issues from the
foreign direct investment policy perspective.
Increased market activity with more registrations,
approvals and listings
In 2016, RBI introduced a fast track registration process
and two categories of applications depending on
acceptance of public funds and customer interface. This
fast track process increased activity in the sector in the
form of registration of new NBFCs. Additionally, the
number of approvals granted for foreign investment in
investing companies and the number of NBFC listings
with the stock exchanges have also increased
substantially. The sector has also witnessed a large
number of entrepreneurial initiatives and successes,
mostly aiming at mid to bottom-of-the-pyramid
customers.
Sector to look out for
The government policy of demonetisation acted as a
deterrent for the unorganised sector and led to
compulsive financial inclusion. The regulatory changes
aimed towards promoting foreign investment also
provided a boost to the financial sector. This sector has
evolved significantly in the past few years and the
growth of financial inclusion is expected to be driven
further with higher penetration into parts of the
economy where public-sector banks are unable to
penetrate.
What is the procedure for application to the Reserve
Bank for Registration?
The applicant company is required to apply online and
submit a physical copy of the application along with the
necessary documents to the Regional Office of the
Reserve Bank of India. The application can be submitted
online by accessing RBI’s secured website
https://cosmos.rbi.org.in . At this stage, the applicant
company will not need to log on to the COSMOS
application and hence user ids are not required. The
company can click on “CLICK” for Company Registration
on the login page of the COSMOS Application. A window
showing the Excel application form available for
download would be displayed. The company can then
download suitable application form (i.e. NBFC or SC/RC)
from the above website, key in the data and upload the
application form. The company may note to indicate the
correct name of the Regional Office in the field “C-8” of
the “Annex-I dentification Particulars” in the Excel
application form. The company would then get a
Company Application Reference Number for the CoR
application filed on-line. Thereafter, the company has to
submit the hard copy of the application form (indicating
the online Company Application Reference Number,
along with the supporting documents, to the concerned
Regional Office. The company can then check the status
of the application from the above mentioned secure
address, by keying in the acknowledgement number.
https://rbidocs.rbi.org.in/rdocs/Forms/PDFs/NBFC1706
2016.pdf
Section 45-IA of RBI ACT 1934
Requirement of registration and net owned fund.
(1) Notwithstanding anything contained in this Chapter
or in any other law for
the time being in force, no non-banking financial
company shall commence or
carry on the business of a non-banking financial
institution without–
(a) obtaining a certificate of registration issued under
this Chapter; and
(b) having the net owned fund of twenty-five lakh
rupees or such other
amount, not exceeding two hundred lakh rupees, as the
Bank may, by
notification in the Official Gazette, specify.
(2) Every non-banking financial company shall make an
application for
registration to the Bank in such form as the Bank may
specify:
Provided that a non-banking financial company in
existence on the
commencement of the Reserve Bank of India
(Amendment) Act, 1997
shall make an application for registration to the Bank
before the expiry of
six months from such commencement and
notwithstanding anything
contained in sub-section (1) may continue to carry on
the business of a
non-banking financial institution until a certificate of
registration is issued
to it or rejection of application for registration is
communicated to it.
(3) Notwithstanding anything contained in sub-section
(1), a non-banking
financial company in existence on the commencement
of the Reserve Bank of
India (Amendment) Act, 1997 and having a net owned shall be necessary to ensure that the commencement
fund of less than of or carrying on of
twenty-five lakh rupees may, for the purpose of the business in India by a non-banking financial company
enabling such company to shall not be
fulfil the requirement of the net owned fund, continue prejudicial to the public interest or in the interest of the
to carry on the depositors.
business of a non-banking financial institution– (5) The Bank may, after being satisfied that the
(i) for a period of three years from such conditions specified in subsection
commencement; or (4) are fulfilled, grant a certificate of registration subject
(ii) for such further period as the Bank may, after to such
recording the reasons in conditions which it may consider fit to impose.
writing for so doing, extend, subject to the condition (6) The Bank may cancel a certificate of registration
that such company granted to a non-banking
shall, within three months of fulfilling the requirement financial company under this section if such company–
of the net owned (i) ceases to carry on the business of a non-banking
fund, inform the Bank about such fulfilment: financial institution in
Provided that the period allowed to continue business India; or
under this (ii) has failed to comply with any condition subject to
subsection shall in no case exceed six years in the which the certificate
aggregate. of registration had been issued to it; or
(4) The Bank may, for the purpose of considering the (iii) at any time fails to fulfil any of the conditions
application for referred to in clauses
registration, require to be satisfied by an inspection of (a) to (g) of sub-section (4); or
the books of the nonbanking (iv) fails–
financial company or otherwise that the following (a) to comply with any direction issued by the Bank
conditions are under the
fulfilled:– provisions of this chapter; or
(a) that the non-banking financial company is or shall be (b) to maintain accounts in accordance with the
in a position to requirements of any
pay its present or future depositors in full as and when law or any direction or order issued by the Bank under
their claims the provisions
accrue; of this Chapter; or
(b) that the affairs of the non-banking financial company (c) to submit or offer for inspection its books of account
are not being or and other
