Contents. iii v. Syllabus for the NBFC course Chapters MODULE A : CHAPTER 1. Foreword Recommended reading

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1 Contents Foreword Recommended reading Syllabus for the NBFC course Chapters iii v vii ix MODULE A : Indian Financial System and regulatory requirements for NBFCs CHAPTER 1 Indian financial system - An Overview 1.0 Objectives What is a financial system? Roles and Functions in Brief of the Central Banking Authority Commercial Banks Co-operative Banks The Securities and Exchange Board of India Functions of SEBI National Housing Bank (NHB) Functions of NHB Insurance Regulatory and Development Authority of India (IRDAI) Duties, powers and functions of IRDAI Pension Fund Regulatory & Development Authority 13 xi

2 1.6.1 Duties, Powers and Functions of Pension Fund Regulatory and Development Authority National Bank for Agriculture and Rural Development (NABARD) Role and functions of NABARD Non-Banking Financial Companies (NBFCs) Primary Dealers Role and obligations of the PDs Facilities from RBI to PDs Foreign Investments in India The routes under which foreign investment Direct foreign investment Foreign Portfolio Investment Investment in other securities Foreign Venture Capital Investment Investment in Investment Vehicle Let us sum up Key words Check your progress Answers to check your progress 24 CHAPTER 2 MARKETS 2.0 Objectives Introduction Financial market and the sub-markets Money Market Indian Money Market Money Market : Conceptual Framework Concepts Participants in the Money Market 34 xii

3 2.4.1 Banks (SCB) excluding RRBs Discount and Finance House of India Limited 34 (DFHI)/SBI DFHI Limited Public Sector Undertakings Public Financial Institutions Money Market Mutual Funds Non-Banking Finance Companies Financial Subsidiaries and Mutual Funds Primary Dealers (PDs) Provident Funds Private Sector Companies (Corporates) Money Market Instruments General Characteristics Money at Call or Short Notice (Notice Money) Term Money Treasury Bills (T-Bills) Bills Rediscounting Scheme Certificate of Deposit (CDs) Commercial Paper (CP) Repurchase Agreements (REPO) Collateralised Borrowings and Lending Obligations 50 (CBLO) Inter Bank Participation Certificates (IBPCs) Options Cash Management Bills Different Types of Interest Rate Quotations Fixed Rate of Interest Floating Rate of Interest Yield Count Conventions 54 xiii

4 2.6.5 Premium & Discount Debt Market Advantages of fixed income securities Risks associated with debt securities Benefits associated with an efficient Debt 57 Market Trading structure in wholesale debt-market Segments in the secondary debt market The major participants in the Indian debt 58 market Types of instruments in Debt Market Debt Market and some related terms Foreign Exchange Market Foreign Exchange - Definition Participants of Foreign Exchange Market 64 (Forex Market) Exchange Rates - Factors influencing them Exchange Rate Mechanism Exchange Rate Quotation Forex Derivatives and their Usages Risks associated in Foreign Exchange Market Capital Market Divisions of Capital Market Capital Market Instruments Mutual Funds Different Types of Mutual Fund Schemes Insurance Market Insurance Industry of India Different types of Life Insurance Policies Regulator of the Insurance Sector : IRDAI Let us sum up Key words 92 xiv

5 2.14 Check your progress Answers to check your progress 93 CHAPTER 3 NBFCs - TYPES OF NBFCs AND THEIR ROLES 3.0 Objectives Introduction Non-Banking Financial Company (NBFCs) Exemptions from Registration with RBI Types of NBFCs and their Role in Promoting Inclusive 99 Growth 3.5 Regulators of NBFCs Role of NBFCs in promoting inclusive growth Companies Act, Recent Changes Highlights of the Companies (Amendment) Act, Reserve Bank of India Act, Corporate Governance Let us sum up Key words Check your progress Answers to check your progress 123 CHAPTER 4 Recent RBI Initiatives in the Financial System 4.0 Objective Introduction Small Finance Banks (SFBs) 127 xv

