Non Banking Financial Companies

Structure Registered with and regulated by RBI Registered with and regulated by RBI LC, IC, ELC, HPFC, RNBC LC, IC, ELC, HPFC, RNBC Not registered with RBI, but it issues direction relating to deposit acceptance activity Not registered with RBI, but it issues direction relating to deposit acceptance activity MBFC(Notified Nidhis), MNBCs(Chit Funds) MBFC(Notified Nidhis), MNBCs(Chit Funds) Exempted from RBI regulation including requirement of registration by other regulatory authority Exempted from RBI regulation including requirement of registration by other regulatory authority Insurance co., Stock exchange, Stock broker, Merchant banking Co., Housing finance co. Insurance co., Stock exchange, Stock broker, Merchant banking Co., Housing finance co.

Definition : NBFC is an institution or company whose principle business is to accept deposits under any schemes or arrangement or in any other manner and to lend it any manner Definition : NBFC is an institution or company whose principle business is to accept deposits under any schemes or arrangement or in any other manner and to lend it any manner Any co. which carries on principal buss. Of agriculture act., industrial activity, trading in community, dealing in immovable properties etc. is not FIs. Any co. which carries on principal buss. Of agriculture act., industrial activity, trading in community, dealing in immovable properties etc. is not FIs.

Nature and Category- NBFIs Nature and Category- NBFIs NBFCsNBFSCs Loan Companies (LCs)MBs Investment Companies (ICs)VCs Hire Purchase Finance Companies (HPFCs)FACTORs Lease Finance Companies (LFCs)C-RATING Agency Housing Finance Companies (HFCs)Depositories Mutual Benefit Companies (MBFCs)& Custodial Services Residuary Non Banking Companies (RNBCs) Structure and Growth Structure and Growth Year Reported NBFCs NBFCs with Pub. Dep

Resources of NBFCs are derived from public deposits, Net owned funds, shareholders, directors, other co., borrowing by issue of non convertible debentures etc. Resources of NBFCs are derived from public deposits, Net owned funds, shareholders, directors, other co., borrowing by issue of non convertible debentures etc. Deposits means money received by NBFCs by way of deposits or loans or in any other form. Deposits means money received by NBFCs by way of deposits or loans or in any other form. a. Regulated deposits includes 1. Deposits received by shareholders 2. Deposits guaranteed by directors 3. Fixed deposits 4. Inter corporate deposits

b. Exempted deposits includes 1. Borrowings from banks and financial institutions 2. Money received from CG, SG and foreign govt.. 3. Security deposits 4. Advances received against orders 5. Convertible debentures Exempted deposits are far exceed than regulated deposits Exempted deposits are far exceed than regulated deposits

Regulation of NBFCs Regulation of NBFCs Minimum NOF of 25 lakhs and for new applicants NBFCs raised to 2 crores (Apr ’99) Minimum NOF of 25 lakhs and for new applicants NBFCs raised to 2 crores (Apr ’99) SLR – an amount of business on any day shall not be less than 15% public deposits SLR – an amount of business on any day shall not be less than 15% public deposits They have to maintain not 25% of their deposits in liquid form. They have to maintain not 25% of their deposits in liquid form. Reserve fund - not less than 20% of profit before dividend Reserve fund - not less than 20% of profit before dividend RBI now can direct them on issue of disclosures, prudential norms credit, investment. Etc RBI now can direct them on issue of disclosures, prudential norms credit, investment. Etc Period of deposit- 1. No DD deposits Period of deposit- 1. No DD deposits 2. NBFCs – 12 – 60 months 2. NBFCs – 12 – 60 months RNBC – 12 – 84 months RNBC – 12 – 84 months

Capital Adequacy ratio 10%(’88), 12%(’99), 15% currently Capital Adequacy ratio 10%(’88), 12%(’99), 15% currently RBI introduced ALM for NBFCs for effective risk management in their various portfolio(’02). Earlier ALM was only for NBFC which have asset size of 4 crores or public deposits of 200 crores or more. RBI introduced ALM for NBFCs for effective risk management in their various portfolio(’02). Earlier ALM was only for NBFC which have asset size of 4 crores or public deposits of 200 crores or more.

