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What is a Non-Banking Financial Company (NBFC)?A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company).2. What does conducting financial activity as “principal business” mean?Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term 'principal business' is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.3. NBFCs are doing functions similar to banks. What is difference between banks & NBFCs?NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:i. NBFC cannot accept demand deposits;ii. NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;iii. deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.4. Is it necessary that every NBFC should be registered with RBI?In terms of Section 45-IA of the RBI Act, 1934, no Non-banking Financial company can commence or carry on business of a non-banking financial institution without a) obtaining a certificate of registration from the Bank and without having a Net Owned Funds of ₹ 25 lakhs (₹ Two crore since April 1999). However, in terms of the powers given to the Bank, to obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. Venture Capital Fund/Merchant Banking companies/Stock broking companies registered with SEBI, Insurance Company holding a valid Certificate of Registration issued by IRDA, Nidhi companies as notified under Section 620A of the Companies Act, 1956, Chit companies as defined in clause (b) of Section 2 of the Chit Funds Act, 1982,Housing Finance Companies regulated by National Housing Bank, Stock Exchange or a Mutual Benefit company.5. What are the requirements for registration with RBI?A company incorporated under the Companies Act, 1956 and desirous of commencing business of non-banking financial institution as defined under Section 45 I(a) of the RBI Act, 1934 should comply with the following:i. it should be a company registered under Section 3 of the companies Act, 1956ii. It should have a minimum net owned fund of ₹ 200 lakh. (The minimum net owned fund (NOF) required for specialized NBFCs like NBFC-MFIs, NBFC-Factors, CICs is indicated separately in the FAQs on specialized NBFCs)6. 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.7. What are the essential documents required to be submitted along with the application form to the Regional Office of the Reserve Bank?The application form and an indicative checklist of the documents required to be submitted along with the application is available at www.rbi.org.in → Site Map → NBFC List → Forms/ Returns.8. What are systemically important NBFCs?NBFCs whose asset size is of ₹ 500 cr or more as per last audited balance sheet are considered as systemically important NBFCs. The rationale for such classification is that the activities of such NBFCs will have a bearing on the financial stability of the overall economy.B. Entities Regulated by RBI and applicable regulations9. Does the Reserve Bank regulate all financial companies?No. Housing Finance Companies, Merchant Banking Companies, Stock Exchanges, Companies engaged in the business of stock-broking/sub-broking, Venture Capital Fund Companies, Nidhi Companies, Insurance companies and Chit Fund Companies are NBFCs but they have been exempted from the requirement of registration under Section 45-IA of the RBI Act, 1934 subject to certain conditions.Housing Finance Companies are regulated by National Housing Bank, Merchant Banker/Venture Capital Fund Company/stock-exchanges/stock brokers/sub-brokers are regulated by Securities and Exchange Board of India, and Insurance companies are regulated by Insurance Regulatory and Development Authority. Similarly, Chit Fund Companies are regulated by the respective State Governments and Nidhi Companies are regulated by Ministry of Corporate Affairs, Government of India. Companies that do financial business but are regulated by other regulators are given specific exemption by the Reserve Bank from its regulatory requirements for avoiding duality of regulation.It may also be mentioned that Mortgage Guarantee Companies have been notified as Non-Banking Financial Companies under Section 45 I(f)(iii) of the RBI Act, 1934. Core Investment Companies with asset size of less than ₹ 100 crore, and those with asset size of ₹ 100 crore and above but not accessing public funds are exempted from registration with the RBI.10. What are the different types/categories of NBFCs registered with RBI?NBFCs are categorized a) in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs, b) non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct. Within this broad categorization the different types of NBFCs are as follows:I. Asset Finance Company (AFC) : An AFC is a company which is a financial institution carrying on as its principal business the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments, moving on own power and general purpose industrial machines. Principal business for this purpose is defined as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.II. Investment Company (IC) : IC means any company which is a financial institution carrying on as its principal business the acquisition of securities,III. Loan Company (LC): LC means any company which is a financial institution carrying on as its principal business the providing of finance whether by making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.IV. Infrastructure Finance Company (IFC): IFC is a non-banking finance company a) which deploys at least 75 per cent of its total assets in infrastructure loans, b) has a minimum Net Owned Funds of ₹ 300 crore, c) has a minimum credit rating of ‘A ‘or equivalent d) and a CRAR of 15%.V. Systemically Important Core Investment Company (CIC-ND-SI): CIC-ND-SI is an NBFC carrying on the business of acquisition of shares and securities which satisfies the following conditions:-(a) it holds not less than 90% of its Total Assets in the form of investment in equity shares, preference shares, debt or loans in group companies;(b) its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its Total Assets;(c) it does not trade in its investments in shares, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;(d) it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the RBI act, 1934 except investment in bank deposits, money market instruments, government securities, loans to and investments in debt issuances of group companies or guarantees issued on behalf of group companies.(e) Its asset size is ₹ 100 crore or above and(f) It accepts public fundsVI. Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC) : IDF-NBFC is a company registered as NBFC to facilitate the flow of long term debt into infrastructure projects. IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity. Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.VII. Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit taking NBFC having not less than 85% of its assets in the nature of qualifying assets which satisfy the following criteria:a. loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding ₹ 1,00,000 or urban and semi-urban household income not exceeding ₹ 1,60,000;b. loan amount does not exceed ₹ 50,000 in the first cycle and ₹ 1,00,000 in subsequent cycles;c. total indebtedness of the borrower does not exceed ₹ 1,00,000;d. tenure of the loan not to be less than 24 months for loan amount in excess of ₹ 15,000 with prepayment without penalty;e. loan to be extended without collateral;f. aggregate amount of loans, given for income generation, is not less than 50 per cent of the total loans given by the MFIs;g. loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrowerVIII. Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking NBFC engaged in the principal business of factoring. The financial assets in the factoring business should constitute at least 50 percent of its total assets and its income derived from factoring business should not be less than 50 percent of its gross income.IX. Mortgage Guarantee Companies (MGC) - MGC are financial institutions for which at least 90% of the business turnover is mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business and net owned fund is ₹ 100 crore.X. NBFC- Non-Operative Financial Holding Company (NOFHC) is financial institution through which promoter / promoter groups will be permitted to set up a new bank .It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold the bank as well as all other financial services companies regulated by RBI or other financial sector regulators, to the extent permissible under the applicable regulatory prescriptions.11. What are the powers of the Reserve Bank with regard to 'Non-Bank Financial Companies’, that is, companies that meet the 50-50 Principal Business Criteria?The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.12. What action can be taken against persons/financial companies making false claim of being regulated by the Reserve Bank?It is illegal for any financial entity or unincorporated body to make a false claim of being regulated by the Reserve Bank to mislead the public to collect deposits and is liable for penal action under the Indian Penal Code. Information in this regard may be forwarded to the nearest office of the Reserve Bank and the Police.13. What action is taken if financial companies which are lending or making investments as their principal business do not obtain a Certificate of Registration from the Reserve Bank?If companies that are required to be registered with the Reserve Bank as NBFCs, are found to be conducting non-banking financial activity, such as, lending, investment or deposit acceptance as their principal business, without seeking registration, the Reserve Bank can impose penalty or fine on them or can even prosecute them in a court of law. If members of public come across any entity which does non-banking financial activity but does not figure in the list of authorized NBFC on RBI website, they should inform the nearest Regional Office of the Reserve Bank, for appropriate action to be taken for contravention of the provisions of the RBI Act, 1934.14. Where can one find list of Registered NBFCs and instructions issued to NBFCs?The list of registered NBFCs is available on the web site of Reserve Bank of India and can be viewed at www.rbi.org.in → Sitemap → NBFC List. The instructions issued to NBFCs from time to time are also hosted at www.rbi.org.in → Notifications → Master Circulars → Non-banking, besides, being issued through Official Gazette notifications and press releases.15. What are the regulations applicable on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore?The regulation on non-deposit accepting NBFCs with asset size of less than ₹ 500 crore would be as under:(i) They shall not be subjected to any regulation either prudential or conduct of business regulations viz., Fair Practices Code (FPC), KYC, etc., if they have not accessed any public funds and do not have a customer interface.