6 4.3 Guidelines for Licensing of Small Finance Banks in the Private Sector as issued on November 27, Operating guidelines for Small Finance Banks Payment Banks Operating Guidelines for Payment Banks Micro Units Development & Refinance Agency Limited (MUDRA) Role and Responsibilities of MUDRA Pradhan Mantri Mudra Yojana (PMMY) Credit Guarantee Fund for Micro Units Scheme for guarantee coverage to eligible Non-Banking Finance Companies (NBFCs) Impact on NBFCs on the recent changes in the Financial 146 Market 4.7 Let us sum up Key words Check your progress Answers to check your progress 148 MODULE B : Resource mobilisation for NBFCs & capital adequacy norms CHAPTER 5 SOURCEs OF FINANCE I 5.0 Objectives Introduction Share Capital Types of Share Capital Components of Different Types of Capital Common Equity Tier 1 Capital 161 xvi

7 5.3.2 Additional Tier 1 capital Elements of Tier 2 Capital Capital Requirements for NBFCs Debentures and its Types Let us sum up Key words Check your progress Answers to check your progress 170 CHAPTER 6 SOURCES OF FINANCE II 6.0 Objectives Introduction Public Deposits Acceptance of Public Deposits Restrictions on acceptance of public deposits by NBFCs Bank Finance Bank Finance to NBFCs registered with RBI Bank Finance to NBFCs not requiring Registration Bank Finance to Residuary Non-Banking 179 Companies (RNBCs) Bank investment in Non-Convertible 180 Debentures Activities not eligible for Bank Credit Restrictions regarding investments made by 181 banks in securities/instruments issued by NBFCs Prudential Ceilings for exposure of Banks to 181 NBFCs Leased and Sub-Leased Assets 182 xvii

8 6.4 Commercial Paper Eligibility for issuance of CP Rating Requirement Eligibility for investment in CP Form of the instrument, mode of issuance, 183 tenor Credit Enhancement, limits, redemption etc Buyback of CP Short Term and Long Term Bonds Collateralized Borrowing and Lending Obligation 186 (CBLO) 6.7 Let us sum up Key words Check your progress Answers to check your progress 189 CHAPTER 7 Sources of Finance III 7.0 Objective Introduction Factoring Different types of factoring Parties in Factoring Advantages for the seller Forfaiting Difference between Factoring and Forfaiting American Depository Receipts (ADRs) Global Depository Receipts (GDRs) External Commercial Borrowings (ECBs) Let us sum up Key words Check your progress Answers to check your progress 207 xviii

9 CHAPTER 8 Regulatory requirements/compliance 8.0 Objectives Introduction Registration of NBFC Minimum Net-Owned Funds (NOF) Supplementary Capital Instruments Types of Supplementary Capital Capital Adequacy Norms & Leverage Ratio Capital Adequacy - The Concept Guidelines on Minimum Capital Requirements Capital adequacy Norms and Leverage ratio for NBFCs Income Recognition Income from Investments Applicability of Accounting Standards Asset Classification Asset Classification for NBFC-Factor Asset Classification Norms for NBFC-MFIs NBFC Housing Finance Companies Provisioning requirements Provisioning requirements for NBFC Mortgage 227 Guarantee Companies Provisioning requirement for NBFC Hou- 229 sing Finance Companies Points to be noted while making provision Provision for Hire purchase assets Points to be noted Provisioning for Standard Assets 232 xix