are not likely to be conducted in a manner detrimental relevant documents when so demanded by an
to the interest of inspecting authority of
its present or future depositors; the Bank; or
66 67
(c) that the general character of the management or the (v) has been prohibited from accepting deposit by an
proposed order made by the
management of the non-banking financial company shall Bank under the provisions of this Chapter and such
not be prejudicial order has been in
to the public interest or the interest of its depositors; force for a period of not less than three months:
(d) that the non-banking financial company has Provided that before cancelling a certificate of
adequate capital structure registration on the
and earning prospects; ground that the non-banking financial company has
(e) that the public interest shall be served by the grant failed to comply
of certificate of with the provisions of clause (ii) or has failed to fulfil any
registration to the non-banking financial company to of the
commence or to conditions referred to in clause (iii) the Bank, unless it is
carry on the business in India; of the opinion
(f) that the grant of certificate of registration shall not that the delay in cancelling the certificate of registration
be prejudicial to the shall be
operation and consolidation of the financial sector prejudicial to public interest or the interest of the
consistent with depositors or the
monetary stability, economic growth and considering non-banking financial company, shall give an
such other relevant opportunity to such
factors which the Bank may, by notification in the company on such terms as the Bank may specify for
Official Gazette, specify; taking necessary
and steps to comply with such provision or fulfillment of
(g) any other condition, fulfilment of which in the opinion such condition;
of the Bank, Provided further that before making any order of
cancellation of
certificate of registration, such company shall be given
a reasonable
opportunity of being heard.
(7) A company aggrieved by the order of rejection of
application for
registration or cancellation of certificate of registration
may prefer an appeal,
within a period of thirty days from the date on which
such order of rejection
or cancellation is communicated to it, to the Central
Government and the
decision of the Central Government where an appeal
has been preferred to it,
or of the Bank where no appeal has been preferred, shall
be final:
Provided that before making any order of rejection of
appeal, such
company shall be given a reasonable opportunity of
being heard.
Explanation.– For the purposes of this section,–
(I) “net owned fund” means–
(a) the aggregate of the paid-up equity capital and free
reserves as disclosed in the latest balance-sheet of the
company after deducting therefrom–
(i) accumulated balance of loss;
(ii) deferred revenue expenditure; and
(iii) other intangible assets; and
(b) further reduced by the amounts representing–
(1) investments of such company in shares of–
(i) its subsidiaries;
(ii) companies in the same group;
(iii) all other non-banking financial companies; and
68
(2) the book value of debentures, bonds, outstanding
loans
and advances (including hire-purchase and lease
finance)
made to, and deposits with,–
(i) subsidiaries of such company; and
(ii) companies in the same group,
to the extent such amount exceeds ten per cent of (a)
above.
(II) “subsidiaries” and “companies in the same group”
shall have
the same meanings assigned to them in the Companies
Act, 1956.
Section 3 of Companies Act 2013
Classification of Companies as limited Companies
and unlimited Companies
Classification of Companies as limited Companies
and unlimited Companies
Classification of Companies as Private and Public
Companies
Legal Requirements for formation of a Company
Public Company
Private Company
One Person Company (OPC)
1. Every Company formed under the Companies Act,
2013 shall be either a limited Company or an
unlimited Company.
2. A limited Company may be further classified as
follows:-
i. Company limited by shares
ii. Company limited by guarantee having no share
capital
iii. Company limited by guarantee and having a share
capital
3. An unlimited Company may be further classified as
follows:-
i. An unlimited Company having no share capital
ii. An unlimited Company having a share capital
Classification of Companies as Private and Public
Companies
Pursuant to Section 3(1) of the Companies Act,
2013, Every Company formed under the Companies
Act, 2013 shall be either a Public Company or Private
Company.A Company may be formed under the Act
as One Person Company (OPC). OPC is also a private
Company
Pursuant to Section 3(2) of the Companies Act,
2013, A Company formed under section 3(1) may
be either-
A Company limited by shares; or
A Company limited by guarantee; or
An unlimited Company
Formation of Company (Section 3 of Companies, Act,
2013)
Legal Requirements for formation of a Company
Lawful purpose:- Section 3 states that a Company
may be formed for any lawful purpose. Thus, no
company shall be formed for carrying on any unlawful
objects.
Subscription to Memorandum:-The Person who sign
on the memorandum are termed as subscribers. The
Provisions relating to subscription of Memorandum
are explained as below:-
In case the Company proposed to be formed is a
public company, the memorandum must be
subscribed to by seven or more persons.
In case the Company proposed to be formed is a
private company, the memorandum must be
subscribed to by two or more persons.
In case the Company proposed to be formed is OPC,
the memorandum must be subscribed to by one
person.
Public Company
According to section 2 (71) of the companies Act,
2013“public company” means a company which—
(a) is not a private company;
(b) has a minimum paid-up share capital as may be
prescribed:
Provided that a company which is a subsidiary of a
company, not being a private company, shall be
deemed to be public company for the purposes of
this Act even where such subsidiary company
continues to be a private company
Private Company
According to section 2 (68) of the companies Act,
2013 “private company” means a company having a
minimum paid-up share capital as may be prescribed,
and which by its articles,—
(i) restricts the right to transfer its shares;
(ii) except in case of One Person Company, limits the
number of its members to two hundred:
(iii) prohibits any invitation to the public to subscribe
for any securities of the company;