(ii) Those having customer interface will be subjected only to conduct of business regulations including FPC, KYC etc., if they are not accessing public funds.(iii) Those accepting public funds will be subjected to limited prudential regulations but not conduct of business regulations if they have no customer interface.(iv) Where both public funds are accepted and customer interface exist, such companies will be subjected both to limited prudential regulations and conduct of business regulations.16. What does the term public funds include? Is it the same as public deposits?Public funds are not the same as public deposits. Public funds include public deposits, inter-corporate deposits, bank finance and all funds received whether directly or indirectly from outside sources such as funds raised by issue of Commercial Papers, debentures etc. However, even though public funds include public deposits in the general course, it may be noted that CICs/CICs-ND-SI cannot accept public deposits.Further, indirect receipt of public funds means funds received not directly but through associates and group entities which have access to public funds.17. What are the various prudential regulations applicable to NBFCs?The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements. Details of the prudential regulations applicable to NBFCs holding deposits and those not holding deposits is available in the section ‘Regulation – Non-Banking – Notifications - Master Circulars’ in the RBI website.18. Please explain the terms ‘owned fund’ and ‘net owned fund’ in relation to NBFCs?‘Owned Fund’ means aggregate of the paid-up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, after deducting therefrom accumulated balance of loss, deferred revenue expenditure and other intangible assets. 'Net Owned Fund' is the amount as arrived at above, minus the amount of investments of such company in shares of its subsidiaries, companies in the same group and all other NBFCs and the book value of debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group, to the extent it exceeds 10% of the owned fund.19. What are the responsibilities of the NBFCs registered with Reserve Bank, with regard to submission on compliances and other information?A. Returns to be submitted by deposit taking NBFCsNBS-1 Quarterly Returns on deposits in First Schedule.NBS-2 Quarterly return on Prudential Norms is required to be submitted by NBFC accepting public deposits.NBS-3 Quarterly return on Liquid Assets by deposit taking NBFC.NBS-4 Annual return of critical parameters by a rejected company holding public deposits. (NBS-5 stands withdrawn as submission of NBS 1 has been made quarterly.)NBS-6 Monthly return on exposure to capital market by deposit taking NBFC with total assets of ₹ 100 crore and above.Half-yearly ALM return by NBFC holding public deposits of more than ₹ 20 crore or asset size of more than ₹ 100 croreAudited Balance sheet and Auditor’s Report by NBFC accepting public deposits.Branch Info Return.B. Returns to be submitted by NBFCs-ND-SINBS-7 A Quarterly statement of capital funds, risk weighted assets, risk asset ratio etc., for NBFC-ND-SI.Monthly Return on Important Financial Parameters of NBFCs-ND-SI.ALM returns:(i) Statement of short term dynamic liquidity in format ALM [NBS-ALM1] -Monthly,(ii) Statement of structural liquidity in format ALM [NBS-ALM2] Half yearly,(iii) Statement of Interest Rate Sensitivity in format ALM -[NBS-ALM3], Half yearlyBranch Info returnC. Quarterly return on important financial parameters of non deposit taking NBFCs having assets of more than ₹ 50 crore and above but less than ₹ 100 croreBasic information like name of the company, address, NOF, profit / loss during the last three years has to be submitted quarterly by non-deposit taking NBFCs with asset size between ₹ 50 crore and ₹ 100 crore.There are other generic reports to be submitted by all NBFCs as elaborated in Master Circular on Returns to be submitted by NBFCs as available on www.rbi.org.in → Notifications → Master Circulars → Non-banking and Circular DNBS (IT) CC.No.02/24.01.191/2015-16 dated July 9, 2015 as available on www.rbi.org.in → Notifications.20. Whether the circular on Lending against shares dated August 21, 2014 is applicable to existing loans also?The Circular is applicable from the date of the circular and therefore the Circular shall not apply on those transactions which have been entered into prior to the date of the Circular. However, the guidelines will be applicable in case of roll-over/ renewal of loans. Guidelines will not apply to transactions where documents have been executed prior to the date of the circular and disbursement is pending.21. Will the circular on Lending against shares be applicable on restructured accounts?No. the Circular will not be applicable on restructured accounts22. Will the Circular on Lending against shares be applicable on those loans where the primary security is not shares/ units of mutual funds?Loans which are against the collateral of multiple securities and it is specifically agreed to in the agreement that primary security would be something other than shares/ units of mutual funds, LTV would not be applicable. However, reporting requirements shall remain. In cases where such differentiation is not made (thereby NBFCs can off-load shares at the instance of a default), LTV would be applicable.23. Whether LTV for loans issued against the collateral of shares is to be computed at scrip level or at portfolio level?LTV would be computed at portfolio level.24. Whether PoA/ Non-Disposal undertaking structure by whatever name called is covered under the Circular on Lending against shares?Yes, the Circular would be applicable and the type of encumbrance created is immaterial.25. Does the definition of “companies in a group” as given in Systemically Important Non-Banking Financial (non-deposit accepting or holding) companies Prudential Norms Directions, 2015 apply in respect of concentration of credit/ investment norms.No, the definition of “companies is a group” is only for the purpose of determining the applicability of prudential norms on multiple NBFCs in a group.26. Whether acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC within the same group i.e. intra group transfers require prior approval of the Bank?Yes, prior approval would be required in all cases of acquisition/ transfer of shareholding of 26 per cent or more of the paid up equity capital of an NBFC. In case of intra-group transfers, NBFCs shall submit an application, on the company letter head, for obtaining prior approval of the Bank. Based on the application of the NBFC, it would be decided, on a case to case basis, whether the NBFC requires to submit the documents as prescribed at para 3 of DNBR (PD) CC Kjøpesenter Gjøvik & Hamar. 065/03.10.001/2015-16 dated July 9, 2015 for processing the application of the company. In cases where approval is granted without the documents, the NBFC would be required to submit the same after the process of transfer is complete.27. NBFCs are charging high interest rates from their borrowers. Is there any ceiling on interest rate charged by the NBFCs to their borrowers?Reserve Bank of India has deregulated interest rates to be charged to borrowers by financial institutions (other than NBFC- Micro Finance Institution). The rate of interest to be charged by the company is governed by the terms and conditions of the loan agreement entered into between the borrower and the NBFCs. However, the NBFCs have to be transparent and the rate of interest and manner of arriving at the rate of interest to different categories of borrowers should be disclosed to the borrower or customer in the application form and communicated explicitly in the sanction letter etc.28. RBI permits NBFCs to hedge their exposure through dealing in IRFs. Currently, IRFs are on single stock 10 yr 8.40% 2024 security. The Composition of Balance Sheet is mix of fixed/ floating interest rate and different credit profile. Whether 10 yr single security can be used for hedging 2-3 yr liability and asset (Duration adjusted) or can be used for investment in other long tenor securities or corporate bonds. Alternatively, whether IRFs can be used holistically for hedging assets and liabilities in dynamic interest rate scenarios within total Balance Sheet amount and within hedging definition?IRF may be used to hedge interest rate risk associated with single asset/ liability or a group of assets/ liabilities. Hence, NBFCs are permitted to use duration based hedging for managing interest rate risk.29. Whether NBFCs as trading member can participate in the IRF market only for hedging or can also take trading position?As per extant guidelines NBFCs with asset size of ₹ 1,000 cr and above are permitted to participate in IRF as trading members. While, trading members of stock exchanges are permitted to execute trades on their own account as well as on account of their clients, banks and PDs have been allowed to deal in IRF for both hedging and trading on own account and not on client’s account. Similarly, NBFCs as trading members are permitted to execute their proprietary trades and not to undertake transactions on behalf of clients.C. Residuary Non-Banking Companies (RNBCs)30. What is a Residuary Non-Banking Company (RNBC)? In what way it is different from other NBFCs?Residuary Non-Banking Company is a class of NBFC which is a company and has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner and not being Investment, Asset Financing, Loan Company. These companies are required to maintain investments as per directions of RBI, in addition to liquid assets. The functioning of these companies is different from those of NBFCs in terms of method of mobilization of deposits and requirement of deployment of depositors' funds as per Directions. Besides, Prudential Norms Directions are applicable to these companies also.31. We understand that there is no ceiling on raising of deposits by RNBCs, then how safe is deposit with them?It is true that there is no ceiling on raising of deposits by RNBCs. However, every RNBC