10 Standard asset provisioning for Non-Systemically 232 Important Non-Deposit taking Company Standard asset provisioning for Systemically Important Non-Deposit taking Company and Deposit taking Company Disclosure in the Balance Sheet Accounting year Transactions in Government Securities Submission of a certificate from Statutory Auditor Corporate Governance and Disclosure norms Fit and Proper Criteria for Directors Compliance with RBI Act/Directions Illustrative Compliance Checklist Returns to be submitted by NBFCs Other Returns by concerned NBFCs Reporting of Miscellaneous Non-Banking Company Asset Liability Management (ALM) ALM Information System ALM Organisation Composition of ALCO ALM process Market Risk Market Risk Management Structure Risk Identification Risk Measurement Risk Monitoring and control Risk Reporting Risk Mitigation Operational Risk Identification of Operational Risk 254 xx

11 Assessment of Operational Risk Measurement of Operational Risk Monitoring of Operational Risk Control/Mitigation of Operational Risk Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR) Requirement of Maintenance of Liquid Assets for NBFC-D Let us sum up Key words Check your progress Answers to check your progress 258A MODULE C : Customer Service and Deposits CHAPTER 9 CUSTOMER RELATIONSHIP 9.0 Objectives Introduction Types of Customers and the different services offered by them Types of customers according to the constitution Types of customers according to the nature of business of the NBFC and the services offered Services offered by NBFCs Fair Practices Code (FPC) for NBFCs Applications for loans and their processing Loan appraisal and terms/conditions Disbursement of loans including changes in terms and conditions 267 xxi

12 9.5 NBFC-MFIs Disclosures in loan agreement/loan card Non-Coercive Methods of Recovery Internal control system Lending against collateral of gold jewellery Depositor Protection Initiatives Default in repayment of deposits by NBFC Payment of interest on overdue deposits Pre-payment of deposits Measures initiated by RBI to protect the interest of depositors Grievance Redressal Display of contact person in case of grievance Availability of ombudsman scheme Consumer Protection Act (COPRA) Jurisdiction of consumer forums and the 276 commission How complaints are submitted Let us sum up Key words Check your progress Answers to check your progress 279 CHAPTER 10 KYC/AML/CFT NORMS 10.0 Objectives Introduction: Know Your Customer (KYC) Guide- 283 lines - Anti Money Laundering Standards 10.2 KYC Policy Compliance of KYC Policy Customer Acceptance Policy 287 xxii

13 10.3 Risk Management Customer Identification Procedure Verifying identity of customers and due diligence 288 by third party Part I - Customer Due Diligence Procedure 290 (CDD) Officially Valid Documents (OVD) Simplified measures for OVD Part II - Simplified procedure for opening 293 accounts by NBFCs Part III - CDD Measures for Sole Proprietary 294 firms Part IV - CDD Measure for Legal Entities Part V - Identification of Beneficial Owner Part VI - On-going due diligence Periodic Updation Part VII - Enhanced and Simplified Due 298 Diligence Procedure 10.4 Client accounts opened by professional intermediaries Adherence to Know Your Customer (KYC) Guidelines 300 by NBFCs Including Brokers/Agents 10.6 Due Diligence of Persons Authorised by NBFCs 300 Including Brokers/Agents etc Customer service in terms of identifiable contact with 300 persons authorised by NBFCs including brokers/agents etc Principal Officer (PO) Suspicion of Money Laundering/Terrorist Financing Prevention of Money Laundering Act, Obligations 301 of NBFCs in terms of rules notified thereunder Designated Director Maintenance of Records of Transactions Preservation of Records 304 xxiii

14 10.14 Combating Financing of Terrorism (CFT) An indicative list of suspicious transactions Reporting to Financial Intelligence Unit-India Let us sum up Check your progress Answers to check your progress 310 CHAPTER 11 OPERATIONAL ASPECTS OF OPENING ACCOUNTS 11.0 Objectives Introduction Operational Aspects of opening and maintaining accounts of different types of Customers Regulations applicable on non-deposit taking 314 NBFCs with asset size of less than ` 500 Crore Operational aspects of Deposit Accounts Safe Custody of Liquid Assets/Collection of Interest 322 on SLR Securities 11.4 KYC/AML/CFT norms for accounts opened by NBFCs 322 and persons authorised by them including brokers/agents etc., for their customers 11.5 Monitoring of borrower accounts Term Deposits and other Services of NBFCs Difference between NBFC deposits and bank deposits Let us sum up Key words Check your progress Answers to check your progress 328 xxiv

