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  1. NBFC
  2. TOPICS TO BE COVERED • Sources of Finance • Functions and Investment Policies of NBFIs in India • RBI Guidelines on NBFCs • Products offered by different NBFCs in India • Features of these Financial Products
  3. Sources of Finance
  4. On The Basis Of Time Or Period • Long Term and • Short Term . On The Basis Of Ownership • Owned Fund . • Borrowed Fund On The Basis Of Source Of Generation • Internal Fund • External Fund Sources of Fund
  5. Sources of Fund or Finance • Issue of shares • Debenture • Bond • Loan and Overdraft • Leasing and Hire Purchase • Mortgage loan • Retained Earnings • Trade Credit • Sale of Stock and Fixed Assets • Debt Collection • Factoring • Public Deposit • Commercial Bank • Commercial Paper
  6. Issue of Shares- What is a Share? • A part or portion of a larger amount which is divided among a number of people, or to which a number of people contribute. • A unit of ownership that represents an equal proportion of a company's capital. It entitles its holder (the shareholder) to an equal claim on the company's profits and an equal obligation for the company's debts and losses. • In general a share is a part of the ownership of a company. A person who buys a portion of a company’s capital becomes a shareholder in that company’s assets and as such receives a share of the company’s profits in the form of an annual dividend. Lucky or astute investors may also reap a capital gain as the market value of the shares increases.
  7. Types of Shares • Mainly Two Types of Shares – Equity Shares – Preference Shares
  8. EQUITY SHARES • Equity shares are the main source of finance of a firm. • It is issued to the general public. • Equity shareholders do not enjoy any preferential rights with regard to repayment of capital and dividend. • They are entitled to residual income of the company, but they enjoy the right to control the affairs of the business and all the shareholders collectively are the owners of the company.
  9. MERITS • Equity shares are suitable for investors who are willing to assume risk for higher returns • Payment of dividend to the equity shareholders in not compulsory • Equity capital serves as permanent capital as it is to be repaid only at the time of liquidation of a company • Equity capital provides credit worthiness to the company and confidence to prospective loan providers
  10. LIMITATIONS • Investors who wants steady income may not prefer equity shares as equity shares get fluctuating returns • The cost of equity shares is generally more as compared to the cost of ravishing funds through other sources • Issue of additional equity shares dilutes the voting power and earnings of existing equity shareholders • More formalities and procedural delays are involved while raising funds through issue of equity share.
  11. PREFERENCE SHARES • Type of share which enjoy preference in all cases • Preference shares allow an investor to own a stake at the issuing company with a condition that whenever the company decides to pay dividends, the holders of the preference shares will be the first to be paid. • This shares, often with no voting rights, which receive their dividend before all other shares and are repaid first at face value if the company goes into liquidation
  12. Merits • Preference shares provide reasonably steady income in the form of fixed rate of return and safety of investment. • Preference shares are useful for those investors who want fixed rate of return with comparatively low risk. • It does not affect the control of equity shareholders over the management as preference shareholders don’t have voting rights.
  13. LIMITATIONS • Preference shares are not suitable for those investors who are willing to take risk and are interested in higher returns . • Preference capital dilutes the claims of equity shareholders over assets of the company. • The rate of dividend on preference shares is generally higher than the rate of interest on debentures.
  14. Equity Shares V/S Preference Shares
  15. DEBENTURES • A debenture is a type of debt instrument • That is not secured by physical asset or collateral. • Debentures are backed only by the general credit worthiness and reputation of the issuer. • Both corporations and governments frequently issue this type of bond to secure capital. • Like other types of bonds, debentures are documented in an indenture.
  16. • If a company needs funds for extension and development purpose without increasing its share capital, • it can borrow from the general public by issuing certificates for a fixed period of time and at a fixed rate of interest. • Such a loan certificate is called a debenture. • Debentures are offered to the public for subscription in the same way as for issue of equity shares. • Debenture is issued under the common seal of the company acknowledging the receipt of money.
  17. Merit • It is preferred by investors who want fixed income at lesser risk • Debentures are fixed charge funds and do not particulars in profits of the company. • The issue of debentures is suitable in the situation when the sales and earnings are relatively stable.