has to ensure that the amounts deposited with it are fully invested in approved investments. In other words, in order to secure the interests of depositor, such companies are required to invest 100 per cent of their deposit liability into highly liquid and secure instruments, namely, Central/State Government securities, fixed deposits with scheduled commercial banks (SCB), Certificate of Deposits of SCB/FIs, units of Mutual Funds, etc.32. Can RNBC forfeit deposit if deposit instalments are not paid regularly or discontinued?No. Residuary Non-Banking Company cannot forfeit any amount deposited by the depositor, or any interest, premium, bonus or other advantage accrued thereon.33. What is the rate of interest that an RNBC must pay on deposits and what should be maturity period of deposits taken by them?The minimum interest an RNBC should pay on deposits should be 5% (to be compounded annually) on the amount deposited in lump sum or at monthly or longer intervals; and 3.5% (to be compounded annually) on the amount deposited under daily deposit scheme. Interest here includes premium, bonus or any other advantage, that an RNBC promises to the depositor by way of return. An RNBC can accept deposits for a minimum period of 12 months and maximum period of 84 months from the date of receipt of such deposit. They cannot accept deposits repayable on demand. However, at present, the only RNBCs in existence (Peerless) has been directed by the Reserve Bank to stop collecting deposits, repay the deposits to the depositor and wind up their RNBC business as their business model is inherently unviable.D. Definition of deposits, Eligible / Ineligible Institutions to accept deposits and Related Matters34. What is ‘deposit’ and ‘public deposit’? Is it defined anywhere?The term ‘deposit’ is defined under Section 45 I(bb) of the RBI Act, 1934. ‘Deposit’ includes and shall be deemed always to have included any receipt of money by way of deposit or loan or in any other form but does not include:i. amount raised by way of share capital, or contributed as capital by partners of a firm;ii. amount received from a scheduled bank, a co-operative bank, a banking company, Development bank, State Financial Corporation, IDBI or any other institution specified by RBI;iii. amount received in ordinary course of business by way of security deposit, dealership deposit, earnest money, advance against orders for goods, properties or services;iv. amount received by a registered money lender other than a body corporate;v. amount received by way of subscriptions in respect of a ‘Chit’.Paragraph 2(1)(xii) of the Non-Banking Financial Companies Acceptance of Public Deposits ( Reserve Bank) Directions, 1998 defines a ‘ public deposit’ as a ‘deposit’ as defined under Section 45 I(bb) of the RBI Act, 1934 and further excludes the following:a. amount received from the Central/ State Government or any other source where repayment is guaranteed by Central/ State Government or any amount received from local authority or foreign government or any foreign citizen/ authority/ person;b. any amount received from financial institutions specified by RBI for this purpose;c. any amount received by a company from any other company;d. amount received by way of subscriptions to shares, stock, bonds or debentures pending allotment or by way of calls in advance if such amount is not repayable to the members under the articles of association of the company;e. amount received from directors of a company or from its shareholders by private company or by a private company which has become a public company;f. amount raised by issue of bonds or debentures secured by mortgage of any immovable property or other asset of the company subject to conditions;fa. any amount raised by issuance of non-convertible debentures with a maturity more than one year and having the minimum subscription per investor at ₹ 1 crore and above, provided it is in accordance with the guidelines issued by the Bank.g. the amount brought in by the promoters by way of unsecured loan;h. amount received from a mutual fund;i. any amount received as hybrid debt or subordinated debt;j. amount received from a relative of the director of an NBFC;k. any amount received by issuance of Commercial Paper.l. any amount received by a systemically important non-deposit taking non-banking financial company by issuance of ‘perpetual debt instruments’m. any amount raised by the issue of infrastructure bonds by an Infrastructure Finance CompanyThus, the directions exclude from the definition of public deposit, amount raised from certain set of informed lenders who can make independent decision.35. Which entities can legally accept deposits from public?Banks, including co-operative banks, can accept deposits. Non-bank finance companies, which have been issued Certificate of Registration by RBI with a specific licence to accept deposits, are entitled to accept public deposit. In other words, not all NBFCs registered with the Reserve Bank are entitled to accept deposits but only those that hold a deposit accepting Certificate of Registration can accept deposits. They can, however, accept deposits, only to the extent permissible. Housing Finance Companies, which are again specifically authorized to collect deposits and companies authorized by Ministry of Corporate Affairs under the Companies Acceptance of Deposits Rules framed by Central Government under the Companies Act can also accept deposits also upto a certain limit. Cooperative Credit Societies can accept deposits from their members but not from the general public. The Reserve Bank regulates the deposit acceptance only of banks, cooperative banks and NBFCs.It is not legally permissible for other entities to accept public deposits. Unincorporated bodies like individuals, partnership firms, and other association of individuals are prohibited from carrying on the business of acceptance of deposits as their principal business. Such unincorporated bodies are prohibited from even accepting deposits if they are carrying on financial business.36. Can all NBFCs accept deposits? Is there any ceiling on acceptance of Public Deposits? What is the rate of interest and period of deposit which NBFCs can accept?All NBFCs are not entitled to accept public deposits. Only those NBFCs to which the Bank had given a specific authorisation and have an investment grade rating are allowed to accept/ hold public deposits to a limit of 1.5 times of its Net Owned Funds. All existing unrated AFCs that have been allowed to accept deposits shall have to get themselves rated by March 31, 2016. Those AFCs that do not get an investment grade rating by March 31, 2016, will not be allowed to renew existing or accept fresh deposits thereafter. In the intervening period, i.e. till March 31, 2016, unrated AFCs or those with a sub-investment grade rating can only renew existing deposits on maturity, and not accept fresh deposits, till they obtain an investment grade rating.However, as a matter of public policy, Reserve Bank has decided that only banks should be allowed to accept public deposits and as such has since 1997 not issued any Certificate of Registration (CoR) to new NBFCs for acceptance of public deposits.Presently, the maximum rate of interest an NBFC can offer is 12.5%. The interest may be paid or compounded at rests not shorter than monthly rests. 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.37. In respect of companies which do not fulfill the 50-50 criteria but are accepting deposits – do they come under RBI purview?A company which does not have financial assets which is more than 50% of its total assets and does not derive at least 50% of its gross income from such assets is not an NBFC. Its principal business would be non-financial activity like agricultural operations, industrial activity, purchase or sale of goods or purchase/construction of immoveable property, and will be a non-banking non-financial company. Acceptance of deposits by a Non-Banking Non-Financial Company are governed by the rules and regulations issued by the Ministry of Corporate Affairs.38. Why is the RBI so restrictive in allowing NBFCs to raise public deposits?The Reserve Bank's overarching concern while supervising any financial entity is protection of depositors' interest. Depositors place deposit with any entity on trust unlike an investor who invests in the shares of a company with the intention of sharing the risk as well as return with the promoters. Protection of depositors' interest thus is supreme in financial regulation. Banks are the most regulated financial entities. The Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits up to ₹ One lakh in case a bank failed.39. Which are the NBFCs specifically authorized by RBI to accept deposits?The Reserve Bank publishes the list of NBFCs that hold a valid Certificate of Registration for accepting deposits on its website: www.rbi.org.in → Sitemap → NBFC List → List of NBFCs Permitted to Accept Deposits. At times, some companies are temporarily prohibited from accepting public deposits. The Reserve Bank publishes the list of NBFCs temporarily prohibited also on its website. The Reserve Bank keeps both these lists updated. Members of the public are advised to check both these lists before placing deposits with NBFCs.40. Whether NBFCs can accept deposits from NRIs?Effective from April 24, 2004, NBFCs cannot accept deposits from NRIs except deposits by debit to NRO account of NRI provided such amount does not represent inward remittance or transfer from NRE/FCNR (B) account. However, the existing NRI deposits can be renewed.41. Can a Co-operative Credit Society accept deposits from the public?No. Co-operative Credit Societies cannot accept deposits from general public. They can accept deposits only from their members within the limit specified in their bye laws.42. Can a Salary Earners’ Society accept deposits from the public?No. These societies are formed for salaried employees and hence they can accept deposit only from their own members and not from general public.43. Is nomination facility available to the Depositors of NBFCs?Yes, nomination facility is available to the depositors of NBFCs. The Rules for nomination facility are provided for in section 45QB of the Reserve Bank of India Act, 1934. Non-Banking Financial Companies have been advised to adopt the Banking Companies (Nomination) Rules, 1985 made under Section 45ZA of the Banking Regulation Act, 1949. Accordingly, depositor/s of NBFCs are permitted to