Provided that where two or more persons hold one
or more shares in a company jointly, they shall, for
the purposes of this clause, be treated as a single
member:
Provided further that—
(A) persons who are in the employment of the
company; and
(B) persons who, having been formerly in the
employment of the company, were members of the
company while in that employment and have
continued to be members after the employment
ceased,
shall not be included in the number of members;
One Person Company (OPC)
According to section 2 (62) of the companies Act,
2013, ‘One Person Company (OPC)’ means a
company which has only one person as a member.
The Companies Act, 2013 has introduced new
concept of ‘One Person Company’ (herein after
referred to as ‘OPC’). Section 3 (1) (c) has been
notified vide notification dated 26th March, 2014
and the same has been effective from 01st April,
2014.
It is a new form of business by which company can
be incorporated with one person only. It enables the
entrepreneur carrying the business in the Sole-
Proprietor form of business to enter into a
Corporate Framework. One Person Company is a
hybrid of Sole-Proprietor and Company form of
business, and has been provided with relaxed
requirements under the Companies Act, 2013.
MODULE 5
Financial inclusion-objectives- Microfinance
as a Development Tool - The Indian
Experience- Evolution and Character of
microfinance in India- Microfinance Delivery
Methodologies and models- Legal and
Regulatory Framework- Impact of
Microfinance - Revenue Models of
Microfinance- Profitability Efficiency and
Productivity- Emerging issues
1. Financial Inclusion
As defined by RBI
Financial Inclusion Inclusion is the process process of
ensuring access to appropriate financial products and
services needed by vulnerable groups such as weaker
sections and low income groups at an affordable cost in
a fair and transparent transparent manner by
mainstream Institutional player.
Objective
 To provide complete Financial services encompassing
all below: -
 A basic no frills banking account for making /
receiving payment. g g gy
 Saving product (including investment / pension)
suited to the pattern of cash flows of poor
households.
 Simple credit products, Overdrafts linked with
No-frill a/c’s, KCC, GCC, ACC etc.
 Remittance - money transfer facilities.
 Micro Insurance (life and non Micro Insurance
(life and non-life).
 Micro Pension
CREDIT COUNSELLING AND FINANCIAL
EDUCATION/LITERACY. NTEGRAL TO PROCESS OF
BUUILDING BASIC FINANCIAL SKILLS AND IS A
CONTINUOUS PROCESS.
Credit Delivery Methodologies used by Microfinance
Institutions
MFI’s use two basic methods in delivering financial
services to their clients.
These are:
(!) Group Method and
(2) Individual method
Group Method
This is one of the most common methodologies for
providing micro-finance. Group method primarily
involves a group of individuals, which becomes the basic
unit of operation for the MFIs. As we have discussed
earlier, MFIs have to provide collateral free loans, group
methodologies help in creating social collateral (peer
pressure) that can effectively substitute physical
collateral. Group becomes a basic unit with which MFIs
deal. The advantage of group methodology is that
• Groups are trained to own joint responsibility for loans
that are taken by individuals in the group.
• Groups ensure repayments from all individuals in that
group and incase of a default
• Groups functions as the forum where the credit
discipline and other related issues are discussed.
• Group may have to jointly own the responsibility of
defaults and pay on behalf of defaulting client.
• Group also help credit appraisal and provide opinion on
creditworthiness of each individual in the group.
• Groups methodology also helps in controlling cost
This ensures that even without taking any physical
collateral, the MFI is able to manage its credit risk (loan
related risk).
MFIs actually deliver the financial service at the client’s
location which could be a village in rural areas or a
colony/slum in urban area. Having a group helps the MFIs
in getting all clients at one spot rather than visiting each
individual’s house. This helps the MFI in increasing the
efficiency of staff and controlling the cost. Group
methodology creates a forum where individuals come
and discuss, can provide opinion, and exert social
pressure.
The advantage of Group methodology can easily be
appreciated by the fact if the a MFI employee has to visit
each individual house in isolation, it would be very
difficult. Also in the absence of a group, if a client refuses
to pay there is no forum where such a case can be
discussed or there is no method through which the MFI
can expert pressure on the client.
Group methodology is also important because in case of
larger loan defaults a financial institutions can take
recourse o legal action but in small loans legal recourse
is not an economically sound option. An MFI who may
have an outstanding or Rs 3,000 at default cannot apply
legal pressure as the cost of recovery through that
method can be higher than the amount to be recovered
itself.
Moreover, the clients that the MFIs are dealing with are
generally poor and may face genuine problems at times.
Rather than taking an aggressive/legal approach, which
such vulnerable clients it is always better to have more
constructive and collective approach, which is provided
by the Groups.
Due to the various advantages, as indicated above
provided by groups, this methodology is widely accepted
and used in micro-finance across the world.
Self-help Group and Joint Liability Groups (Grameen
model and its variants) are two common credit
delivery models in India.
Self –Help Groups (SHGs)
Self-help Group concept has its origin in India. SHGs are
now considered to be very important bodies in rural
development and are therefore found in almost all parts
of the country and their number is still rapidly growing.
SHGs are formed by Non-Government Organisations as
well as Government agencies and are used as channels
for various development programmes.
A Self-Help Group is an association of generally up to
20 members (not exceeding 20 members), preferably
from the same socio-economic background. SHGs are
facilitated by Government agencies or NGOs for
members to come together for discussing and solving
their common problems either financial or social
through mutual help. An SHG can be all-women group,
all-men group, or even a mixed Group. However, it has
