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 5 1.1 What is a financial system? 5 1.2 Roles and Functions in Brief of the Central Banking Authority 7 1.2.1 Commercial Banks 8 1.2.2 Co-operative Banks 8 1.3 The Securities and Exchange Board of India 9 1.3.1 Functions of SEBI 9 1.4 National Housing Bank (NHB) 10 1.4.1 Functions of NHB 11 1.5 Insurance Regulatory and Development Authority of India (IRDAI) 12 1.5.1 Duties, powers and functions of IRDAI 12 1.6 Pension Fund Regulatory & Development Authority 13 xi
1.6.1 Duties, Powers and Functions of Pension Fund Regulatory and Development Authority 13 1.7 National Bank for Agriculture and Rural Development (NABARD) 15 1.7.1 Role and functions of NABARD 15 1.8 Non-Banking Financial Companies (NBFCs) 16 1.9 Primary Dealers 18 1.9.1 Role and obligations of the PDs 19 1.9.2 Facilities from RBI to PDs 19 1.10 Foreign Investments in India 19 1.10.1 The routes under which foreign investment 20 1.10.2 Direct foreign investment 20 1.10.3 Foreign Portfolio Investment 21 1.10.4 Investment in other securities 22 1.10.5 Foreign Venture Capital Investment 22 1.10.6 Investment in Investment Vehicle 22 1.11 Let us sum up 22 1.12 Key words 23 1.13 Check your progress 23 1.14 Answers to check your progress 24 CHAPTER 2 MARKETS 2.0 Objectives 29 2.1 Introduction 29 2.2 Financial market and the sub-markets 30 2.3 Money Market 31 2.3.1 Indian Money Market 31 2.3.2 Money Market : Conceptual Framework Concepts 32 2.4 Participants in the Money Market 34 xii
2.4.1 Banks (SCB) excluding RRBs 34 2.4.2 Discount and Finance House of India Limited 34 (DFHI)/SBI DFHI Limited 2.4.3 Public Sector Undertakings 35 2.4.4 Public Financial Institutions 35 2.4.5 Money Market Mutual Funds 36 2.4.6 Non-Banking Finance Companies 36 2.4.7 Financial Subsidiaries and Mutual Funds 36 2.4.8 Primary Dealers (PDs) 36 2.4.9 Provident Funds 37 2.4.10 Private Sector Companies (Corporates) 38 2.5 Money Market Instruments 39 2.5.1 General Characteristics 39 2.5.2 Money at Call or Short Notice (Notice Money) 39 2.5.3 Term Money 40 2.5.4 Treasury Bills (T-Bills) 40 2.5.5 Bills Rediscounting Scheme 41 2.5.6 Certificate of Deposit (CDs) 41 2.5.7 Commercial Paper (CP) 43 2.5.8 Repurchase Agreements (REPO) 47 2.5.9 Collateralised Borrowings and Lending Obligations 50 (CBLO) 2.5.10 Inter Bank Participation Certificates (IBPCs) 50 2.5.11 Options 51 2.5.12 Cash Management Bills 52 2.6 Different Types of Interest Rate Quotations 52 2.6.1 Fixed Rate of Interest 52 2.6.2 Floating Rate of Interest 53 2.6.3 Yield 53 2.6.4 Count Conventions 54 xiii
2.6.5 Premium & Discount 54 2.7 Debt Market 54 2.7.1 Advantages of fixed income securities 56 2.7.2 Risks associated with debt securities 57 2.7.3 Benefits associated with an efficient Debt 57 Market 2.7.4 Trading structure in wholesale debt-market 57 2.7.5 Segments in the secondary debt market 58 2.7.6 The major participants in the Indian debt 58 market 2.7.7 Types of instruments in Debt Market 59 2.7.8 Debt Market and some related terms 62 2.8 Foreign Exchange Market 62 2.8.1 Foreign Exchange - Definition 64 2.8.2 Participants of Foreign Exchange Market 64 (Forex Market) 2.8.3 Exchange Rates - Factors influencing them 65 2.8.4 Exchange Rate Mechanism 66 2.8.5 Exchange Rate Quotation 67 2.8.6 Forex Derivatives and their Usages 69 2.8.7 Risks associated in Foreign Exchange Market 71 2.9 Capital Market 73 2.9.1 Divisions of Capital Market 73 2.9.2 Capital Market Instruments 75 2.10 Mutual Funds 81 2.10.1 Different Types of Mutual Fund Schemes 82 2.11 Insurance Market 85 2.11.1 Insurance Industry of India 85 2.11.2 Different types of Life Insurance Policies 87 2.11.3 Regulator of the Insurance Sector : IRDAI 90 2.12 Let us sum up 91 2.13 Key words 92 xiv