  18. LIMITATIONS • As fixed charge instruments debentures put a permanent burden on the earnings of a company. • In case of redeemable debentures, the company has to make provisions for repayment on the specified date, even during periods of financial difficulty. • Each company has certain borrowing capacity.
  19. COMMERCIAL BANKS • A commercial bank is a financial institution that provides various financial service, such as accepting deposits and issuing loans. • Commercial bank customers can take advantage of a range of investment products that commercial banks offer like savings accounts and certificates of deposit. • The loans a commercial bank issues can vary from business loans and auto loans to mortgages.
  20. MERITS • Banks provide timely assistance to business by providing funds as and when needed by it. • Secrecy of business can be maintained as the information supplied to the bank by the borrowers is kept confidential • Formalities such as issue of prospectus and underwriting are not required for raising loans from a bank. • Loan from a bank is a flexible source of finance as the loan according to business needs and can be repaid in advance when funds are not needed.
  21. LIMITATIONS • Funds are generally available for short periods and its extension or renewal is uncertain and difficult • Bankers make detailed investigation of the company affairs financial structure etc and may also ask for security of assets and personal sureties. • In some case difficult terms and conditions are imposed by banks for the grant of loan.
  22. FINANCIAL INSTITUTIONS A financial institution (FI) is a company engaged in the business of dealing with monetary transactions, such as deposits, loans, investments and currency exchange. Virtually everyone living in a developed economy has an ongoing or at least periodic need for the services of financial institutions.
  23. MERITS • Financial institutions provide long term finance which are not provided by commercial banks. • Besides providing funds many of these institutions provide financial managerial and technical advice and consultancy to business firms. • As repayment of loan can be made in easy instalments, it does not prove to be much of a burden on the business.
  24. LIMITATIONS • Financial institutions follow rigid criteria for grant of loans. • Too many formalities make the procedure time consuming and expensive. • Certain restrictions such as restriction on dividend payment are imposed on the powers of the borrowing company by the financial institutions.
  25. RETAINED EARNINGS Profits generated by a company that are not distributed to stockholders (shareholders) as dividends but are either reinvested in the business or kept as a reserve for specific objectives (such as to pay off a debt or purchase a capital asset). • Free off cost source
  26. Merits • Retained earnings is a permanent source of funds available to an organization. • It does not involve any explicit cost in the form of interest, dividend or floatation cost. • As the funds are generated internally, there is a greater degree of operational freedom and flexibility.
  27. LIMITATIONS amongst the • Excessive plaguing back may cause dissatisfaction shareholders as they would get lower dividends. • It is an uncertain source of funds as the profits of business are fluctuating; • The opportunity cost associated with these funds is not recognized by many firms.
  28. Trade Credit • Trade credit is the credit extended to you by suppliers who let you buy now and pay later. • Any time you take delivery of materials, equipment or other valuables without paying cash on the spot, you're using trade credit.
  29. Merit • Trade credit is a convenient and continuous source of funds; • Trade credit may be readily available in case the credit worthiness of the customers is known to the seller; • Trade credit needs to promote the sales of an organization • If an organization wants to increase its inventory level in order to meet expected rise in the sales volume in the near feature.
  30. LIMITATIONS • Availability of easy and flexible trade credit facilities may induce a firm to indulge in overtrading which may add to the risk of the firm. • Only limited amount of funds can be generated through trade credit • It is generally a costly source of funds as compared to most other sources of raising money.
  31. Factoring • Factoring is a type of finance in which a business would sell its accounts receivable (invoices) to a third party to meet its short-term liquidity needs. • Under the transaction between both parties, the factor would pay the amount due on the invoices minus its commission or fees.
  32. Merits • Obtaining funds through factoring is cheaper than financing through other means such as bank credit • With cash flow accelerated by factoring the clients is able to meet his/ her liabilities promptly as and when these arise. • Factoring as a source of funds is flexible and ensures a definite pattern of cash inflows from credit debt that a firm might otherwise be unable to obtain.
  33. LIMITATIONS • This source is expensive when the invoices are numerous and smaller in amount • The advance finance provided by the factor firm is generally available at a higher interest cost than the usual rate of interest. • The factor is a third party to the customer who may not feel comfortable who may not feel comfortable while dealing with it.