15 CHAPTER 12 MARKETING AND DISTRIBUTION 12.0 Objectives Introduction Meaning, Importance and Functions of Marketing Management Understanding the market place and the 332 customer needs Designing a customer-driven marketing 333 strategy Production Concept Product Concept Selling Concept Marketing Concept Societal Marketing Concept Constructing a marketing programme to deliver superior 335 value 12.4 Building professional relationship with the customer 335 and customer delight 12.5 Customer Relationship Management (CRM) Customer Value Customer Satisfaction Capturing Value from Customers Building the Right Relationship with the Right Customer Butterflies True Friends Barnacles Strangers Changing Marketing Scenario The New Digital Age 338 xxv

16 Rapid Globalisation Ethical marketing and social responsibility Growth of Not-for-Profit Marketing Pricing of Products Cost Based Pricing Value Based Pricing Competition Based Pricing Role of Promotions in Marketing Advertising Sales Promotion Public Relations Personal Selling Direct Marketing Direct and Indirect Channels of Distribution Marketing in the Digital Age E-business E-marketing Domains Let us sum up Key words Check your Progress Answers to check your Progress 350 MODULE D : Loans and Advances and Investments CHAPTER 13 Types of Credit Facilities 13.0 Objectives Introduction Types of Credit Facilities Demand Loans 356 xxvi

17 Term Loans Working Capital Loans Different types of financing Project Loans Infrastructure Finance Trade Finance Retail Loans for Personal Segment Customers 363 (Housing loans, Car Loans, Two-wheeler loans, Personal loans, Gold loans, Loans against shares) MSME Finance Microfinance Let us sum up Check your progress Answers to check your progress 369 CHAPTER 14 Credit Appraisal Techniques 14.0 Objectives Introduction Assessment of Term Loans Working Capital Assessment Operating Cycle Method Turnover Method - Assessment based on the 379 Turnover (Nayak Committee Recommendations) Assessed Bank Finance (ABF) on the Basis of 379 Holding Norms Cash Budget Method Non-fund based working capital limits Letter of Credit Bank Guarantee 387 xxvii

18 14.5 Let us sum up Check your progress Answers to check your progress 390 CHAPTER 15 Documentation, Credit Management & Credit Monitoring 15.0 Objectives Introduction Documentation Credit Management and Credit Monitoring Credit Risk Measurement of Credit Risk Risk Mitigation Risk Rating Risk Pricing Portfolio Management Loan Review Mechanism (LRM) Credit Monitoring Recent RBI initiatives/guidelines/directions in the field of Credit Management, Monitoring and Mitigation of Credit Risk in respect of Distressed Assets deserves a special mention as indicated below Early recognition of stress and reporting to 406 Central Repository of Information on Large Credits (CRILC); Formation of JLF and implementation of CAP Corrective Action Plan (CAP) By JLF Strategic Debt Restructuring Scheme Scheme for Sustainable Structuring of Stressed Assets (54A) 416 xxviii

19 15.5 Classification of Assets and NPA Management NPA Management and Recovery of Loans Let us sum up Check your progress Answers to check your progress 435 CHAPTER 16 Securities - Different Types of Charges - Different Types of Collaterals and their Characteristics 16.0 Objectives Introduction Securities & Different Types of Charge over Securities Negative Lien Set off Collateral Securities and their Characteristics Let us sum up Key words Check your progress Answers to check your progress 454 CHAPTER 17 Types of Investments 17.0 Objectives Introduction Different Types of Investments Government Securities Debentures and Bonds Mutual Funds Inter Corporate Deposits 477 xxix

20 Investment Policy & Accounting of Investments of NBFCs Let us sum up Check your progress Answers to check your progress 485 xxx