commercial banks.pdf

Finance

1. Commercial Banks
A commercial bank is a financial institution which performs the functions of
accepting deposits from the general public and givi ng loans for investment with
the aim of earning profit.
In fact, commercial banks, as their name suggests, axe profit
-
seeking institutions,
In fact, commercial banks, as their name suggests, axe profit
-
seeking institutions,
i.e., they do banking business to earn profit.
They generally finance trade and commerce with shor t-term loans. They charge
high rate of interest from the borrowers but pay mu ch less rate of Interest to
their depositors with the result that the differenc e between the two rates of
interest becomes the main source of profit of the b anks. Most of the Indian joint
stock Banks are Commercial Banks such as Punjab Nat ional Bank, Allahabad
Bank, Canara Bank, Andhra Bank, Bank of Baroda, etc .

2. The two most distinctive features of a commercial b ank are borrowing and lending,
i.e., acceptance of deposits and lending of money t o projects to earn Interest (profit).
In short, banks borrow to lend. The rate of interes t offered by the banks to depositors
is called the borrowing rate while the rate at whic h banks lend out is called lending
rate.
The difference between the rates is called ‘spread’ which is appropriated by the
banks. banks. Functions Primary Functions of Commercial Banks
The primary functions of a commercial bank are as f ollows:
1. Accepting Deposits Commercial banks accept deposits from people, busin esses, and other entities in the
form of:
•Savings deposits–The commercial bank accepts small deposits, from h ouseholds
or persons, in order to encourage savings in the ec onomy.

3. •Time deposits–The bank accepts deposits for a fixed time and car ries a
higher rate of interest as compared to savings depo sits.
•Current deposits–These accounts do not offer any interest. Further, most
current accounts offer overdrafts up to a pre-speci fied limit. The bank,
therefore, undertakes the obligation of paying all Cheque against deposits
subject to the availability of sufficient
funds in the account.
subject to the availability of sufficient
funds in the account.
2. Lending of Funds •Another important activity is lending funds to cust omers in the form of loans
and advances, cash credit, overdraft anddiscounting of bills, etc.
•Loans are advances that a bank extends to his custo mers with or without
security for a specified time and at an agreed rate of interest. Further, the
bank credits the loan amount in the customers’ acco unt which he withdraws
as per his needs.

4. Under the cash credit facility, the bank offers its customers a facility to borrow
cash up to a certain limit against the security of goods. Further, an overdraft is an
arrangement that a bank offers to customers wherein a temporary facility is
offered to overdraw from the current account withou t any security.
Secondary Functions of Commercial Banks
•The secondary functions of a commercial bank are as follows:
Bank as an Agent
•A bank acts as an agent to its customers for variou s services like:
•Collecting bills, draft, Cheque, etc.
•Paying the insurance premium, rent, loan installmen ts, etc.
•Working as a representative of a customer for purch asing or redeeming
securities, etc. in thestock exchange.

5. •Acting as an executor, administrator, or trustee of the estate of a customer
•Also, preparing income tax returns, claiming tax re funds, etc.
General Utility Services
•There are several generalutility services that comm ercial banks offer like:
•Issuing traveler cheques
•Offering locker facilities for keeping valuables in safe custody
•Also, issuingdebitcards and credit cards, etc.

6. Development in Commercial Banking sector since 1991 s
Since nationalization of banks in 1969, the banking sector
had been dominated by the public sector. There was financial repression, role of
technology was limited, no risk management etc. Thi s resulted in low profitability
and poor asset quality. The country was caught in d eep economic crises. The
Government decided to introduce comprehensive econo mic reforms. Banking sector reforms were part of this package. In august 1991, the Government appointed a Government decided to introduce comprehensive econo mic reforms. Banking sector reforms were part of this package. In august 1991, the Government appointed a committee on financial system under the chairmanshi p of M. Narasimhan. First Phase of Banking sector reforms To promote healthy development of financial sector, the Narasimhan committee
made recommendations.
I) RECOMMENDATIONS OFNARASIMHAN COMMITTEE: •Establishment of 4 tier hierarchy for banking struc ture with 3 to 4 large banks
(including SBI) at top and at bottom rural banks en gaged in agricultural activities.