  34. LEASE FINANCING • Lease financing is one of the important sources of medium- and long- term financing • The owner of an asset gives another person, the right to use that asset against periodical payments. • The owner of the asset is known as lessor and the user is called lessee.
  35. Merits • It enables the lessee to acquire the asset with a lower investment. • Simple documentation makes it easier to finance assets. • Lease rentals paid by the lessee are deductible for computing taxable profits. • It provides finance without diluting the ownership or control of business.
  36. LIMITATIONS • A lease arrangement may impose certain restrictions on the use of assets. • The normal business operations may be affected in case the lease is not renewed. • It may result in higher payout obligation in case the equipment is not found useful and the lessee opts for premature termination of the lease agreement.
  37. Public Deposits • Public deposits refer to the unsecured deposits invited by companies from the public mainly to finance working capital needs. • A company wishing to invite public deposits makes an advertisement in the newspapers. • Any member of the public can fill up the prescribed form and deposit the money with the company. • The company in return issues a deposit receipt. • This receipt is an acknowledgement of debt by the company. • The terms and conditions of the deposit are printed on the back of the receipt. • The rate of interest on public deposits depends on the period of deposit and reputation of the company.
  38. Merits • The procedure of obtaining deposits is simple and does not contain restrictive conditions as are generally there in a loan agreement. • Public deposits do not usually create any charge on the assets of the company. The assets can be used as security for raising loans from other sources.
  39. LIMITATIONS • New companies generally find it difficult to raise funds through public deposits • It is an unreliable source of the finance as the public may not respond when the company needs money • Collection of public deposits may prove difficult, particularly when the size of deposits required is large.
  40. COMMERCIAL PAPER • Commercial Paper or CP is defined as a short-term, unsecured money market instrument, issued as a promissory note by big corporations having excellent credit ratings. • As the instrument is not backed by collateral, only large firms with considerable financial strength are authorized to issue the instrument.
  41. MERITS • A commercial paper is sold on an unsecured basis and does not contain any restrictive conditions • As it is a freely transferable instrument it has high liquidity • It provides more funds compared to other source • A commercial paper provides a continuous source of funds. • Companies can park their excess funds in commercial paper thereby earning some good retunes on the same.
  42. LIMITATIONS • Only financially sound and highly rated firms can raise money through commercial papers • The size of money that can be raised through commercial paper is limited to the excess liquidity available with the suppliers of funds at a particular time. • Commercial paper is an impersonal method of financing.
  43. Functions of NBFC
  44. Functions of NBFC ⚫Brokers of loanable funds. ⚫Mobilization of savings. ⚫Channelization of funds into investment, ⚫Stabilize the capital market, ⚫Provide liquidity.
  45. Regulations of NBFC
  46. RBI REGULATIONS • 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, 1956 – ii. 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)
  47. Bank regulate all Does the Reserve 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.
  48. What are the requirements for registration with RBI? • In terms of Section 45-IA of the RBI Act, 1934, it is mandatory that every NBFC should be registered with RBI to commence or carry on any business of non-banking financial institution. • To obviate dual regulation, certain categories of NBFCs which are regulated by other regulators are exempted from the requirement of registration with RBI viz. – Eg. Venture Capital Fund / Merchant Banking companies / Stock broking companies registered with SEBI.
  49. Contd.. • Should have a minimum net owned fund of Rs 25 lakh raised to Rs 200 lakh WEF April 21, 1999. • NBFC have to maintain 10 and 15 per cent of their deposits in liquid assets effectively from January 1 and April 1,1998, respectively. • All NBFCs are not entitled to accept public deposits. Only those NBFCs holding a valid Certificate of Registration with authorization to accept Public Deposits can accept/hold public deposits.
  50. Contd… • They have to create reserve fund and transfer not less than 20% of their net deposits to it every year. • 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.
  51. Regulationsapplicable onnon-depositacceptingNBFCswithasset sizeof lessthan500crore? 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.