been the experience that women’s groups perform
better in all the important activities of SHGs. Mixed
group is not preferred in many of the places, due to the
presence of conflicting interests.
Some of the distinct features of SHGs are;
(i) Recognized by government: SHGs are well recognized
and accepted by government, SHGs can open bank
accounts in the name of SHG. They can also receive
government grants and funds for development
activities.
(ii) SHGs are social intermediaries: SHGs do not restrict
their functions only to financial transactions. SHGs are
often involved in many social activities. There are
example where SHGs have taken up social issues and
fought against social evils like alcoholism, violence,
against women, dowry, getting into village politics and
being elected as Sarpanch.
(iii) Books of accounts: SHGs maintain their own books
of accounts. These are simple books to keep records of
their savings, loans income and expenditures. Strong
SHGs also make their Balance sheets and Income
statements.
(iv) Have office bearers: SHGs gave a structure where
there is a Group President, Secretary and Treasure.
They are elected by the group.
(v) SHGs are more autonomous as they decide their
own rules and regulations.
(vi) SHGs mobilize thrift and rotate it internally.
(vii) SHGs can hold bank account and can also borrow
from banks and other financial institutions.
We see that SHGs are groups, which are more
autonomous. While they are involved in financial
transactions, their role is not just restricted to it. SHGs
are also involved in various social issues.
As more SHGs are formed they have started federating
themselves into clusters and clusters in turn as SHG
Federations. The Federations are able to channelise
funds to the SHGs and also help in improving the
managing and financial skills of SHGs.
Joint Liability Group – Grameen Model
Grameen model is based on the concept of joint liability.
It is the brainchild of Prof.. Muhammad Yunus, founder
of Grameen Bank in Bangladesh. Grameen model is the
most accepted and prevalent micro-finance delivery
model in the world today. Many MFIs have accepted the
model as it has high focus on standardization and
discipline
Grameen model, as mentioned, is a joint liability group
model. Here five-member groups are formed and eight
such groups form a Center. Hence, in a full-capacity
Center there are 40 members (8 x 5). However, over the
years people have experimented with Centers of
different sizes and now there are variations of 5-8
groups within a Center. Center is the operational unit
for the MFI, which means that MFI deals with a Center
as a whole.
Meetings also take place only at the Central level and
individual groups do not meet. Group meetings take
place only in front of the Field staff of the MFI. A
Grameen model is focused on financial transactions and
other social issues are generally not discussed. The
Group and Center are Joint liability Groups, which means
that all members are jointly responsible (‘liable’) for the
repayment. MFI recovers full money from Center, if any
member has defaulted: the group members have to pool
in money to repay to the MFI. If Group members are
unable to do it, Center as whole has to contribute and
share the responsibility.
Some other features of Grammen Model are:
(i) The group meeting take place every week
(ii) Interest rate are charged on flat basis
(iii) MFI staff conducts the meeting
(iv) All transactions take place only in Center meetings
Grameen model is focused on providing financial
services to the clients and hence there is an emphasis
on standardization and discipline. The model suggests
weekly meeting for frequent interaction with the clients
to reduce credit risk. The meetings are conducted for
carrying out the financial transactions only. The
meetings are conducted systematically in a short-time
and other social issues are not discussed. Flat interest
is charged again for making the system standardized. In
flat rate system installment size of repayment remains
small for all weeks and hence is convenient and easier
to explain. Also, it is easy to break the loan installment
into the principal and interest component.
We see that the SHG and Grameen model have
originated with two different approaches. SHG model
has been developed with holistic view of development
and empowerment of society where financial
transactions are only one part of it. While Grameen
model is specifically focused on providing financial
services to the low-income clients. A broad comparison
of the two models is presented in the Table 1.
Joint Liability Groups (JLG)
Grameen model is a particular form of joint liability
Group but in India there are other forms of Joint liability
Groups as well. MFIs, particularly in urban areas, form
JLGs of five-members. These are group of individuals
coming together to borrow from the financial
institution. They share responsibility (“liability”) and
stand as guarantee for each other. There is a Group
Leader in such JLGs, many MFIs prefer such group in
urban business areas. Such JLGs do not hold periodic
meetings.
Typically members are shopkeepers from same locality.
These forms of JLGs are somewhere between Group and
Individual lending methods. While lending in such JLGs is
to individual members small JLGs still provide some sort
of comfort to the MFIs. Also collection can be done from
a single point, generally from the Group leader rather
than going to each individual. As in urban areas
shopkeepers do not have time to hold meeting, these
JLGs do not meet.
Individual Method
So far we have discussed the Group based lending
method. However MFIs are also increasingly providing
loans to individuals. In Individual lending method, MFIs
provide loans to an individual based on his/her own
personal credit worthiness. Individual lending is more
prevalent with clients who generally need bigger size
loans and have the capacity to produce guarantee and
generate enough comfort to the MFI. MFIs generally
base their decision on personal knowledge of the client,
his/her reputation among peers and society, client’s
income sources and business position. MFIs also ask for
individual guarantors or take post-dated cheques from
clients.
Individual guarantors come from friends or relatives well
known to the borrower and who are ready to take
liability of repaying the loan, should the borrower fail to
do so. If the loan is significantly larger, then MFIs may