2.14 Check your progress 92 2.15 Answers to check your progress 93 CHAPTER 3 NBFCs - TYPES OF NBFCs AND THEIR ROLES 3.0 Objectives 97 3.1 Introduction 97 3.2 Non-Banking Financial Company (NBFCs) 97 3.3 Exemptions from Registration with RBI 98 3.4 Types of NBFCs and their Role in Promoting Inclusive 99 Growth 3.5 Regulators of NBFCs 103 3.6 Role of NBFCs in promoting inclusive growth 107 3.7 Companies Act, 2013 - Recent Changes 108 3.8 Highlights of the Companies (Amendment) Act, 2015 110 3.9 Reserve Bank of India Act, 1934 111 3.10 Corporate Governance 119 3.11 Let us sum up 121 3.12 Key words 122 3.13 Check your progress 122 3.14 Answers to check your progress 123 CHAPTER 4 Recent RBI Initiatives in the Financial System 4.0 Objective 127 4.1 Introduction 127 4.2 Small Finance Banks (SFBs) 127 xv
4.3 Guidelines for Licensing of Small Finance Banks in the Private Sector as issued on November 27, 2014 128 4.3.1 Operating guidelines for Small Finance Banks 129 4.4 Payment Banks 133 4.4.1 Operating Guidelines for Payment Banks 136 4.5 Micro Units Development & Refinance Agency Limited (MUDRA) 140 4.5.1 Role and Responsibilities of MUDRA 141 4.5.2 Pradhan Mantri Mudra Yojana (PMMY) 142 4.5.3 Credit Guarantee Fund for Micro Units 143 4.5.4 Scheme for guarantee coverage to eligible Non-Banking Finance Companies (NBFCs) 143 4.6 Impact on NBFCs on the recent changes in the Financial 146 Market 4.7 Let us sum up 146 4.8 Key words 147 4.9 Check your progress 147 4.10 Answers to check your progress 148 MODULE B : Resource mobilisation for NBFCs & capital adequacy norms CHAPTER 5 SOURCEs OF FINANCE I 5.0 Objectives 153 5.1 Introduction 153 5.2 Share Capital 153 5.2.1 Types of Share Capital 153 5.3 Components of Different Types of Capital 158 5.3.1 Common Equity Tier 1 Capital 161 xvi
5.3.2 Additional Tier 1 capital 162 5.3.3 Elements of Tier 2 Capital 163 5.4 Capital Requirements for NBFCs 164 5.5 Debentures and its Types 165 5.6 Let us sum up 168 5.7 Key words 169 5.8 Check your progress 169 5.9 Answers to check your progress 170 CHAPTER 6 SOURCES OF FINANCE II 6.0 Objectives 173 6.1 Introduction 173 6.2 Public Deposits 174 6.2.1 Acceptance of Public Deposits 175 6.2.2 Restrictions on acceptance of public deposits by NBFCs 175 6.3 Bank Finance 178 6.3.1 Bank Finance to NBFCs registered with RBI 179 6.3.2 Bank Finance to NBFCs not requiring Registration 179 6.3.3 Bank Finance to Residuary Non-Banking 179 Companies (RNBCs) 6.3.4 Bank investment in Non-Convertible 180 Debentures 6.3.5 Activities not eligible for Bank Credit 180 6.3.6 Restrictions regarding investments made by 181 banks in securities/instruments issued by NBFCs 6.3.7 Prudential Ceilings for exposure of Banks to 181 NBFCs 6.3.8 Leased and Sub-Leased Assets 182 xvii
6.4 Commercial Paper 182 6.4.1 Eligibility for issuance of CP 183 6.4.2 Rating Requirement 183 6.4.3 Eligibility for investment in CP 183 6.4.4 Form of the instrument, mode of issuance, 183 tenor 6.4.5 Credit Enhancement, limits, redemption etc. 184 6.4.6 Buyback of CP 184 6.5 Short Term and Long Term Bonds 184 6.6 Collateralized Borrowing and Lending Obligation 186 (CBLO) 6.7 Let us sum up 188 6.8 Key words 188 6.9 Check your progress 188 6.10 Answers to check your progress 189 CHAPTER 7 Sources of Finance III 7.0 Objective 193 7.1 Introduction 193 7.2 Factoring 193 7.2.1 Different types of factoring 194 7.2.2 Parties in Factoring 194 7.2.3 Advantages for the seller 195 7.3 Forfaiting 195 7.4 Difference between Factoring and Forfaiting 196 7.5 American Depository Receipts (ADRs) 196 7.6 Global Depository Receipts (GDRs) 197 7.7 External Commercial Borrowings (ECBs) 199 7.8 Let us sum up 205 7.9 Key words 206 7.10 Check your progress 206 7.11 Answers to check your progress 207 xviii
