The Non Banking Financial Sector And Banks Finance Essay - Free Essay Example

Sample details Pages: 4 Words: 1105 Downloads: 6 Date added: 2017/06/26 Category Finance Essay Type Narrative essay Did you like this example? Of late there has been a lot of activity in the non-banking financial sector India got its first Micro Finance Institution (MFI) listed on the bourses through SKS Microfinance (SKS) and what has followed subsequently does not seem to augur well for the MFI space in particular and NBFCs in general. SKSs CEO S. Gurumani was fired a month after the IPO of SKS and then there was news of SKS and other MFIs causing suicides in Andhra Pradesh due to exorbitant interest rates and ruthless collection practices. Don’t waste time! Our writers will create an original "The Non Banking Financial Sector And Banks Finance Essay" essay for you Create order This has led to AP government announcing ordnance for change in collection cycle from weekly to monthly among other requirements. Further the RBI has set up the Malegam Committee to put regulations on the sector under pressure from the Finance Ministry. Markets are discounting the MFI space for now due to which IPOs lined up have been stalled for the time-being. The whole NBFC sector is wary because NBFCs are being considered in the same breath as MFIs and the regulations on MFIs might significantly impact other segments of NBFCs too which otherwise seem to be working well under RBI guidelines. NBFCs are different from banks and not synonymous with MFIs which operate under models like self-help groups or NGOs or Section 25 companies also. So what are NBFCs? NBFCs are companies which are in the business of financing. Right from the bike store near you to the malls you go to large equipment and vehicle dealers, NBFCs play the role of facilitating business either by financing the customer or the vendor or the business itself. Such companies may or may not collect money from the public but not demand deposits. Legally, Section 45-I (f) of Reserve Bank of India Act, 1934 defines NBFC as (i) a financial institution which is a company; (ii) a non-banking institution which is a company and which has as its principal business the receiving of deposits, under any scheme or arrangement or in any other manner, or leading in any manner; (iii) such other non-banking institution or class of such institutions, as the Bank may, with the previous approval of the Central Government and by notification in the Official Gazette, specify. Based on these and activities they have been divided into four types: equipment leasing company; hire-pu rchase company; loan company and investment company. W.e.f. December 6, 2006 are reclassified as Asset Finance Company (AFC), Investment Company (IC) and Loan Company (LC). The above type of companies may be further classified into those accepting deposits or those not accepting deposits. Besides the above class of NBFCs the Residuary Non-Banking Companies are also registered as NBFC with the Bank. Banking regulation Like other fund agents in the Indian financial system, the NBFCs are also governed by the Reserve Bank of India (RBI). NBFCs dont completely resemble banks due to the fact that they cannot accept demand deposits and they are not a part of payment and settlement system and as such cannot issue cheques to its customers. But NBFCs also dont have to maintain cash reserve ratio (CRR) and statutory liquid ratio (SLR). Priority sector lending norm of 40% (of total advances) is also not applicable for them. As per RBI guidelines, NBFCs require a minimum Net Owned Fund (NOF) of Rs. 2 crore. NBFCs accepting public deposits (NBFCs-D) are subject to RBI regulations. But of late due to rise of NBFC-ND-SI (non deposit taking NBFCs which are systemically important i.e. NOF= Rs. 100 Crores) have been subject to CRAR and exposure norms prescribed by the Reserve Bank The existing policy since 2001 has been that an NBFC with a good track record for conversion into a bank, if : It is not p romoted by a Large Industrial or Business House Satisfies the prescribed minimum capital requirements Has a AAA rating or its equivalent, credit rating in the last year Capital Adequacy of not less than 12% and Net Non Performing Assets (NPA) ratio of not more than 5% NBFCs in the running for banking licences A recent discussion paper by RBI, dwelt on the issue of giving banking licences to corporate houses and NBFCs. Fresh licences to NBFCs would help in increasing the reach of the financial system as a whole to the interiors of India besides fostering greater competition and reduction in costs and improvement in quality. It is said that players like LIC Housing Finance, Reliance Capital, Shriram Group, AB Nuvo, Mahindra Finance, and Religare Enterprise are looking to obtain banking licences this time around. RBI has suggested to the following two options of which the latter is gaining favour in the industry: Proposal 1: Permitting standalone (i.e. those not promoted by Industrial/ Business Houses) NBFCs (including those regulated by SEBI, IRDA NHB) to promote banks Proposal 2: Permitting conversion of NBFCs into banks provided they should not be directly/indirectly engaged in real estate activity. Banking licence to NBFCs would help them in the following ways: Acces s to low-cost CASA(current account and savings account) deposits Relaxed capital requirement for CRAR of 10% Relaxation of regulatory compliances for issue of public deposits The problem for NBFCs could be the high startup capital requirement of at least Rs 500 crores to be scaled up to Rs 1000 crore in five years time putting high pressure on the Balance Sheets of NBFCs. Problems to NBFC turned banks -failures and challenges The challenges for the NBFCs wanting to convert into banks can be rated as follows: Lesser free play due to greater RBI restrictions as is prevalent on banks 40% priority sector lending requirement would prove an uphill task and might put pressure on asset quality itself Lending restrictions to the real estate sector High expenses on skills and technology Investment in infrastructure for ATMs, credit cards and internet banking The asset-mix is more long term oriented and hence asset-liability mismatch may arise Indian banking space was opened up in 1994 when 9 players were given banking licenses. Also in 2003, when fresh banking licenses were issued , Yes Bank and Kotak Mahindra Bank . Out of these 11 players on 7 have survived GTB merged with OBC; Times Bank was merged with HDFC Bank; Bank of Punjab with Centurion Bank, which itself has been merged with HDFC Bank. This means a 35% failure rate for new banks. Banking is a multi-functional game whereas non-b anking finance has focussed on a small portfolio of services. It remains to be seen as to what kind of business model an eligible NBFC would take to be successful as a bank. As such giving a licence to an NBFC which eventually goes on to fail would not only create systemic problems besides reducing the faith of the customers in the banking system.