nominate one person to whom the NBFC can return the deposit in the event of the death of the depositor/s. NBFCs are advised to accept nominations made by the depositors in the form similar to one specified under the said rules, viz Form DA 1 for the purpose of nomination, and Form DA2 and DA3 for cancellation of nomination and change of nomination respectively.44. How does the Reserve Bank come to know about unauthorized acceptance of deposits by companies not registered with it or of NBFCs engaged in lending or investment activities without obtaining the Certificate of Registration from it?NBFCs that ought to have sought registration from RBI but are functioning without doing so are committing a breach of law. Such companies are liable for action as envisaged under the RBI Act, 1934. To identify such entities, RBI has multiple sources of information. These include market intelligence, complaints received from affected parties, industry sources, and exception reports submitted by statutory auditors in terms of Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2008. Further, the State Level Co-ordination Committees (SLCC) is convened by RBI in all the States/UTs on quarterly basis. The SLCC is now chaired by the Chief Secretary/ Administrator of the concerned State/UT and has, as its members, apart from the Reserve Bank, the Regional Directorate of the MCA/ ROC, local unit of SEBI, NHB, Registrar of Chits, ICAI, Economic Intelligence Unit of the State Police and officials from Law and Home Ministries of the State Government. As all the relevant financial sector regulators and enforcement agencies participate in the SLCC, it is possible to quickly share the information and agree on an effective course of action to be taken against entities indulging in unauthorized and suspect businesses involving funds mobilization from public.45. Can Proprietorship/Partnership Concerns associated/not associated with registered NBFCs accept public deposits?No. Proprietorship and partnership concerns are un-incorporated bodies. Hence they are prohibited under the RBI Act 1934 from accepting public deposits.46. There are many jewellery shops taking money from the public in instalments. Is this amounting to acceptance of deposits?It depends on whether the money is received as advance for delivering jewellery at a future date or whether the money is received with a promise to return the same with interest. The money accepted by Jewellery shops in instalments for the purpose of delivering jewellery at the end of the period of contract is not deposit. It will amount to acceptance of deposits if in return for the money received, the jewellery shop promises to return the principal amount along with interest.47. What action can be taken if such unincorporated entities accept public deposits? What if NBFCs which have not been authorized to accept public deposits use proprietorship/partnership firms floated by their promoters to collect deposits?Such unincorporated entities, if found accepting public deposits, are liable for criminal action. Further NBFCs are prohibited by RBI from associating with any unincorporated bodies. If NBFCs associate themselves with proprietorship/partnership firms accepting deposits in contravention of RBI Act, they are also liable to be prosecuted under criminal law or under the Protection of Interest of Depositors (in Financial Establishments) Act, if passed by the State Governments.48. What is the difference between acceptance of money by Chit Funds and acceptance of deposits?Deposits are defined under the RBI Act 1934 as acceptance of money other than that raised by way of share capital, money received from banks and other financial institutions, money received as security deposit, earnest money and advance against goods or services and subscriptions to chits. All other amounts, received as loan or in any form are treated as deposits. Chit Funds activity involves contributions by members in instalments by way of subscription to the Chit and by rotation each member of the Chit receives the chit amount. The subscriptions are specifically excluded from the definition of deposits and cannot be termed as deposits. While Chit funds may collect subscriptions as above, they are prohibited by RBI from accepting deposits with effect from August 2009.E. Depositor Protection Issues49. What are the salient features of NBFC regulations which the depositor may note at the time of investment?Some of the important regulations relating to acceptance of deposits by NBFCs are as under: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.NBFCs cannot offer interest rates higher than the ceiling rate prescribed by RBI from time to time. The present ceiling is 12.5 per cent per annum. The interest may be paid or compounded at rests not shorter than monthly rests.NBFCs cannot offer gifts/incentives or any other additional benefit to the depositors.NBFCs should have minimum investment grade credit rating.The deposits with NBFCs are not insured.The repayment of deposits by NBFCs is not guaranteed by RBI.Certain mandatory disclosures are to be made about the company in the Application Form issued by the company soliciting deposits.50. What precautions should a depositor take before placing deposit with an NBFC?A depositor wanting to place deposit with an NBFC must take the following precautions before placing deposits:That the NBFC is registered with RBI and specifically authorized by the RBI to accept deposits. A list of deposit taking NBFCs entitled to accept deposits is available at www.rbi.org.in → Sitemap → NBFC List. The depositor should check the list of NBFCs permitted to accept public deposits and also check that it is not appearing in the list of companies prohibited from accepting deposits, which is available at www.rbi.org.in → Sitemap → NBFC List → NBFCs who have been issued prohibitory orders, winding up petitions filed and legal cases under Chapter IIIB, IIIC and others.NBFCs have to prominently display the Certificate of Registration (CoR) issued by the Reserve Bank on its site. This certificate should also reflect that the NBFC has been specifically authorized by RBI to accept deposits. Depositors must scrutinize the certificate to ensure that the NBFC is authorized to accept deposits.The maximum interest rate that an NBFC can pay to a depositor should not exceed 12.5%. The Reserve Bank keeps altering the interest rates depending on the macro-economic environment. The Reserve Bank publishes the change in the interest rates on www.rbi.org.in → Sitemap → NBFC List → FAQs.The depositor must insist on a proper receipt for every amount of deposit placed with the company. The receipt should be duly signed by an officer authorized by the company and should state the date of the deposit, the name of the depositor, the amount in words and figures, rate of interest payable, maturity date and amount.In the case of brokers/agents etc collecting public deposits on behalf of NBFCs, the depositors should satisfy themselves that the brokers/agents are duly authorized by the NBFC.The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.The Reserve Bank of India does not accept any responsibility or guarantee about the present position as to the financial soundness of the company or for the correctness of any of the statements or representations made or opinions expressed by the company and for repayment of deposits/discharge of the liabilities by the company.51. Does RBI guarantee the repayment of the deposits collected by NBFCs?No. The Reserve Bank does not guarantee repayment of deposits by NBFCs even though they may be authorized to collect deposits. As such, investors and depositors should take informed decisions while placing deposit with an NBFC.52. In case an NBFC defaults in repayment of deposit what course of action can be taken by depositors?If an NBFC defaults in repayment of deposit, the depositor can approach Company Law Board or Consumer Forum or file a civil suit in a court of law to recover the deposits. NBFCs are also advised to follow a grievance redress procedure as indicated in reply to question 57 below. Further, at the level of the State Government, the State Legislations on Protection of Interest of Depositors (in Financial Establishments) empowers the State Governments to take action even before the default takes place or complaints are received from depositors. If there is perpetration of an offence and if the intention is to defraud, the State Government can even attach properties.53. What is the role of Company Law Board in protecting the interest of depositors? How can one approach it?When an NBFC fails to repay any deposit or part thereof in accordance with the terms and conditions of such deposit, the Company Law Board (CLB) either on its own motion or on an application from the depositor, directs by order the Non-Banking Financial Company to make repayment of such deposit or part thereof forthwith or within such time and subject to such conditions as may be specified in the order. After making the payment, the company will need to file the compliance with the local office of the Reserve Bank of India.As explained above, the depositor can approach CLB by mailing an application in prescribed form to the appropriate bench of the Company Law Board according to its territorial jurisdiction along with the prescribed fee.