CHAPTER 8 Regulatory requirements/compliance 8.0 Objectives 213 8.1 Introduction 213 8.2 Registration of NBFC 216 8.3 Minimum Net-Owned Funds (NOF) 216 8.4 Supplementary Capital Instruments 217 8.4.1 Types of Supplementary Capital 217 8.5 Capital Adequacy Norms & Leverage Ratio 217 8.5.1 Capital Adequacy - The Concept 217 8.5.2 Guidelines on Minimum Capital Requirements 218 8.5.3 Capital adequacy Norms and Leverage ratio for NBFCs 219 8.6 Income Recognition 220 8.6.1 Income from Investments 220 8.7 Applicability of Accounting Standards 221 8.8 Asset Classification 221 8.8.1 Asset Classification for NBFC-Factor 223 8.8.2 Asset Classification Norms for NBFC-MFIs 224 8.8.3 NBFC Housing Finance Companies 224 8.9 Provisioning requirements 225 8.9.1 Provisioning requirements for NBFC Mortgage 227 Guarantee Companies 8.9.2 Provisioning requirement for NBFC Hou- 229 sing Finance Companies 8.9.3 Points to be noted while making provision 230 8.9.4 Provision for Hire purchase assets 231 8.9.5 Points to be noted 231 8.10 Provisioning for Standard Assets 232 xix
8.10.1 Standard asset provisioning for Non-Systemically 232 Important Non-Deposit taking Company 8.10.2 Standard asset provisioning for Systemically Important Non-Deposit taking Company and Deposit taking Company 233 8.11 Disclosure in the Balance Sheet 233 8.12 Accounting year 233 8.13 Transactions in Government Securities 233 8.14 Submission of a certificate from Statutory Auditor 234 8.15 Corporate Governance and Disclosure norms 234 8.16 Fit and Proper Criteria for Directors 234 8.17 Compliance with RBI Act/Directions 235 8.17.1 Illustrative Compliance Checklist 235 8.17.2 Returns to be submitted by NBFCs 237 8.17.3 Other Returns by concerned NBFCs 244 8.17.4 Reporting of Miscellaneous Non-Banking Company 244 8.18 Asset Liability Management (ALM) 245 8.18.1 ALM Information System 246 8.18.2 ALM Organisation 246 8.18.3 Composition of ALCO 247 8.18.4 ALM process 247 8.19 Market Risk 248 8.19.1 Market Risk Management Structure 249 8.19.2 Risk Identification 251 8.19.3 Risk Measurement 251 8.19.4 Risk Monitoring and control 252 8.19.5 Risk Reporting 252 8.19.6 Risk Mitigation 252 8.20 Operational Risk 252 8.20.1 Identification of Operational Risk 254 xx
8.20.2 Assessment of Operational Risk 254 8.20.3 Measurement of Operational Risk 255 8.20.4 Monitoring of Operational Risk 255 8.20.5 Control/Mitigation of Operational Risk 255 8.21 Cash Reserve Ratio (CRR) & Statutory Liquidity Ratio (SLR) 256 8.21.1 Requirement of Maintenance of Liquid Assets for NBFC-D 257 8.22 Let us sum up 257 8.23 Key words 258 8.24 Check your progress 258 8.25 Answers to check your progress 258A MODULE C : Customer Service and Deposits CHAPTER 9 CUSTOMER RELATIONSHIP 9.0 Objectives 263 9.1 Introduction 263 9.2 Types of Customers and the different services offered by them 264 9.2.1 Types of customers according to the constitution 264 9.2.2 Types of customers according to the nature of business of the NBFC and the services offered 264 9.3 Services offered by NBFCs 265 9.4 Fair Practices Code (FPC) for NBFCs 266 9.4.1 Applications for loans and their processing 266 9.4.2 Loan appraisal and terms/conditions 267 9.4.3 Disbursement of loans including changes in terms and conditions 267 xxi