  52. Regulation of NBFCs • While NBFCs have been rendering many useful services, several advances, unhealthy features of their working also have been observed. • At present all NBFCs except HFCs are regulated by the RBI. • With enactment of RBI (Amendment) act 1997, all of them with net owned funds of ì.25Lakhs and above have to register with the RBI now. • The BFS with the help of department of supervision of the RBI began supervising NBFCs from July 1995. • HFCs are regulated by NHB. The major regulatory provisions are:- (i) The minimum net worth funds of 25 Lakh and the NBFC should achieve the minimum net worth norm in 3 years or extended 3years more at the discretion of RBI. (ii) NBFCs have to maintain 10%and15% of their deposits in liquid assets. (iii)They have to create reserve fund and transfer not less than 20% of their net deposits to it every year.
  53. Contd… (iv)The RBI directs them on issues of disclosures, prudential norms, credit, investments etc. (v) Nomination facility is available to depositors of these companies. (vi)Unincorporated bodies engaged in financial activity cannot accept deposits from the public from April,1997. (vii)They have to achieve a minimum capital adequacy norm of 8% by March, 1996. (viii)They have to obtain a minimum credit rating from any one of 3 credit rating agencies. (ix)A ceiling of 15% interest on deposits has been prescribed for MBFCs or Nidhis. (x)The interest rate ceiling on deposits as also the ceiling on quantum of deposits for NBFCs (other than Nidhis) have removed
  54. Investment Policies of NBFIs in India
  55. Investment Policies of NBFIs in India • An investment policy is any government regulation or law that encourages or discourages foreign investment in the local economy • A document that formalizes an institution's goals, objectives, and guidelines for asset management, investment advisory contracting, fees, and utilization of consultants and other outside professionals.
  56. Contd. • Over the years since liberalization of the Indian economy in 1991, India witnessed a significant interest of foreign investors in the Indian NBFC sector. • NBFCs are governed under the policies and guidelines as issued from time to time by the Reserve Bank of India. • FDI in NBFCs has been allowed up to 100% since 1997 subject to the minimum capitalization norms as issued by the Government.
  57. Foreign investment is allowed in the following activities: • Merchant Banking • Under Writing • Portfolio Management Services • Investment Advisory Services • Financial Consultancy • Stock Broking • Asset Management • Venture Capital • Custodian Services • Factoring • Credit Rating Agency • Leasing & Finance • Housing Finance • Forex Broking • Credit Card Business • Money Changing Business • Micro Credit and Rural Credit.
  58. Law governing the foreign investments in NBFC • Foreign exchange provisions are regulated by the FEMA, 2000 and NBFCs operations are regulated by the Reserve Bank of India within the framework of the RBI Regulation Act 1934, 100% FDI is allowed in NBFCs subject to the minimum capitalization norms as issued by the Government.
  59. • As per Press Note 7 of 2008 issued by the DIPP the minimum capitalization of foreign holding requirements for NBFC's are as follows: 1. US$0.5millionincasetheshareholdingpercentage is below 51% 2. US$5millionincasetheshareholdingpercentage isbetween51%&75% & 3. US$20millionincasetheshareholdingpercentage isbetween75%&100%
  60. Foreign Investments Subject to Minimum Capitalization Norms • The US $0.5 million for foreign capital up to 51% to be brought up front. • The US $5 million for foreign capital more than 51% and up to 75% to be brought up front. • 50 million for foreign capital more than 75% out of which $7.5 million to be brought up front and the balance in 24 months. • The NBFCs having foreign investment more than 75% and up to 100%, and with a minimum capitalization of $50 million, can set up step down subsidiaries for specific NBFC activities, without any restriction on the number of operating subsidiaries and without bringing additional capital. • Joint Venture operating NBFCs that have 75% or less than 75% foreign investment can also set up subsidiaries for undertaking other NBFC activities, subject to the subsidiaries also complying with the applicable minimum capitalization norm mentioned above. • Non- Fund based activities: The US $0.5 million to be brought upfront for all permitted non- fund based NBFCs irrespective of the level of foreign investment.
  61. • Subject to certain conditions • For such company it would not be permissible to set up any subsidiary for any other activity, nor can participate in the equity of an NBFC holding company. Above mentioned capitalization norms apply to each downstream subsidiary engaging in NBFC activities except where its parent entity already has more than 75% foreign investment.