7. •The supervisory functions over banks and financial institutions can be assigned to a quasi-
autonomous body sponsored by RBI.
•Phased reduction in statutory liquidity ratio.
•Phased achievement of 8% capital adequacy ratio.
•Abolition of branch licensing policy.
II) Banking Reform Measures of Government: On the r ecommendations of Narasimhan Committee, following measures were undertaken by go vernment since 1991: Committee, following measures were undertaken by go vernment since 1991: 1. Lowering SLR and CRR: •The high SLR and CRR reduced the profits of the ban ks. The SLR has been reduced from
38.5% in 1991 to 25% in 1997. This has left more fu nds with banks for allocation to
agriculture, industry, trade etc.
•The Cash Reserve Ratio (CRR) is the cash ratio of a bank’s total deposits to be maintained
with RBI. The CRR has been brought down from 15% in 1991 to 4.1% in June 2003. The
purpose is to release the funds locked up with RBI.

8. 2. Prudential Norms: •Prudential norms have been started by RBI in order to impart professionalism
in commercial banks. The purpose of prudential norm s include proper
disclosure of income, classification of assets and provision for Bad debts so as
to ensure that the books of commercial banks reflec t the accurate and correct
picture of financial position. picture of financial position.
•Prudential norms required banks to make 100% provis ion for all Non-
performing Assets (NPAs). Funding for this purpose was placed at Rs. 10,000
croresphased over 2 years.
3. Capital Adequacy Norms (CAN
):
•Capital Adequacy ratio is the ratio of minimum capi tal to risk asset ratio. In
April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had
attained the ratio of 8%. It was also attained by f oreign banks.

9. 4. Deregulation of Interest Rates: The Narasimhan Committee advocated that interest ra tes should be allowed to
be determined by
market forces. Since 1992, interest rate has become much simpler and freer.
•
Scheduled Commercial banks have now the freedom to set interest rates on
•
Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and m aximum ceiling rates.
•Interest rate on domestic term deposits has been de controlled.
•The prime lending rate of SBI and other banks on ge neral advances of over Rs.
2 lakhs has been reduced.
•Rate of Interest on bank loans above Rs. 2 lakhs ha s been fully decontrolled.
•The interest rates on deposits and advances of all Co-operative banks have
been deregulated subject to a minimum lending rate of 13%.

10. 5. Recovery of Debts: •The Government of India passed the “Recovery of deb ts due to Banks and
Financial Institutions Act 1993” in order to facili tate and speed up the recovery
of debts due to banks and financial institutions. S ix Special Recovery Tribunals
have been set up. An Appellate Tribunal has also be en set up in Mumbai.
6. Competition from New Private Sector Banks: •Now banking is open to private sector. New private sector banks have already
started functioning. These new private sector banks are allowed to raise
capital contribution from foreign institutional inv estors up to 20% and from
NRIs up to 40%. This has led to increased competiti on.

11. 7. Phasing Out Of Directed Credit: •The committee suggested phasing out of the directed credit programme. It
suggested that credit target for priority sector sh ould be reduced to 10% from
40%. It would not be easy for government as farmers , small industrialists and
transporters have powerful lobbies.
8. Access to Capital Market: •The Banking Companies (Acquisition and Transfer of Undertakings) Act was
amended to enable the banks to raise capital throug h public issues. This is
subject to provision that the holding of Central Go vernment would not fall
below 51% of paid-up-capital. SBI has already raise d substantial amount of
funds through equity and bonds.
9. Freedom of Operation: •Scheduled Commercial Banks are given freedom to ope n new branches and
upgrade extension counters, after attaining capital adequacy ratio and
prudential accounting norms. The banks are also per mitted to close non-viable
branches other than in rural areas.

12. 10. Local Area banks (LABs): •In 1996, RBI issued guidelines for setting up of Lo cal Area Banks and it gave its
approval for setting up of 7 LABs in private sector . LABs will help in mobilizing
rural savings and in channeling them in to investme nt in local areas.
11. Supervision of Commercial Banks: 11. Supervision of Commercial Banks: •The RBI has set up a Board of financial Supervision with an advisory Council to
strengthen the supervision of banks and financial i nstitutions. In 1993, RBI
established a new department known as Department of Supervision as an
independent unit for supervision of commercial bank s.

13. Management of Non-Performing Assets
• Interest and/ or instalment of principal remain o verdue for a period of more than
90 days in respect of a term loan,
• The account remains ‘out of order’ for a period o f more than 90 days, in respect of
an Overdraft/Cash Credit (OD/CC),
• The bill remains overdue for a period of more tha n 90 days in the case of bills
purchased and discounted,
• Interest and/or instalment of principal remains o verdue for two harvest seasons • Interest and/or instalment of principal remains o verdue for two harvest seasons but for a period not exceeding two half years in th e case of an advance granted for
agricultural purposes, and w.e.f 30.09.2004 followi ng further amendments were
issued by the Apex Bank:
• A loan granted for short duration crops will be t reated as NPA if the instalment of
principal or interest thereon remains overdue for t wo crop seasons.
• A loan granted for long duration crops will be tr eated as NPA if the instalment of
principal or interest thereon remains overdue for o ne crop season.
• Any amount to be received remains overdue for a p eriod of more than 90 days in
respect of other accounts.