9.5 NBFC-MFIs 269 9.5.1 Disclosures in loan agreement/loan card 270 9.5.2 Non-Coercive Methods of Recovery 271 9.5.3 Internal control system 271 9.5.4 Lending against collateral of gold jewellery 271 9.6 Depositor Protection Initiatives 272 9.6.1 Default in repayment of deposits by NBFC 273 9.6.2 Payment of interest on overdue deposits 273 9.6.3 Pre-payment of deposits 273 9.6.4 Measures initiated by RBI to protect the interest of depositors 274 9.7 Grievance Redressal 274 9.7.1 Display of contact person in case of grievance 275 9.7.2 Availability of ombudsman scheme 276 9.8 Consumer Protection Act (COPRA) 276 9.8.1 Jurisdiction of consumer forums and the 276 commission 9.8.2 How complaints are submitted 277 9.9 Let us sum up 277 9.10 Key words 278 9.11 Check your progress 278 9.12 Answers to check your progress 279 CHAPTER 10 KYC/AML/CFT NORMS 10.0 Objectives 283 10.1 Introduction: Know Your Customer (KYC) Guide- 283 lines - Anti Money Laundering Standards 10.2 KYC Policy 286 10.2.1 Compliance of KYC Policy 286 10.2.2 Customer Acceptance Policy 287 xxii
10.3 Risk Management 288 10.3.1 Customer Identification Procedure 288 10.3.2 Verifying identity of customers and due diligence 288 by third party 10.3.3 Part I - Customer Due Diligence Procedure 290 (CDD) 10.3.4 Officially Valid Documents (OVD) 292 10.3.5 Simplified measures for OVD 292 10.3.6 Part II - Simplified procedure for opening 293 accounts by NBFCs 10.3.7 Part III - CDD Measures for Sole Proprietary 294 firms 10.3.8 Part IV - CDD Measure for Legal Entities 295 10.3.9 Part V - Identification of Beneficial Owner 296 10.3.10 Part VI - On-going due diligence 296 10.3.11 Periodic Updation 297 10.3.12 Part VII - Enhanced and Simplified Due 298 Diligence Procedure 10.4 Client accounts opened by professional intermediaries 299 10.5 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. 10.7 Customer service in terms of identifiable contact with 300 persons authorised by NBFCs including brokers/agents etc. 10.8 Principal Officer (PO) 301 10.9 Suspicion of Money Laundering/Terrorist Financing 301 10.10 Prevention of Money Laundering Act, 2002 - Obligations 301 of NBFCs in terms of rules notified thereunder 10.11 Designated Director 302 10.12 Maintenance of Records of Transactions 303 10.13 Preservation of Records 304 xxiii
10.14 Combating Financing of Terrorism (CFT) 304 10.15 An indicative list of suspicious transactions 305 10.16 Reporting to Financial Intelligence Unit-India 307 10.17 Let us sum up 308 10.18 Check your progress 309 10.19 Answers to check your progress 310 CHAPTER 11 OPERATIONAL ASPECTS OF OPENING ACCOUNTS 11.0 Objectives 313 11.1 Introduction 313 11.2 Operational Aspects of opening and maintaining accounts of different types of Customers 314 11.2.1 Regulations applicable on non-deposit taking 314 NBFCs with asset size of less than ` 500 Crore 11.2.2 Operational aspects of Deposit Accounts 314 11.3 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 324 11.6 Term Deposits and other Services of NBFCs 324 11.7 Difference between NBFC deposits and bank deposits 325 11.8 Let us sum up 325 11.9 Key words 326 11.10 Check your progress 327 11.11 Answers to check your progress 328 xxiv
CHAPTER 12 MARKETING AND DISTRIBUTION 12.0 Objectives 331 12.1 Introduction 331 12.2 Meaning, Importance and Functions of Marketing Management 332 12.2.1 Understanding the market place and the 332 customer needs 12.2.2 Designing a customer-driven marketing 333 strategy 12.2.3 Production Concept 333 12.2.4 Product Concept 333 12.2.5 Selling Concept 334 12.2.6 Marketing Concept 334 12.2.7 Societal Marketing Concept 334 12.3 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) 336 12.5.1 Customer Value 336 12.5.2 Customer Satisfaction 336 12.5.3 Capturing Value from Customers 336 12.6 Building the Right Relationship with the Right Customer 337 12.6.1 Butterflies 337 12.6.2 True Friends 337 12.6.3 Barnacles 337 12.6.4 Strangers 338 12.7 Changing Marketing Scenario 338 12.7.1 The New Digital Age 338 xxv