RBI is usual WHITE ELEPHANT Government department, their stories of inefficiencies are well known.FAILURE OF RBI IN DEVELOPING A HEALTHY MONEY MARKET IN INDIA, STIFLING CONTROLS AND LACK OF IMAGINATION IN POLICY MAKEOVER:1. ABSENCE OF CO-ORDINATION IN THE MONEY-MARKET:There is no proper co-ordination among the different sectors of Indian Money-market.The Indigenous Bankers even to-day lie out-side the purview of the control of the Reserve Bank.This is one of the important causes of the failure of the Reserve Bank of India.2. ABSENCE OF PROPER BANKING FACILITIES:The present banking facilities are not adequate, if we study it with the area of the country and its population, we can safely come to the conclusion that there are number of places where no banking facilities are available. Therefore, it can be said that Reserve Bank has not succeeded in removing this short-coming in the Indian banking system.3. THERE IS NO UNIFORMITY IN INTEREST RATES:Due to lack of co-ordination in the Indian money-market, a great diversity of interest rates is found in different parts of the country. This diversity can be considered as a major cause of failure of the Reserve Bank.4. ABSENCE OF WELL-DEVELOPED BILL MARKET:The development of the bill market is not adequate for the country. Reserve Bank has not been able to develop this market suitably and effectively.5. NO PROPER AND ADEQUATE DEVELOPMENT OF AGRICULTURE CREDIT:There is no doubt that the Reserve Bank has taken several steps for the agricultural credit, yet it has not been possible to bring about an adequate development of this credit in the country. Even to-day sufficient credit at reasonable rates is not available to the farmers for agricultural purposes.6. RESERVE BANK IS SIMPLY A TOOTHLESS WATCH DOG:In-spite of the wide powers of Reserve Bank, but the truth is that the bank has turned out to be a toothless watch dog in performing its role as the coordinator, controller and regulator of India’s banking system.7. FAILURE TO FUNCTION AS THE LENDER OF THE LAST RESORT:As a lender of the last resort it is expected that the Reserve Bank will extend its protection to the member banks against banking crisis. But unfortunately this hope has not been fulfilled. Several banks failed in the country but the Reserve Bank could not save them from failure8. RESERVE BANK HAS FAILED TO SECURE EQUITABLE SHARE FOR THE INDIAN BANKS IN FOREIGN EXCHANGE BUSINESS:In India the foreign exchange banks continue to enjoy almost complete monopoly of the foreign exchange business. The Reserve Bank has failed to secure to the Indian banks a proper and equitable share in the foreign exchange business of the country.9. INSTABILITY SITUATION IN THE INTERNAL VALUE OF THE RUPEE:The Reserve Bank is not able to maintain the stability in the internal value of rupee which is considered as a great failure of the Reserve Bank. The inflation has produced adverse repercussions on the economic situation of the country. Though, the Reserve Bank has adopted several anti-inflationary measures, it has not been able to make any significant impact on the monetary situation in the country._____________________We have some excerpts from RBI PublicationIII. EVOLUTION OF BANKING IN INDIAhttps://www.rbi.org.in/scripts/PublicationsView.aspx?id=10487Bank Failures and Liquidation/Consolidation of Smaller Banks3.43 The partition of the country hurt the domestic economy, and the banking sector was no different. Of the 84 banks operating in the country in the organised sector before partition, two banks were left in Pakistan. Many of the remaining banks in two States of Punjab and West Bengal were deeply affected. In 1947, 38 banks failed, of which, 17 were in West Bengal alone, having total paid-up capital of Rs.18 lakh. The paid-up capital of banks that failed during 1947 amounted to a little more than 2 per cent of the paid-up capital of the reporting banks.15 The average capital of the failed banks between 1947 and 1955 was significantly lower than the average size of paid-up capital of reporting banks in the industry, suggesting that normally it was small banks that failed (Table 3.12).3.44 The year 1948 was one of the worst years for the relatively larger banks as 45 institutions (out of more than 637 banks) with paid-up capital averaging about Rs.4 lakh were closed down. They failed as they had over-reached themselves by opening more branches than they could sustain on the strength of their resources and by making large loans against property or inadequate security. Some of these, however, had prudential issues as they were functioning with very low capital base. Repeated bank failures caused great hardships to the savers. Failures also reduced faith in the banking system. Most of the savings during this period were in the for m of land and gold. Household savings constituted 66 per cent of the total domestic savings. Of the total household savings, 89 per cent were in physical assets.16 Financial savings flowed in greater measure to the postal department that was considered a safer avenue due to government ownership. Bank deposits mobilised by commercial banks were largely lent out to security based borrowers in trade and industry.3.45 The first task before the Reserve Bank after independence, thus, was to develop a sound structure along contemporary lines. It was recognised that banks and banking soundness were crucial in promoting economic prosperity and stability. Banks, through their spread and mobilisation of deposits, promote the banking habits and savings in the economy. This could help in garnering resources for investment and development. The initiation of planned economic development required the banking industry to spread far and wide to augment deposit mobilisation and provide banking services.3.46 The issue of bank failure in some measure was addressed by the Banking Companies Act, 1949 (later renamed as the Banking Regulation Act), but to a limited extent. The Banking Companies Act of 1949 conferred on the Reserve Bank the extensive powers for banking supervision as the central banking authority of the country.17 It focused on basic prudential features for protecting the interests of depositors and covered various aspects such as organisation, management, audit and liquidation of the banking companies. It granted the Reserve Bank control over opening of new banks and branch offices, powers to inspect books of accounts of the banking companies and preventing voluntary winding up of licensed banking companies. The Act was the first regulatory step by the Government of independent India, enacted with a view to streamlining the functioning and activities of commercial banks in India. The Act was long overdue as the Indian Central Banking Enquiry Committee had, in 1931, recommended the enactment of such an Act for India. The most effective of the supervisory powers conferred on the Reserve Bank was the power to inspect banking companies at any time. The Reserve Bank was empowered to inspect any banking company with the objective of satisfying itself regarding the eligibility for a licence, opening of branches, amalgamation, compliance with the directives issued by the Reserve Bank. A key feature contained in this Act was to describe BANKING as distinct from other commercial operations. This was in line with the traditional role of commercial banks, where banks were considered as a special entity in the financial system, requiring greater attention and separate treatment (Selgin, 1996).3.47 The Banking Companies Act, however, had some limitations. It did not have adequate provisions against abuse of the powers by persons, who controlled the commercial banks’ managements. The Reserve Bank in July 1949 decided to organise efficient machinery for the systematic and periodical inspection of all banking companies in the country, irrespective of their size and standing. The ultimate aim was to create an organisation for the annual inspection of every bank. It was made clear that the primary objective of the inspections was to assist the banks in the establishment of sound banking traditions by drawing their attention to defects or unsatisfactory features in their working methods before they assumed serious proportions necessitating drastic action. The task of evolving an efficient machinery and organisation for conducting the inspections of all the banks was a formidable one.3.48 Bank failures continued in the period after independence and after the enactment of the Banking Companies Act, although such failures reduced considerably. In order to protect public savings, it was felt that it would be better to wind up insolvent banks or amalgamate them with stronger banks. Accordingly, in the 1950s, efforts were tuned towards putting in place an enabling legislation for consolidation, compulsory amalgamation and liquidation of banks. This was required as the then existing procedure for liquidation was long and time consuming. It involved proceedings in the High Court and caused significant cost and hardship to the depositors. Similarly, the suspension of business was also a long drawn process for licensed banking companies as it involved declaration of moratorium, appointment of official liquidator by the High Court and inspection of the books and accounts of the respective banking companies by the Reserve Bank. Voluntary winding up was an easy exit route for banking companies that were not granted a licence under Section 22, as the provisions of Section 44 did not apply to such banking companies and the prior permission of the Reserve Bank was not required before voluntary liquidation of such companies. This made it easy for the fly-by-night operators to voluntarily wind-up their operations. Many non-scheduled banks, especially in West Bengal became untraceable. Of the 165 non-scheduled banks reported to exist in June 1954, the whereabouts of 107 banks were not known.18 The licence of all of these and the remaining non-scheduled banks, barring six, was cancelled.3.49 The Travancore- Cochin region also had a large number of small banks. According to a survey by Travancore-Cochin Inquiry Committee in 1954, out of 163 banks in the region, as many as 136 were small set up in hamlets. Of these, only 16 had deposits above Rs.40 lakh. The working capital of 95 banks was less than Rs.10 lakh. Thirty-nine banks had capital and reserves below the level applicable to them under Section 11 of the Banking Companies Act 1949. The Committee suggested that these banks be given time to enhance their capital. Eighteen banks were refused licences. Elsewhere in India, the banks faced fewer problems. At the all-India level, in December 1957, only 21 banks were refused licences as they were beyond repair.3.50 Even some bigger banks such as the Palai Central Bank were not performing well. Their performance was marred by the poor level of reserves and high percentage of unsecured advances. The Reserve Bank’s Committee of the Central Board in October 1952 considered the possibility of the bank being excluded from the second schedule of the Reserve Bank Act on the basis of the irregularities as pointed out by the inspection report.19 The Reserve Bank had two options, viz., to exercise its powers to close the bank or to nurse it back to normalcy. The first option was easy but was fraught with risks that it might precipitate a systemic crisis. The second option was more difficult. With the interest of depositors in mind, the Palai Bank was given time to improve its working and it was placed under moratorium. However, the bank failed in 1960. There was a public and parliamentary outcry after this failure that speeded up the