14. CATEGORIES OF NPA •Substandard Assets –Which has remained NPA for a period less than or eq ual to
12 months.
•Doubtful Assets –Which has remained in the sub-standard category for a period
of 12 months
•
Loss Assets
–
where loss has been identified by the bank or inter nal or external
•
Loss Assets
–
where loss has been identified by the bank or inter nal or external
auditors or the RBI inspection but the amount has n ot been written off wholly.
PROVISIONING NORMS The minimum amount of provision required to be made against a loan asset is
different for different types of assets:
–10 percent on total outstanding should be made wit hout making any allowance for
ECGC guarantee cover and securities available
–NPAs under Sub standard Assets category :The ‘unse cured exposures’ which are
identified as ‘sub standard’ would attract additio nal provision of 10 percent, i.e. a
total of 20 percent on the outstanding balance.
–The provisioning requirement for unsecured doubtfu l assets is 100 percent

15. NPA MANAGEMENT –PREVENTIVE MEASURES • Formation of the Credit Information Bureau (India ) Limited (CIBIL)
• Compromise settlement schemes
• Measures for faster legal process –Lok Adalats –D ebt Recovery Tribunals
• Circulation of information on defaulters • Circulation of information on defaulters • Recovery action against large NPAs
• Asset Reconstruction Company
• Legal Reforms
• Corporate Debt Restructuring (CDR)
• Proposed guidelines on wilful defaults/diversion of funds
• Special Mention Accounts -Additional Precaution a t the Operating Level

16. Latest Measures by RBI The main proposals are:
–Early formation of a lenders’ committee with timel ines to agree to a plan for
resolution.
–Incentives for lenders to agree collectively and q uickly to a plan
–better regulatory treatment of stressed assets if a resolution plan is underway,
accelerated provisioning if no agreement can be rea ched.
–Improvement in current restructuring process: Inde pendent evaluation of large
value restructurings mandated, with a focus on viab le plans and a fair sharing of
losses (and future possible upside) between promote rs and creditors.
–More expensive future borrowing for borrowers who do not co-operate with
lenders in resolution.
–More liberal regulatory treatment of asset sales.
–Lenders can spread loss on sale over two years pro vided loss is fully disclosed.
–Takeout financing/refinancing possible over a long er period and will not be
construed as restructuring.

17. Formation of Joint Lenders’ Forum:
As soon as an account is reported to CRILC as SMA-2 , all lenders, including NBFC-
SIs, should form a lenders’ committee to be called Joint Lenders’ Forum (JLF)
under a convener and formulate a joint corrective a ction plan (CAP) for early
resolution of the stress in the account.
Corrective Action Plan (CAP) by JLF: Corrective Action Plan (CAP) by JLF: Theoptions under Corrective Action Plan (CAP) by th e JLF would generally
include: Rectification; Restructuring; Recovery
Compromise Settlement Schemes
• Banks are free to design and implement their own policies for recovery and
write off incorporation compromise and negotiated s ettlements with board
approval
• Specific guidelines were issued in May 1999 for o ne time settlement of small
enterprise sector.
• Guidelines were modified in July 2000 for recover y of NPAs of Rs.5 crore and
less as on 31st March 2007.

18. Lok Adalats
• Small NPAs up to Rs.20 Lakhs
• Speedy Recovery
• Veil of Authority
• Soft Defaulters
• Less expensive
• Easier way to resolve

19. SALE OF NPA TO OTHER BANKS
• A NPA is eligible for sale to other banks only if it has remained a NPA for at
least two years in the books of the selling bank
• The NPA must be held by the purchasing bank at le ast for a period of 15
months before it is sold to other banks but not to bank, which originally sold the months before it is sold to other banks but not to bank, which originally sold the NPA.
• The NPA may be classified as standard in the book s of the purchasing bank for
a period of 90 days from date of purchase and there after it would depend on the
record of recovery with reference to cash flows est imated while purchasing
• The bank may purchase/ sell NPA only on without r ecourse basis
• If the sale is conducted below the net book value , the short fall should be
debited to P&L account and if it is higher, the exc ess provision will be utilized to
meet the loss on account of sale of other NPA.