12.7.2 Rapid Globalisation 338 12.7.3 Ethical marketing and social responsibility 339 12.7.4 Growth of Not-for-Profit Marketing 339 12.8 Pricing of Products 339 12.8.1 Cost Based Pricing 341 12.8.2 Value Based Pricing 341 12.8.3 Competition Based Pricing 341 12.9 Role of Promotions in Marketing 341 12.9.1 Advertising 342 12.9.2 Sales Promotion 343 12.9.3 Public Relations 343 12.9.4 Personal Selling 344 12.9.5 Direct Marketing 344 12.9.6 Direct and Indirect Channels of Distribution 345 12.10 Marketing in the Digital Age 346 12.10.1 E-business 346 12.10.2 E-marketing Domains 347 12.11 Let us sum up 347 12.12 Key words 349 12.13 Check your Progress 349 12.14 Answers to check your Progress 350 MODULE D : Loans and Advances and Investments CHAPTER 13 Types of Credit Facilities 13.0 Objectives 355 13.1 Introduction 355 13.2 Types of Credit Facilities 356 13.2.1 Demand Loans 356 xxvi
13.2.2 Term Loans 356 13.2.3 Working Capital Loans 356 13.3 Different types of financing 357 13.3.1 Project Loans 357 13.3.2 Infrastructure Finance 358 13.3.3 Trade Finance 360 13.3.4 Retail Loans for Personal Segment Customers 363 (Housing loans, Car Loans, Two-wheeler loans, Personal loans, Gold loans, Loans against shares) 13.3.5 MSME Finance 366 13.3.6 Microfinance 366 13.4 Let us sum up 368 13.5 Check your progress 369 13.6 Answers to check your progress 369 CHAPTER 14 Credit Appraisal Techniques 14.0 Objectives 373 14.1 Introduction 373 14.2 Assessment of Term Loans 374 14.3 Working Capital Assessment 377 14.3.1 Operating Cycle Method 378 14.3.2 Turnover Method - Assessment based on the 379 Turnover (Nayak Committee Recommendations) 14.3.3 Assessed Bank Finance (ABF) on the Basis of 379 Holding Norms 14.3.4 Cash Budget Method 380 14.4 Non-fund based working capital limits 386 14.4.1 Letter of Credit 386 14.4.2 Bank Guarantee 387 xxvii
14.5 Let us sum up 388 14.6 Check your progress 389 14.7 Answers to check your progress 390 CHAPTER 15 Documentation, Credit Management & Credit Monitoring 15.0 Objectives 393 15.1 Introduction 393 15.2 Documentation 394 15.3 Credit Management and Credit Monitoring 395 15.3.1 Credit Risk 396 15.3.2 Measurement of Credit Risk 397 15.3.3 Risk Mitigation 401 15.3.4 Risk Rating 402 15.3.5 Risk Pricing 403 15.3.6 Portfolio Management 403 15.3.7 Loan Review Mechanism (LRM) 404 15.3.8 Credit Monitoring 404 15.4 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 405 15.4.1 Early recognition of stress and reporting to 406 Central Repository of Information on Large Credits (CRILC); Formation of JLF and implementation of CAP 15.4.2 Corrective Action Plan (CAP) By JLF 409 15.4.3 Strategic Debt Restructuring Scheme 410 15.4.4 Scheme for Sustainable Structuring of Stressed Assets (54A) 416 xxviii
15.5 Classification of Assets and NPA Management 420 15.6 NPA Management and Recovery of Loans 430 15.7 Let us sum up 433 15.8 Check your progress 434 15.9 Answers to check your progress 435 CHAPTER 16 Securities - Different Types of Charges - Different Types of Collaterals and their Characteristics 16.0 Objectives 439 16.1 Introduction 439 16.2 Securities & Different Types of Charge over Securities 439 16.2.1 Negative Lien 451 16.2.2 Set off 451 16.3 Collateral Securities and their Characteristics 452 16.4 Let us sum up 452 16.5 Key words 453 16.6 Check your progress 454 16.7 Answers to check your progress 454 CHAPTER 17 Types of Investments 17.0 Objectives 457 17.1 Introduction 457 17.2 Different Types of Investments 457 17.2.1 Government Securities 458 17.2.2 Debentures and Bonds 468 17.2.3 Mutual Funds 472 17.2.4 Inter Corporate Deposits 477 xxix
17.2.5 Investment Policy & Accounting of Investments of NBFCs 479 17.3 Let us sum up 483 17.4 Check your progress 485 17.5 Answers to check your progress 485 xxx