move towards the requisite legislation to tackle bank failures.3.51 In the wake of this development, amalgamation of banks was seen as a solution. The moratorium and consequent amalgamation of the Kerala banks ushered in a new era of rapid consolidation of the Indian banking system. Accordingly, the Banking Companies (Amendment) Act 1961 was enacted that sought, inter alia, to clarify and supplement the provisions under Section 45 of the Banking Companies Act, which related to compulsory reconstruction or amalgamation of banks. The Act enabled compulsory amalgamation of a banking company with the State Bank of India or its subsidiaries. Until that time, such amalgamation was possible with only another banking company. The legislation also enabled amalgamation of more than two banking companies by a single scheme. Detailed provisions relating to conditions of service of employees of banks, subject to reconstruction or amalgamation, were also laid down.3.52 Between 1954 and 1966, several banks were either amalgamated or they otherwise ceased to function or their liabilities and assets transferred to other banks. During the six year period before the Reserve Bank was formally given the powers in 1960 to amalgamate banks, a total number of 83 banks were amalgamated. However, between the period from 1960 to 1966, as many as 217 banks were amalgamated under different provisions such as under Section 45 of the BR Act 1949 (compulsory amalgamation) and Section 44 A of BR Act 1949 (voluntary amalgamation). Liabilities and assets of those banks which otherwise ceased to function were transferred to other banks. In the year 1960 alone, as many as 30 banks were amalgamated. However, as a conscious policy, the smaller but well-functioning banks were not consolidated. The transferring the assets and liabilities to other banks proved to be a popular exit route. In 1964 alone, as many as 63 banks went out of business (Table 3.13). The process of bank consolidation was accompanied by a vigorous bank licensing policy, wherein the Reserve Bank tried to amalgamate the unviable units. A number of banks that did not comply with the requisite norms were also delicensed.3.53 The process of strengthening of the banking sector also took the form of weeding out the unviablebanks by liquidation or the taking of the assets of the non-functioning banks by other banks. During the period 1954 to 1959 as many as 106 banks were liquidated. Of these, 73 banks went into voluntary liquidation and 33 went into compulsory liquidation. Between 1960 to 1966, another 48 banks went into liquidation (Table 3.14).3.54 The policy of strengthening of the banking sector through a policy of compulsory amalgamation and mergers helped in consolidating the banking sector. The success of this could be gauged from the visible reduction in the number of non-scheduled banks from 474 in 1951 to 210 in 1961 and further to 20 in 1967. Their branch offices declined from 1504 in 1951 to 622 in 1961 and to 203 in 1967 (Table 3.15).3.55 The bank failures and the hardship caused to the depositors led the Reserve Bank to provide safety nets to depositors. The Banking Companies (Second Amendment) Act, 1960, which came into force in September 19, 1960 sought to facilitate expeditious payments to the depositors of banks in liquidation and also vested the Government and the Reserve Bank with additional powers to rehabilitate banks in difficulties. Prior to the Amendment, the procedure for determination of claims of secured creditors and other persons entitled to preferential treatment was mainly responsible for a good deal of delay in the payment to depositors of banks in liquidation. The new provision required that such preferential payment should be made or provided for within three months from the date of the winding-up order or within three months from the date of commencement of the Amendment Act in respect of banks which had gone into liquidation earlier. It further provided that after the preferential payments, the three-month period as specified in the Act, every saving bank depositor should be paid the balance at his credit, subject to a maximum of Rs.250.3.56 In order to ensure the safety of deposits of small depositors in banks in India, the Deposit Insurance Corporation Act, 1961 was enacted. Accordingly, Deposit Insurance Corporation of India was established in January 1962. India was then one of the few countries to introduce such a deposit insurance; the US was the first country to introduce the deposit insurance. This scheme was expected to increase depositor’ confidence in the banking system and was expected to facilitate the mobilisation of deposits and help promote the spread and growth of the banking sector. The Corporation provided insurance cover against loss of all or part of deposits with an insured bank up to a certain level.3.57 As a regulator of the banking system, the Reserve Bank was empowered by the Banking Companies Act to inspect banks. The instances of failures of banks in Kerala that occurred due to misappropriation of depositors’ funds by directors underscored the need to strengthen the mechanism of inspection. Accordingly, changes in the policy regarding inspection were made to undertake surprise inspection of banks, and cover many more branches than in the past to detect frauds. The legislative changes that followed took shape in the insertion of a new Chapter IIIA in the RBI Act in 1962. The entire purpose of regulation of banking was to plug the loopholes in law that permitted any irregularity. An amendment Act passed in 1963, which became effective February 1, 1964, gave further powers to the Reserve Bank, particularly to restrain the control exercised by particular groups of persons over the affairs of banks and to restrict loans and advances as well as guarantees given by banks. It also enlarged the Reserve Banks’ powers of control in the appointment and removal of banks’ executive personnel._____________________Recently an article appeared in the LiveMint:Does India really need to identify too-big-to-fail banks?http://www.livemint.com/Money/gB7N7LAJaehxUhGlHSp6cK/Does-India-really-need-to-identify-toobigtofail-banks.htmlThe FRDI Bill proposes to create a framework for overseeing financial institutions such as banks, insurance companies, non-banking financial services (NBFC) companies and stock exchanges in case of insolvency. The “Resolution Corporation”, proposed in the draft bill, would look after the process and prevent the banks from going bankrupt. It would do this by “writing down of the liabilities, a phrase some have interpreted as a bail-in.It was felt that just like the resolution plan for borrower manufacturers i.e. in the form of Bankruptcy Code, there should be a law backing resolution mechanism for a failing lender banking companies (Banks) also.Another angle to it may be that in a Crisis situation, without bail-in entire economy would crash due to uncontrollable chain reaction, it is a prophylactic emergency step.Most regulators had thought that there were only two options for troubled institutions in 2008: taxpayer (Government) bailouts or a systemic collapse of the banking system.Bail-ins soon emerged as an attractive third option to recapitalize troubled institutions from within, by having creditors agree to rollover their short-term claims or engage in a restructuring. The result is a stronger financial institution that isn't indebted to governments or external influencers — only its own creditors.When those who are the most culpable in financial failures of Banks i.e. the regulators, government officials (finance ministry personnel) and Bank personnel are totally left unaccountable. Creditors, who have nothing to do with either bank mismanagement or regulatory failure, are asked to suffer. Banks fail due to mismanagement, negligence/ refusal to comply with regulatory framework, tendency towards window-dressing of annual reports and compliance needs, probable graft, nepotism, misdirected patronage of illegal activities, political clout, friendly pressure, corrupt purpose of Bank employees and Regulator or due to sabotage by infiltration of competitors in your organization.Banking Regulation Act, 1949 provides a framework using which commercial banking in India is supervised and regulated. The Act supplements the Companies Act. The Act gives the Reserve Bank of India (RBI) the power to license banks, have regulation over shareholding and voting rights of shareholders; supervise the appointment of the boards and management; regulate the operations of banks; lay down instructions for audits; control moratorium, mergers and liquidation; issue directives in the interests of public good and on banking policy, and impose penalties. It should include the creditors also, in running/ managing Banks.Now, will government/ regulator give the creditors option of representation in management of these business in a quid pro quo for Bail-ins as first principle? Will the Government agree for Creditors’ representatives in the Board of a normally functioning healthy Bank so that the creditors can have a say in running the Bank prudently?There should be Trusts formed representing every category of Creditors, e.g. Savings Bank Deposit holder’s Trust, Fixed Deposit holder’s Trust etc etc and then these Trusts should get representation in the Board.Then, what is the gist of changes for Creditors in The FRDI Bill, At present if a bank becomes insolvent, a depositor gets nothing over and above the insurance limit (of Rs 1 lakh).But in case a bank becomes insolvent in FRDI bill regime, the depositor gets the insurance amount (unspecified, surely an enhanced amount, to be decided later after the bill is enacted) and the balance gets converted into a longer term instrument (i.e. money is not lost).The contrast is clear. The depositor at least can stake claim over his money once the FRDI Bill (in its current form) comes. Unlike the past where he has to say goodbye to anything above Rs 1 lac.Politicians of various stripes have started to raise red flags about a provision in a bill that the present Indian government intends to move in the Lok Sabha in the upcoming winter session, which could theoretically allow beleaguered banks and financial institutions to scoop up depositors' money to stop them from going bust.It is called a "bail-in" - a concept coined during the European banking crisis of 2008-09 - which has been wormed into THE FINANCIAL RESOLUTION AND DEPOSIT INSURANCE (FRDI) BILL.When