FINANCIAL SERVICES SECTOR – CS EXECUTIVE
Financial Services sector comprises of wide range of economic services in today’s world. Though the term invariably relates to banking, investing, and insurance services, it is not limited to those. Financial Services industry in general deals with funds, more appropriately acts as bridge in transfer of funds between the one having surplus and one facing deficit.
Therefore it has grown into an vital player that manage funds, including credit unions, banks, insurance companies, consumer-finance companies, stock brokerages, investment funds, individual portfolio managers and some government-sponsored enterprises as well.
The Government of India has introduced several reforms to liberalize, regulate and enhance this industry. These include launching different categories of Non-Banking Finance Companies (NBFC’s), Asset Reconstruction Companies (ARC’s) and Micro Finance Institutions (MFI’s). In the recent times, with mobile technology taking over and vast strides in the field of information technology, Payment Banks has emerged as a new model of banks conceptualized by the Reserve Bank of India (RBI).
Now let us get into some details understanding these Financial Services Sectors;
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NON BANKING FINANCIAL COMPANY (NBFC)
A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 2013 (or any earlier enactments) engaged in the business of loans and advances, acquisition of various marketable securities, leasing, hire-purchase, insurance business, chit business etc.
Further 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).
However it 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.
RBI has laid down the criteria to determine whether a company is into financial business or not. It provides that if a company fulfills the below two criteria, it is said that the principle business of the company is financial activity and such company should be registered as NBFC by RBI.
- company’s financial assets constitute more than 50 per cent of the total assets and
- Income from financial assets constitutes more than 50 per cent of the gross income.
SCOPE OF ACTIVITIES
NBFCs basically lend and make investments and hence their activities are similar to that of banks; however there are a few differences as given below:
- NBFC cannot accept demand deposits;
- NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
- Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.
Further, the NBFC’s are categorized into few categories bases on the below features:
- in terms of the type of liabilities into Deposit and Non-Deposit accepting NBFCs,
- non deposit taking NBFCs by their size into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and
- by the kind of activity they conduct.
NBFC Registration involves two steps, namely:
- Incorporation of Company under Companies Act, 2013. Their principal business, to be stated in the MOA, while registering under the Companies Act shall be lending credit, making investments in various types of shares and stocks, leasing, hire-purchase, insurance business, chit business, and receiving deposits under any scheme or arrangement.
Since the Net Owned Funds of the entity should be not less than Rs. Two Crore, it must be ensured that the Authorized Share Capital of the NBFC is not less than Rs. 2 Crore.
- Registration Process with Reserve Bank of India by making an application with requisite documents along with the application. The documents required may vary depending on the category of registration sought by the applicant.
HOUSING FINANCE COMPANIES (HFC)
Housing Finance Company (HFC) is a type of non-banking financial institution which is primarily engaged in the business of providing home loans and other related products. The main aspect to be noted here is unlike other Non-Banking Financial Companies governed under the regulatory framework of RBI, HFCs are regulated by the National Housing Bank (NHB).
In HFC’s, Collateral securities are accepted against loans advanced by HFCs which include the property for which loan has been granted. Since properties serve as the underlying asset on which financing is given, the amount of loan advanced depends upon the value of the collateral offered. The value of the collateral ensures that the lender is secured and has covered itself from the risk of default.
In general, loans given by HFC’s are usually for a long period of time. Though the value of property is less volatile but there are chances that the same may fluctuate during the loan tenure. Thus revaluation at regular intervals is done so that the lender is assured of little or no deviation in the Loan to Value (LTV) ratio and also that the property is valued at its current fair market value.
A Housing Finance Company (HFC) shall be:
- Company registered under the Companies Act, 2013 or any earlier enactment having as one of its principal objects as the transacting of the business of providing finance for housing, whether directly or indirectly and
- Also requires registration with National Housing Bank (NHB) for commencing or carrying on the business of housing finance. The National Housing Bank was set up under the National Housing Bank Act, 1987. Housing Finance Companies are governed by the said Act and by Circulars, Guidelines, Notifications and Directions issued by National Housing Bank.
In terms of Section 29A of the National Housing Bank Act, 1987, no Housing Finance Company shall commence or carry on the business of a housing finance institution without –
- Obtaining a certificate of registration from National Housing Bank issued under Chapter V of the said Act, and
- Having the net owned fund of Rs. 10 Crore or such other higher amount, as the National Housing Bank may, by notification, specify.
ASSET RECONSTRUCTION COMPANY (ARC)
The origin of ARC in India should be linked to the problem of recovery from NPAs recognized in 1997 by Government of India. The Narasimhan Committee Report mentioned that an important aspect of the continuing reform process was to reduce the high level of NPAs as a means of banking sector reform. It was expected that with a combination of policy and institutional development, new NPAs in the future could afford to be lower.
As a result, Asset Reconstruction Company (Securitization Company / Reconstruction Company) has its existence. An ARC is a company registered under Section 3 of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SRFAESI) Act, 2002 and regulated by Reserve Bank of India as a Non Banking Financial Company (u/s 45I (f) (iii) of RBI Act, 1934). However, RBI has exempted ARCs from the compliances under section 45-IA, 45-IB and 45-IC of the Reserve Bank Act, 1934. In nutshell, ARC functions like an AMC within the guidelines issued by RBI.
ARC has been set up to provide a focused approach to Non-Performing Loans resolution issue by:-
(a) Isolating Non Performing Loans (NPLs) from the Financial System (FS),
(b) Freeing the financial system to focus on their core activities and
(c) Facilitating development of market for distressed assets.
MICRO FINANCE INSTITUTIONS (MFI)
A microfinance institution is an organization that offers financial services to low income populations. Basically, these institutions give almost all loans to their members, and many offer insurance, deposit and other services. OThey are those that offer credits and other financial services to the representatives of poor strata of population (except for extremely poor strata). An increasing number of microfinance institutions (MFIs) are seeking non-banking finance company (NBFC) status from RBI to get wide access to funding, including bank finance.
NABARD has defined microfinance as “provision of thrift, credit and other financial services and products of very small amounts to the poor in rural, semi-urban and urban areas provided to customers to meet their financial needs; with only qualification that (1) transactions value is small and (2) customers are poor.”
To be registered as a MFI, it should be:
- Company has to be incorporated under the Companies Act, 2013. The company may be a private company or a public company
- After incorporation, the company has to register itself with the Reserve Bank of India by submitting an application in this regard with requisite documents, since a Micro Finance Institution (hereinafter referred to as MFI) is regulated by the Reserve Bank of India.
Payments banks are a new model of banks conceptualized by the Reserve Bank of India (RBI). These banks can accept a restricted deposit, which is currently limited to Rs. 1 lakh per customer and may be increased further. They can pay interest on these deposits just like savings bank account. Both current account and savings accounts can be operated by such banks.
Payments banks can issue services like ATM cards, debit cards, net-banking, third party transfers and mobile-banking and offer remittance services. The main notable restriction is that these banks cannot grant loans or issue credit cards.
The main objective of payments bank is to widen the spread of payment and financial services to small business, low-income households; migrant labor workforce in secured technology-driven environment. With payments banks, RBI seeks to increase the penetration level of financial services to the remote areas of the country.
Payment Banks are regulated by the Reserve Bank of India. For a payment bank registration, an application has to be filed with Reserve Bank of India in Form III under Section 22 of the Banking Regulation Act, 1949 for a license to commence banking business by a company incorporated in India and desiring to commence banking business.
Further the payment banks are regulated by the Guidelines for Licensing of Payment Banks and Operating Guidelines for Payment Banks released by the Reserve Bank of India.
Hope it helped you!
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