also take some collateral security.
Impact of Microfinance on INDIAN Economy
Financial inclusion
• SHARE, SKS and Spandana serve more than 1.5
million families, most of them very poor when they
started accessing micro-financial services
• MFI’s achieved an overall growth of customer base
by 10.8%
• Borrowing base increased from 83.6 to93.9 million
• Increase of personal income
• Empowerment of women
• Improvement in nutrition
• Increased education of the borrower’s children
• Pressure on banking institutions to improve
Challenges of Micro Finance in India
Rate of Interest
Uniform policy of rate of interest is not being followed.
Generally, it has been observed that MFIs followed
different pattern of charging interest rates and few one
are also taking free deposits and additional charges. All
this make the pricing very confusing and hence most of
the borrowers feel incompetent in terms of bargaining
power. Thus, a common practice for charging interest
should be followed by all MFIs so that it makes the
sector more competitive and the beneficiaries can easily
make effective comparison of different financial
products before buying.
Purpose of Loans
Loans should be for productive purposes. It should be
for starting a business and for expansion of a micro
business. It should be given to poor people only. It should
not be mismanaged.
Cost of Promoting a Group
Self help Groups requires an investment of both time
and money. Someone has to incur the cost of promoting
groups i.e. for organizing meetings, training the
members. The estimate of this cost is controversial,
with NABARD claiming it to be as low as Rs 1000 per
group and NGOs saying it takes as much Rs 12,000.
Lack of Capacity to Promote
After the promotion of a group, these groups should be
closely monitored to strengthen their internal capacity
to undertake administrative tasks like accounting,
meeting minutes, correspondence, and negotiations
with bankers and commercial activities such as business
start-ups, marketing, and reinvestment. The Self help
group lack the required skills and local knowledge. Many
groups have come collectively just because they want a
credit. Insufficient attention to group quality could
threaten the longer term reliability and feasibility of the
whole program. Efforts are also needed to ensure the
groups remain monetarily sustainable and have the
capability to offset personal losses like accidents,
illness, death and natural disasters.
Regulations
The regulatory rules are hard. Many MFIs break rules.
Only few do work as per R.B.I. guidelines. Only a small
number of Microfinance institutions are able in
encouraging common savings among groups.
High Cost of Funds
Huge Cost of funds for Indian MFIs has to be incurred
unlike in Bangladesh and a number of other Countries.
Indian MFI sector has not benefited from grants and
subsidized funding.
Unbalanced Growth of Schemes
Kisan Credit Cards issued by commercial banks, RRBs
and cooperative banks are not truly credit cards. These
cards are not distributed evenly.
Unequal Distribution of Micro Finance
As we know Microfinance has become a major
channel in providing credit to poor for poverty reduction.
But MFIs are not covering all deprived people. Also these
have not covered all states so far in India. The main
centre of attention of these institutions is to supply
credit to the rural poor and less interest to urban poor.
However, now-a-days urban poverty is very serious
issue with increasing population and migration. There is
a need to take more efforts to exploit the potential of
microfinance in meagre states like Bihar, Uttar Pradesh,
Assam, and Jharkhand etc. NGOs and MFIs are more
active in southern states than northern states. People
are more literate. The financial infrastructure,
supportive culture is other reasons for their success.
Government should also take more steps for creating
effective banking structure in backward region. The poor
section should be targeted without any difference in
rural or urban poor. –
Insufficient Fund Generation
Insufficient funds generation by MFIs is also a major
concern. Some NBFCs have generated funds through
private equity investments which are for profit motive.
These MFIs are restricted from taking public deposits.
Many non profit MFIs have to primarily rely on donation
and grants from government, NABARD and SIDBI etc.
Banks are also a source of funds for these MFIs.
Poor Quality of SHGs
Although there is huge growth in the quantity of SHGs
in the last decade, but the quality has suffered a lot. The
reasons for declining of quality are inadequate training
to staff, misutilization of funds, less knowledge, staff
shortage in financial institutions etc. There should be
focus on Information and Technology for monitoring the
working of SHGs.
Employees Training
Inadequate knowledge of working is also a major
challenge. Staff should be given periodical training. They
should have knowledge of all relevant issues. NABARD is
promoting technical assistance for the staff of banks. A
MIS should be developed to increase the efficiency of
MFIs.
Require Appropriate Inspection
The chunk of credit is given to small businesses,
housing loan, dairy, poultry farming, housing loan etc.
They may mismanage the amount of loan. There should
be appropriate system of inspection for proper
utilization of credit. Periodical training should be
imparted to the borrowers.
Political Meddling:
Too much political interference in MFIs may harm their
sustainable growth. Government should not make strict
rules and regulations. In 2010, Andhra Pradesh
Government has passed an Act, which includes a
number of measures that greatly restricts MFIs
workings. This Act of Andhra Pradesh Government has
put a destructive impact on microfinance sector. Recent
example of this can be taken from Andhra Pradesh
crisis2010. The act was passed on the basis of media
and Government speculation that MFIs are earning huge
profits by charging extraordinary high rate of interest.
The media also highlighted extreme example of suicides
linked to repayment stress. As a result of this Act loan
repayment dropped dramatically and Andhra Pradesh
which was the forefront of microfinance now became
the home of one of the largest group of blacklisted
creditors in the world. Thus, government should make a
regulatory frame work to strengthen the microfinance
movement rather than block innovation with rigid rules.
DEFINITION & EVOLUTION
OF
MICROFINANCE