a bail-in is triggered, a bank's depositors run the risk of being forced to bear a part of the burden of recapitalising the entity. In effect, a part of their deposits may have to be written off. That is what happened to bondholders and depositors in Cyprus banks with more than 100,000 euros in their accounts.Finance ministry officials have said there is no cause for alarm and the provision is meant to ensure emergency capital for banks. They pointed out that banks in India have been fairly well regulated and there have been very few bank failures since 1969 when banks were nationalised.Then, what is the gist of changes for Creditors in The FRDI Bill, At present if a bank becomes insolvent, a depositor gets nothing over and above the insurance limit (of Rs 1 lakh).But in case a bank becomes insolvent in FRDI bill regime, the depositor gets the insurance amount (unspecified, surely an enhanced amount, to be decided later after the bill is enacted) and the balance gets converted into a longer term instrument (i.e. money is not lost).The contrast is clear. The depositor at least can stake claim over his money once the FRDI Bill (in its current form) comes. Unlike the past where he has to say goodbye to anything above Rs 1 lac.Some political parties have started voicing deep concern about Section 52 of the bill that could in certain circumstances allow a "specified service provider" - read a bank - to cancel, modify or change the liability that it owes. i.e. It can change/convert the nature of liability of Deposits to a bond or equity of the Bank.But this will have to be done in consultation with THE RESOLUTION CORPORATION, to be set up under the legislation, which will have THE POWER TO PROVIDE DEPOSIT INSURANCE TO BANKING INSTITUTIONS, find ways to haul a failing bank back from the brink, or act as a liquidator in the event that a liquidation order is given."This is a serious issue," says a former MP. "The Modi government seems to be surreptitiously sneaking in a measure to institute 'hair-cuts' on depositors' money in a manner that is similar to what we have seen in Greece, Cyprus and other European countries which have gone through an economic crisis."A note posted by a political party recently said: "If the draft bill gets the nod of Parliament, it will empower the Resolution Corporation to cancel a bank's liability or alter it to another security."The bail-in instrument may "convert any securities from one class to another, including the creation of a new security in modification of an existing security", the legislation says.Before a bail-in instrument is to be activated, THE RESOLUTION CORPORATION will have to inform the central government about the reasons for issuing it in the first place and the effects it will have. A copy of that report will have to be immediately placed before each House of Parliament.Finance ministry officials, however, played down the campaign against the bail-in provision in the bill."The purpose of the 'bail-in' is to help BRING IN EMERGENCY CAPITAL FOR BANKS. It does not mean that this clause will be used and certainly cannot be invoked for PSU banks which are covered fully by the state's sovereign guarantee," said a ministry official.RISK COVER OF DEPOSITSAt present, a depositor in a bank can draw partial comfort from the fact that his deposit is insured to the extent of Rs 1 lakh with the Deposit Insurance and Credit Guarantee Corporation which was set up under an act of Parliament in 1961.The Rs 1 lakh cover is meant for all deposits of an individual parked in savings bank and current bank accounts and held as fixed deposits, irrespective of how much is parked in these accounts.The FRDI LEGISLATION will change that significantly. The bill empowers THE RESOLUTION CORPORATION to decide the amount insured for each depositor. Theoretically, it is possible that the insured amount will vary for customers across different banks. It could also vary for different categories of customers within the same bank.A CORPORATION INSURANCE FUND will be created that will serve as the vehicle through which the deposit insurance will flow.The corporation, in consultation with the appropriate regulator, shall specify the total amount payable by the corporation to any one depositor.The decision on how much the insured amount should be/ will have to be decided by THE REGULATOR, which in the case of the banking industry is the Reserve Bank of India. It would be fair to assume that once the bill is passed, the regulator will clarify the amount to be insured. It has not given any such indication yet whether the sum would be higher or lower than the existing level of Rs 1 lakh.STABILITY OF BANKSLet us see a classic case of Global Trust Bank (India) (GTB).Global Trust Bank (India) (GTB) was founded on 21 October 1994 and commenced operations at Secunderabad. Its founders included Ramesh Gelli (its first Chairman), Sridar Subasri, and Jayant Madhob, among others. The bank introduced a number of technology-based innovations and responsive service.GTB was involved in the stock market scam of 2001 that the stockbroker Ketan Parekh ran. GTB lent heavily to individuals speculating in the stock market; when the market crashed the bank suffered extensive losses. One consequence was that merger talks with UTI Bank fell through. The Reserve Bank of India (RBI) forced Gelli to resign. Gelli's successor resigned after six months, and Gelli's son joined the board of directors. In 2004, Gelli briefly returned to the bank in February 2004 before being again forced to resign.RBI examined GTB's accounts for 2001-02 and found that GTB's net worth had turned negative, but did not close the bank. GTB did not address its problems. Instead, and despite its dire straits, GTB continued to grow. It had 87 branches in 2002-2003, and grew to 103 branches before the RBI forced it to close. It also paid interest on deposits at a rate equal to or better than other banks in its area. GTB sought to recapitalize itself by bringing in new investors. In mid-2004 GTB was in close talks with Newbridge Capital. Newbridge was to invest US$200million, subject to RBI approval. However, RBI was reluctant to permit private investors to restructure GTB.The RBI issued a Moratorium Order on 24 July 2004. Before GTB's winding up, Goldman Sachs owned 4% of the bank and the International Finance Corporation owned 5%. Oriental Bank of Commerce acquired GTB on 14 August 2004. Shareholders in GTB received nothing for their shares; depositors, however, suffered no loss. After acquiring GTB, OBC discovered that GTB's situation was even worse than it had appeared at the time of acquisition. OBC did gain an increased presence in the southern parts of India, where its presence had been weak and GTB's was extensive.GTB had been leaner than OBC. OBC had ten times the staff and branches than GTB, but only four to five times as much in the form of deposits, investments, or advances.The instance was when Global Trust Bank (GTB) almost went belly up after taking an exposure to capital markets that breached regulatory caps. GTB was eventually merged with Oriental Bank of Commerce and none of its 1 million depositors lost any money. GTB shareholders, however, had to take a hit.In what is known as DERIVATIVE SCAM Banks suffered a heavy loss.The Reserve Bank of India slapped a maximum penalty, according to the Banking Regulation Act, on 19 commercial banks for mis-selling illegal derivative products to exporters in 2011.The following Article appeared in THE HINDU at that timeMis-selling of derivative products: RBI actshttp://www.thehindu.com/business/Economy/misselling-of-derivative-products-rbi-acts/article1983530.ece______________________The FRDI legislation, however, introduces the idea of systemically important financial institutions, which became a buzz phrase after the global economic crisis of 2008.Basically, it creates the notion of banks that are perceived as "too big to fail" and therefore forces regulators to step in with a bailout plan.The theory suggests that some financial institutions are so large and so interconnected that their failure would be disastrous to the economic system with the potential of having knock-on effects.India has already embraced this concept and has designated three banks - State Bank of India, ICICI Bank and HDFC Bank - as systemically important, which subjects them to higher levels of compliance with tough prudential standards.India's banking sector is currently in the throes of distress as a bad loans problem has erupted in the wake of several years of slow industrial growth.According to the RBI's Financial Stability Report released in June 2017, the gross non-performing advances (NPAs) or bad loans to total deposits ratio of all banks stood at 9.6 per cent as of March 2017. State-run banks currently have an even higher bad loans ratio of 13.69 per cent.In a related case to Global Trust Bank, In Central Bureau of Investigation Bank Securities and Fraud Cell Vs Ramesh Gelli and Others in the Supreme Court on 23 February 2016, SC lashed out at legislature for leaving a gap in amending work in related field, that there were anomalies between the two statutes. Which has huge implications for banks, regulators and consumers. That corresponding amendment in Section 46A of the Banking Regulation Act (BRA) was missing.Poor attention to detail by the law ministry meant that changes in the Indian Penal Code, in line with changes to the PCA, were not accompanied by a simultaneous amendment to Section 46A of the Banking Regulation Act (BRA). The SC order, in dealing with this omission said, “Section 46-A of Banking Regulation Act, 1949, cannot be left meaningless and requires harmonious construction.” Pertinently, the substance of Section 46A would not be defeated merely because the Prevention of Corruption Act deleted a few Sections from the Indian Penal Code without making corresponding changes to the BRA.In another related case to Global Trust Bank, In Ramesh Gelli Vs The Inspector of Police on 28 August 2017 in the Madras High Court, said that Even a Private Sector Bank employee is also a Public Servant for purposes of Prevention of Corruption ActIndian Corporate do not do any due-diligence before investing in derivative/ speculative tradeIndian lending Institutions perhaps does not do proper due diligence prior to sanctioning of loan to loan applicant.Either Banks are not making use of their report intelligently between credit worthy clients and doubtful clients.Or the business intelligence of credit agencies have no depth._______________________We have a host of credit rating agencies giving advice to corporates and Banks.Credit Rating Companies or more precisely called as the CRA are termed as one of the biggest players in the credit rating industry.As the name signify ratings, in simple terms rating the debtors are the task of these companies available across India, the good rating is the dream of all debtors or we can say people seeking loans to achieve their different dreams.As per the rules from the debiting companies and different loan based companies or bank, these ratings provided by Credit Agencies are crucial.You must be thinking about the link between Credit Rating and Loans, the link is simple as none of the company wants debtors with an irregular interest payment.The debts or loans you took in the past, these CRA have a total record of the payment and based on timely payment good credit ratings are provided and debtors offer easy loans and debts to regular and timely payers.There are a different range of debt instruments that decides CRAs, some of the top available options for the same are Government bonds, Corporate bonds, CDs, Mortgage-backed securities etc.Here we have 10 best credit rating agencies in India1. Crisil Limited2. Credit Information Bureau India Limited (CIBIL)3. Fitch Ratings India Private Ltd.4. Equifax5. Credit Analysis & Research Ltd6. ICRA Limited7. ONICRA8. High Mark Credit Information Services9. SME Rating Agency of India Ltd. (SMERA)10. Brickwork Ratings India Private Ltd.