Deposits Net Owned Funds Quantum of PublicQuantum of Net Owned Funds Quantum of PublicQuantum of deposits for ELF/HP Public dep. For deposits for ELF/HP Public dep. ForLC/IC 1. Below Rs.25lakh With or without Credit RatingNilNil 2. Rs.25 lakh above without credit ratingPublic dep. Not excedg.1.5 time or Rs.10cr.(less)Nil 3. Rs.25 lakh< with 4 times of NOF Pub. Dep not minimum invest.Provided the excedg. 1.5 times grade credit Rateco. CAR=10%of NOF if CAR 15% CRISIL- FA; ICRA- MA; CARE-BBB(FD) CRISIL- FA; ICRA- MA; CARE-BBB(FD)

Types of NBFCs Types of NBFCs 1. Loan companies : any co. which is carrying on as its principle buss., the providing of finance whether by making loans and advances or otherwise for any other activity other than its own. 2. Investment companies : any company which is carrying on its principle business, the acquisition of securities. 3. Hire Purchase Finance companies : any company which is carrying on its principle business, hire purchased transactions or the financing of such transactions.

4. Lease finance companies : any company which is carrying on its principle business, the activity of leasing of equipment or the financing of such activity. 5. Housing finance : any company which is carrying on its principle business, the financing of acquisition or construction of houses including the acquisition or development of plots of land in connection therewith. 6. Mutual Benefit Financial companies : any company which is notified by the central government under section 620A of the Company act 1956.(Nidhis ) 7. Residuary Non Banking companies : All the non banking companies other than NBFCs and MBFCs falls into category of RNBCs.

Merchant Banks Merchant Banks Venture Capital funds Venture Capital funds 1. VC means taking risk in supplying capital. 2. VCF usually denotes MF or institutional investors 3. It is high risk-return business 4. It includes (a) Seed capital (b) Additional capital at various stages of growth (c) Bridge finance (c) Bridge finance (d) Leverage buyout (d) Leverage buyout (e) Capital to new entrepreneurs in foreign operations (e) Capital to new entrepreneurs in foreign operations (f) Capital to mature enterprises for expansion, diversification, restructuring etc. (f) Capital to mature enterprises for expansion, diversification, restructuring etc.

6. Broadly speaking three types of funding a. Early stage financingb. Expansion financing c. Acquisition buyout financing 7. Locational preference and ownership preference are basic preference,play crucial role in investment decision.other pref. are:- VC firm’s requirement VC firm’s requirement Characteristics of proposal Characteristics of proposal Characteristics of entrepreneurial team Characteristics of entrepreneurial team Nature of business Nature of business Economic environment Economic environment Strategy of proposed venture Strategy of proposed venture

7. Priority of Indian V C 8. VC activity over the years has been of three distinct kind in India:- Institutions backed Indian VC companies Institutions backed Indian VC companies IDBI IDBI UTI UTI TDICI TDICI RCTFC RCTFC Commercial Banks Commercial Banks Institutions backed MNC VC companies either by themselves or through joint ventures Institutions backed MNC VC companies either by themselves or through joint ventures Credit Capital Venture Fund (India) Ltd. Backed by Asian Development Bank, Commonwealth Development Corporation of UK Credit Capital Venture Fund (India) Ltd. Backed by Asian Development Bank, Commonwealth Development Corporation of UK VC start ups VC start ups

Credit Rating Credit Rating 1. Credit rating is the assessment of the borrower’s credit quality. It is an unbiased, objective and independent opinion as to an issuer’s capacity to meet its financial obligations. Credit rating is not a general evaluation of the issuing organisation. It essentially reflects the probability of timely repayment of principal and interest by a borrower company.

2. Features  Specificity: specific to debt instrument  Guidance: aims at furnishing guidance to investors/creditors  Not a recommendation  Broad parameters  No guarantee  Quantitative and qualitative: both factors are employed 7. Types Debt rating Debt rating Equity rating Equity rating Commercial paper rating Commercial paper rating Green rating Green rating