FIJI NATIONAL MICROFINANCE WORKSHOP

Medium Term Strategy for Financial Inclusion in Fiji
4-5 November, 2009 Novotel, Lami
 WHAT IS MICROFINANCE

Microfinance is the provision of financial services for the poor

Services include savings, transfers, insurance and credit

Microfinance products are tailored to the demographics, financial
relationships and needs of the poor:

Use of collateral substitutes

Women clients

Take service to poor

Client participation

Incentivize repayment & loyalty

Delivered by many types of institutions – commercial banks, state
development banks, postal banks, MFI banks, NBFI, coops and CUs, rural
banks, NGOs, insurance coys, transfer payment coys, pawn shops, money
lenders, informal groups & MNOs

Microfinance means building financial systems that serve the
poor
HISTORY & EVOLUTION OF MICROFINANCE

INCLUSIVE FINANCE

MICROCREDIT – GRAMEEN,
ACCION, SEWA

FORMAL STATE OR
COOPERATIVE BANKS

COOPERATIVE &
PEOPLES BANK

INFORMAL CREDIT
& SAVINGS
 From the earliest of time in
traditional societies ……

Informal savings and credit groups have operated

for centuries across the developing world.
 In the Middle Ages…

1462: An Italian monk

created the first official
pawn shop to counter
usury practices.