Market Place vs. on Balance Sheet Lending. Great Question. Thanks to whomever posted it. By way of background, I’m part of a VC firm based in San Francisco that focuses exclusively on FinTech, Green Visor Capital. Our team includes some of most respected professionals in finance. We have lived through a few cycles. We also have depth in this area and have spent a good bit of time internally debating this topic. I’m happy to share some thoughts below. Let me begin with a few points to provide some background and context.The challenge for all new lenders, incuding tech enabled ones, is that getting lending operations started requires a significant amount of capital. The problem never goes away and only grows as one scales the business.Some reading this may say, “but what about marketplaces — they don't keep the loans on their balance sheet, they sell the loans they originate to other investors?” The reality is that even if the FinTech lender is looking to sell the loans they originate, even the marketplace lender still needs capital. More on this below.In the early days of a startup lender, all of the first loans are typically funded by the startup’s equity. As the startup company demonstrates competency with their origination, underwriting and servicing capabilities, they will attract providers of debt capital to help fund future loans.It is important to note that capital providers in the early days will not provide 100% of the capital necessary to fund the loans — typically only about 80%. (This is called an “advance rate” and advance rates vary significantly by quality of the asset class, data available and strength of the team.) That means the startup lender needs to come up with the rest. So, if you’re looking to originate $10 mm in loans (a tiny amount), the debt providers (the structure most often used is a “borrowing base credit facility”) will expect the startup lender to have $2 mm in equity to fund the loans.The debt provider wants “equity” in every loan because if there are unforeseen losses in the loan book they don’t take the first losses on the loans, the originator of loans does. (This amount of the start up lender’s capital put at risk is referred to as “haircut capital” by institutional debt providers.) Think about how a mortgage works. The mortgage provider wants equity in the home to avoid a first loss in the case of a loan default. This is why a down payment is necessary in buying a home, and why haircut capital is a prerequisite of the debt providers to either the a Marketplace or On-balance sheet lender.I would argue that the most critical choice any founder looking to start a new FinTech lender needs to make isn’t the decision over Marketplace or On-Balance sheet model, but rather how to stack the team with operational depth that, among other things, can devise a credible funding strategy. As an aside, what surprises my colleagues and me, is the number of founders that we’ve met that are looking to create a tech-enabled lending businesses that fail to understand this critical business tenet. As the example above illustrates, a would be set of founders in FinTech lending need to think carefully about how they are going to fund their enterprise (i.e., the startup) AND the equity (i.e., the haircut capital) needed in each loan.Now, jumping into the answer of the question at hand.Like anything else in business or life for that matter, there are trade offs in which model to choose. I’m not going to go into detail on that here because there’s already so much on the Net about these points. Rather, I’m going to talk about some of things founders may not be as familiar.First, the models are actually converging and were not as different as some would have you believe.The events that have unfolded around Lending Club has created significant reverberations in the market for both types of lenders. How Lending Club’s Biggest Fanboy Uncovered Shady Loans. As a result, new religion has been found on the part of tech-enabled lenders regarding the importance of balance sheet construction and liquidity management.You’re even hearing some start up founders go so far as to say that they now want to get a banking license, create funds to invest in their loans, and / or partner with banks directly. (So much of the talk in FinTech even up to a few months ago was about “disruption.” The tone and rhetoric among founders in Silicon Valley has softened in recent weeks.)We do not buy into the notion that by selling all of your loan assets via a marketplace is materially different from what on balance sheet lenders actually do. On balance sheet lenders often securitize their loans as a way of funding their loan originations and operations.In either model, licensing is required. Founders can go to the trouble of going state by state to get approvals for lending activities. Others simply partner with a bank to leverage the instution’s banking charter.Second, the disappointing run that tech enabled lenders have had in their public market debut’s (look at OnDeck and LendingClub’s stock price performances post IPO — the stocks trade at a small percentage of where the IPOs were priced), the institutional investor community is having a hard time buying into the supposition that a MarketPlace lender is a tech company that should be priced on a price-to-revenue multiple and should trade at a hefty premium to an On Balance sheet lender.Third, non-bank lenders often do not survive market downturns. Don’t be steered into thinking that a MarketPlace lender is any less risky. It too can succumb to market downturns. Why? They don’t have a balance sheet (see footnote below for further details on what I mean.(1)Fourth, whether your’re building a Marketplace or an On Balance sheet lender, more regulations are headed this way. The rapid growth of FinTech has been nearly unfettered by regulation to date, and it has drawn the ire of traditional financial institutions. Battle lines over FinTech have been drawn in Washington and in many prominent states (e.g, NY and CA), and at the urging of industry incumbents.The banking regulators — i.e., the Federal Reserve; the Federal Deposit Insurance Corporation; the Office of the Comptroller of the Currency; and the Consumer Financial Protection Bureau — are all now stepping up efforts to provide oversight of FinTech.A term you will hear time and time again from regulators is “responsible innovation.” Thomas Curry, Comptroller of the Currency recently asked: “Are these [FinTech] companies providing products and services that banks are authorized to offer? What are the prudential requirements for these types of institutions? How does the innovation promote financial inclusion?”Consider also a recent statement from the CFPB: “The CFPB is interested in encouraging consumer-friendly developments in the marketplace, such as extending affordable, responsible lending to more people. At the same time we must ensure companies play by the rules.”Mary Jo White, Chairman of the SEC, in a recent speech at Stanford University raised concerns that venture capitalists and private companies are an environment that encourages cutting corners, inflated expectations and fast money.Last but not least, the reality is that most FinTech lenders and their business models are still unproven. Worth repeating here is that you have to stack the team with deep operational talent. Having lived through market cycles, we fear for the founders that believe that credit is simply a math problem to be solved and they have have built a far better underwriting model.Consider the recent comments by the US Department of the Treasury in a white paper published in May of this year (https://www.treasury.gov/press-c...). Two quotes jump out from the paper:“While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations. Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions.”“New business models and underwriting tools have been developed in a period of very low interest rates, declining unemployment, and strong overall credit conditions. However, this industry remains untested through a complete credit cycle. Higher charge offs and delinquency rates for recent vintage consumer loans may augur increased concern if and when credit conditions deteriorate.”Furthermore, the Treasury Department warned of the potential fragility of some lenders’ business models, noting that many had no experience of operating “through a complete credit cycle.”Hope that this helps.Note (1): When, I refer to a “balance sheet”, I’m specifically referring to the right hand side of it. A structural advantage of a bank, for example, is that they have diversification in funding. Deposits at banks are arguably the most important source of funding and, in this interest rate environment, a very cheap (in terms of interest paid away by the banks) form of capital. Depositors are also very sticky. By law, only institutions with banking or thrift charters can have a deposit franchise.