  62. Contd. • However, on 10th August 2016, the Government of India approved further changes to the FDI requirements pertaining to NBFC's. • 100% FDI through the automatic route is now permitted in "Other Financial Services" as well, provided such services are regulated by any financial sector regulator. • Minimum capitalization norms as mandated under FDI policy have been eliminated as most of the regulators have already fixed minimum capitalization norms.
  63. • These recent changes of doing away with the minimum capitalization norms is a boon since this will spur economic growth by increasing FDI in the NBFC sector. • NBFCs have had a major impact on the growth of SMEs and businesses in rural areas. • This is primarily based on strong local knowledge and consumer relations. • Increasing FDI will be beneficial for these businesses due to the relatively easier and faster sanction of loans with favorable interest rates.
  64. Contd. • However, a major issue facing the NBFC sector is the multiplicity of regulators. • Both RBI and SEBI exercise regulatory control over NBFC's. • Whilst the regulators try to avoid encroaching upon the others domain, there is consistent tussle between the regulators as to which activity would fall under which regulator's domain. • A clarity and consistency in this regard would be very welcome.
  65. CHANGES MADE IN FDI POLICY • In RBI notification dated 9 September 2016 following key relaxations have been introduced: • In NBFC 100% FDI through the automatic route is now permitted in “Other Financial Services” beyond the 18 specified activities. • Provided that the activities are regulated by financial sector regulators such as RBI, SEBI, Pension Fund Regulatory Authority of India (IRDA) etc. • Under FDI Policy, additional capitalization norms linked to foreign ownership has been removed, and thereby the capitalization norms have been aligned with those prescribed by the relevant regulators regulating these activities. Under FDI Policy, minimum capitalization norms have been eliminated as most of the regulators have already fixed minimum capitalization norms. • Unregulated NBFCs which are not regulated by any financial sector regulators will require prior government approval. • Due to the relatively easier and faster sanction of loans with favorable interest rates, increasing FDI will be beneficial for the business. This move of the government is expected to provide a much-needed boost to this sector.
  67. ROLE OF NBFC • Development of sectors like transpiration, infrastructure • Employment generation • Help and increase wealth creation • Economic development • Tofinance economic weaker section • Huge contribution to state exchequer • Rural development • Financial inclusion
  68. Advantages of NBFC
  69. Some of the major benefits of NBFCs are: • Lenient conditions for getting a loan in comparison to traditional banks • Approve smaller loan sizes • Borrower evaluation based on known history of the business • Single product and dedicated business
  70. List of major products offered by NBFCs in India • Funding for small commercial vehicles • Business loan against property • Funding of infrastructure assets • Retail financing • Loan against shares • Funding of plant and machinery • Project finance • Unsecured personal loans • Trade finance • Venture finance • Home loan • Personal loan • Vehicle loan • Gold loan • Property loan • Business loan • Education loan
  71. FEATURES AND BENEFITS - Funding for small commercial vehicles • Loans from Rs.1 lakh onwards • Fast track approvals • Flexible finance schemes for new and used vehicles • Minimum documentation • Easy repayment options • Maximum funding at ex-showroom price • Attractive schemes to suit your needs • Faster sanction and disbursement of loan • Personalised customer service • Simple documentation process
  72. BUSINESS LOAN AGAINST PROPERTY • Loan available against residential and commercial property • Loan Tenor up to 180 months • Loan Amount – Starting from Rs. 5 Lakh up to Rs. 2 crore • Best income assessment for loan
  73. FEATURES AND BENEFITS- GOLD LOAN • Loan available against jewelry ornaments of 20 ct and above • Loan Tenor of 12 Months • Flexible interest payment of 30, 90 & 180 days • Loan Amount – starts from Rs.3000 • Instant Cash Disbursement • Safe & Secure Storage System • Flexible schemes to suit your financial requirements
  74. What is Retail Banking • Retail banking, also known as consumer banking, is the typical mass- market banking in which individual customers use local branches of larger commercial banks. • Services offered include savings and checking accounts, mortgages, personal loans, debit/credit cards and certificates of deposit (CDs). • In retail banking, the focus is on the individual consumer.