1515: Pope Leon X

authorized pawn shops to
charge interest to cover
their operating costs.
In the eighteenth century…

Irish Loan Fund

System initiated

• provides small loans to poor farmers

who have no collateral.
• covers, at its peak, 20 percent of all
Irish households annually.
 In the nineteenth century…

From 1865, the

cooperative In 1895
In Germany,
movement Indonesian
emergence of
expands rapidly People’s Credit
larger and more
within Germany Banks (BPRs)
formal savings
became the
and credit and other
countries in largest
institutions that
Europe, North microfinance
focused
America, and system in
primarily on the
Indonesia, with
rural and urban eventually
developing close to 9,000
poor.
countries. branches.
In the early twentieth century…
Rural finance adaptations in Latin America aimed to:
• modernize the agricultural sector
• mobilize “idle” savings
• increase investment through credit
• reduce oppressive feudal relations that were
enforced through indebtedness

In most cases, these new

banks for the poor were owned
by government agencies

Over the years, these

institutions became inefficient
and, at times, corrupt.
 1950–1970: Efforts to expand
1950–
access to agricultural credit

These interventions were

rarely successful:
• Institutions went
bankrupt
Governments used state- • Subsidized lending
owned development rates did not cover
finance institutions to their costs, including
channel concessional the cost of massive
loans for agricultural default
credit
• Customers had poor
repayment discipline,
saw their loans as gifts
from the government
 1970s: Microcredit
Microcredit is Born!

Experimental programs extend tiny loans

to groups of poor women to invest in
micro-businesses. Early pioneers include:
• Grameen Bank in Bangladesh (winner of
Nobel Peace Prize)
• ACCION International in Latin America
• Self-Employed Women’s Association (SEWA),
India
1980s: Microcredit Programs
continue to improve
poor people, especially
women, paid their loans
more reliably than better-
off people with loans from
commercial banks

Microcredit programs poor people are willing and

improved on original able to pay interest rates
methodologies and proved that allow MFIs to cover
that: their costs.

Cost-recovery interest
rates and high repayment
permit MFIs to achieve
long-term sustainability
and reach large numbers of
clients.
 Early 1990s: “microcredit”
begins to be replaced by
Microfinance…
Microfinance …
Emphasis on
growing
MFIs transform
MFIs & their strong
into for-profit
networks pursue institutions is
companies that
strategy of a core
could attract
commercialization element of
more capital
this recent
history
 RECENT EVOLUTION OF MICROFINANCE

Financial
Systems
VISION

Directed INCLUSIVE
Credit 2000’s FINANCIAL
Private SYSTEMS
investment,
1990’s New players
Institutions
emerge,
&
1980’s sustainability
Technology
Donor leads
1970’s projects innovation
Agric
credit
 SHIFT IN APPROACHES

Role of Financial Stimulate Efficient

Markets production & intermediation
transfer resources
View of Users Beneficiaries Clients
(supply driven) (demand driven)

Sources of Subsidized funds Diverse pricing

Funds from donors & sources
or govts
Financial Loss making: Sustainability:
Performance depleting capital capitalization

Accountability Activity-based Performance

& Evaluations (focused on donor of institutions
objectives) & systems
 MICROFINANCE & POVERTY REDUCTION

Microfinance serves those that live around the poverty line

Destitute and very poor need other social safety nets and
protection

Poor people use microfinance for:

Smoothing consumption

Deal with emergencies (sickness, natural hazards)

Accumulate useful lump sums to seize opportunities (plus business)

Pay for large expenses (education, h/h assets, funeral, weddings)
 ….MICROFINANCE & POVERTY REDUCTION

Microfinance can help the poor by:

Raising or making more predictable h/h income

Building assets

Reducing their vulnerability to shocks

Empowering women

Research & debate on impact on poverty is ongoing

Microfinance remains:

Highly--valued services
Highly

Helps hundreds of millions of people

Stabilize consumption, finance major expenses, & cope with shocks

Despite incomes that are low, irregular, and unreliable
 ….MICROFINANCE & THE MDGS

1. Eradicate extreme poverty and hunger

2. Achieve universal primary education
3. Promote gender equality and empower women
4. Reduce child mortality
5. Improve maternal health
6. Combat HIV/AIDS, malaria, and other diseases
7. Ensure environmental sustainability
8. Develop a global partnership for development
 THE MICROFINANCE INDUSTRY

Maturing industry

150 m clients, 80 m borrowers

7,000 – 12,000 MFIs

MFIs transformed into banks

Banks providing microfinance

Non--FSPs providing financial services
Non

Mobile Network Operators
 …..THE MICROFINANCE INDUSTRY

104 active investment funds with assets of $6.5

billion

Donors & investors commit $4.5 billion per
year on microfinance

Rating Agencies, Social Performance,
Microinsurance

Nobel Peace Prize

Global standards established – CGAP, SEEP,
MIX Market
 CGAP

Consultative Group to Assist the Poor

Independent policy & research center to advancing
financial access for the world's poor

Supported by over 30 development agencies & private
foundations

Provides:

market intelligence

promotes standards

develops innovative solutions

offers advisory services to governments, microfinance
providers, donors & investors
 MICROFINANCE INFORMATION EXCHANGE

Microfinance Information Exchange

www.themix.org

Data on 1400 MFIs, over 100 investors & 200 partners

Promotes financial transparency in the industry

Reliable, comparable & publicly available information
on financial performance & social impact of MFIs

Match investors & donors with MFIs

Benchmarking - publishes the MicroBanking Bulletin
 www.themix.org

Peer review of 487 MFIs reporting to the MIX in

2007

NGOs 190, NBFIs 172, Banks 50, Rural Banks 40,
CUs 35

344 financially self-
self-sufficient

For--Profit 180, Not-
For Not-for-
for-Profit 307

Commercial funding liabilities ratio 76.4%

Borrowers 19.4 m, Women borrowers 63.4%

Operating Expense/Loan Portfolio 18.1%

Loans per staff member 124

PAR (> 30 days) 2.6%

Demonstrating some resilience to the GEFC
Microfinance in India: Legal &
Regulatory Framework
 Clarity of ownership
 Initial capital requirement and capital adequacy
 Ability to mobilise deposits
 Ability to raise equity
 Ability to raise grants
 Ability to raise funds from banks
 Regulatory authority
 Tax implications
 Type of MFI Legal Form

Not for Profit Entities Society, Trust and Section 25

Companies

For Profit Entities NBFC, Local Area Bank,RRBs

Mutual Benefit Entities Cooperatives,Cooperative Banks

• Societies can be registered under the Societies Registration
Act, 1860 or under respective state acts

• A society can be registered by any seven persons

associated for any literary, scientific or charitable purposes
by subscribing their names to a memorandum of
association and filing with the registrar

• Cannot accept public deposit

• Exemption from Income Tax

• Need registration under FCRA to be able to accept foreign

grants
 TRUSTS
• Public Trusts can be established under the respective state
regulations. Private trusts can be established under Indian
Trusts Act 1882.

• Cannot accept public deposits

• Exempt from Income Tax if registered under Section 12A of

the Income Tax Act.

• Need registration under FCRA to be able to accept foreign

grants
 Section 25 Companies are promoted for the purpose of
promotion of commerce, arts, religion, charity or any other
useful purpose with the intention to apply its profits, if any,
or other income in promoting only its objects

 They are prohibited from payment of dividends to

shareholders

 RBI has exempted NBFCs licensed under section-25 of the

Indian Companies Act from registration, maintenance of
liquid assets and transfer of profit to Reserve Funds, provided
they are engaged in micro-financing activities (Rs50,000 for
small businesses and Rs125,000 for housing)
 Registered under central/state/multi-state co-operative acts.

⇒ Regulated by Registrar of Co-operatives for registration,

management and audit
⇒ Regulated under the Banking Regulation Act, 1949 for licensing,
area of operations and interest rates

 Origins in cooperative credit societies which were organised to

provide credit to meet consumption needs of their members, and
relied on principles of thrift and self

 Urban cooperative banks were traditionally mandated to lend only

for non-agricultural purposes and were located in urban and peri-
urban areas
 Established by the Central Government through a notification in the official
gazette notification

 Minimum capital requirement is Rs 25 lakhs

 The share capital of the RRBs is required to be held by the Central

Government, State Government and Sponsor Bank in the ratio 50:15:35

 From the financial year 2006-07 RRBs have been brought under Income Tax
net

 RBI has also stipulated that RRBs need to maintain disclose Capital
Adequacy Ratio (CAR) starting March 2008
 RBI allowed the establishment of Local Area Bank in 1996 with a
view to providing institutional mechanisms for promoting rural
savings as well as for the provision of credit for viable economic
activities in the local areas
 LABs to observe priority sector lending targets at 40% of net
bank credit

 Lending primarily to agriculture and allied activities, SSI, agro-

industrial activities, trading activities and the non-farm sector
with a view to ensuring the provision of timely and adequate
credit to the local clientele in the area of operation

 LABs are registered as public limited companies under the Indian

Companies Act 1956

 Are allowed to operate in a maximum of three geographically

contiguous districts
• Minimum capital requirement for a LAB is Rs 5 crores

• Promoters of the bank may comprise individuals, corporate

entities, trusts and societies => Can mobilise deposits from
public

• Prudential norms related to banks are applicable

• At present only four LABs are functioning and no new

licenses are being issued
 Companies registered under Indian Companies Act 1956 can apply to RBI to carry on
the business of an NBFC (except Section 25 companies)

 NBFCs are for-profit entities and are taxable

 NBFCs are required to have net owned funds of Rs20 millions

⇒ Ownership can be defined precisely and they can raise equity, FDI
⇒ Mobilisation of public deposits allowed but under strict guidelines by RBI

 NBFCs are subject to prudential regulations regarding income recognition, asset

classification and provisioning, prudential exposure limits and accounting/disclosure
requirements provided they are mobilising public deposits
 Banks are comfortable lending to NBFCs which are well-capitalized and well-
performing