20. SARFESI Act 2002
• SARFESI provides for enforcement of security inte rests in movable (tangible or
intangible assets including accounts receivable) an d immovable property without
the intervention of the court
• The bank and FI may call upon the borrower by way of a written legal notice to • The bank and FI may call upon the borrower by way of a written legal notice to discharge in full his liabilities within 60 days fr om the date of notice, failing which
the bank would be entitled to exercise all or any o f the rights set out under the
Act.
• Another option available under the Act is to take over the management of the
secured assets
• Any person aggrieved by the measures taken by the bank can proffer an appeal
to DRT within 45 days after depositing 75% of the a mount claimed in the notice.

21. Second Amendment & SARFESI
• The second amendment and SARFESI are a leap forwa rd but requirement exists
to make the laws predictable, transparent and affor dable enforcement by
efficient mechanisms outside of insolvency
• No definite time frame has been provided for vari ous stages during the • No definite time frame has been provided for vari ous stages during the liquidation proceedings
• Need is felt for more creative and commercial app roach to corporate entities in
financial distress and attempts to revive rather th an applying conservative
approach of liquidation.
Capital Adequacy Norms
Introduction to Capital Adequacy Norms Along with profitability and safety,banksalso give importance to
Solvency.Solvencyrefers to the situation where asse ts are equal to or more than
liabilities. A bank should select its assets in suc h a way that the shareholders and
depositors' interest are protected.

22. 1. Prudential Norms The norms which are to be followed while investing funds are called "Prudential
Norms." They are formulated to protect the interest s of the shareholders and
depositors. Prudential Norms are generally prescrib ed and implemented by the
central bank of the country.Commercial Bankshave to follow these norms to
protect the interests of the customers. protect the interests of the customers. For international banks, prudential norms were pres cribed by theBank for
International Settlementspopularly known asBIS. The BISappointed aBasle
Committeeon Banking Supervision in 1988.
2. Basel Committee Basel committee appointed by BIS formulated rules a nd regulation for effective
supervision of the central banks. For this it, also prescribed international norms
to be followed by the central banks. This committee prescribedCapital Adequacy
Normsin order to protect the interests of the custo mers.

23. 3. Definition of Capital Adequacy Ratio Capital Adequacy Ratio (CAR) is defined as the rati o of bank's capital to its risk
assets. Capital Adequacy Ratio (CAR) is also known as Capital to Risk (Weighted)
Assets Ratio (CRAR).
India and Capital Adequacy Norms India and Capital Adequacy Norms The Government of India (GOI) appointed theNarasimh am Committeein 1991
to suggest reforms in the financial sector. In the year 1992-93 the Narasimhan
Committee submitted its first report and recommende d that all the banks are
required to have a minimum capital of 8% to the ris k weighted assets of the
banks. The ratio is known asCapital to Risk Assets Ratio (CRAR). All the 27 Public
Sector Banks in India (except UCO and Indian Bank) had achieved the Capital
Adequacy Norm of 8% by March 1997.
The Second Report of Narasimham Committee was submi tted in the year 1998-
99. It recommended that the CRAR to be raised to 10 % in a phased manner. It
recommended an intermediate minimum target of 9% to be achieved by the
year 2000 and 10% by 2002.

24. Concepts of Capital Adequacy Norms
Capital Adequacy Norms included different Concepts, explained as follows :-

25. 1. Tier-I Capital Capital which is first readily available to protect the unexpected losses is called
as Tier-I Capital. It is also termed as Core Capita l.
Tier-I Capital consists of :-
•
Paid
-
Up Capital.
•
Paid
-
Up Capital.
•Statutory Reserves.
Other Disclosed Free Reserves: Reserves which are not kept side for meeting
any specific liability.
Capital Reserves: Surplus generated from sale of Capital Assets.

26. 2. Tier-II Capital Capital which is second readily available to protec t the unexpected losses is
called as Tier-II Capital.
Tier-II Capital consists of :-
•
Undisclosed Reserves and Paid
-
Up Capital Perpetual Preference Shares.
•
Undisclosed Reserves and Paid
-
Up Capital Perpetual Preference Shares.
•Revaluation Reserves (at discount of 55%).
•Hybrid (Debt / Equity) Capital.
•Subordinated Debt.
•General Provisions and Loss Reserves.
•There is an important condition that Tier II Capita l cannot exceed 50% of Tier-I
Capital for arriving at the prescribed Capital Adeq uacy Ratio.

27. 3. Risk Weighted Assets Capital Adequacy Ratio is calculated based on the a ssets of the bank. The values of bank's
assets are not taken according to the book value bu t according to the risk factor involved.
The value of each asset is assigned with a risk fac tor in percentage terms.
4. Subordinated Debt These
are bonds issued by banks for raising Tier II Capit al.
These
are bonds issued by banks for raising Tier II Capit al.
•They are as follows :-
•They should be fully paid up instruments.
•They should be unsecured debt.
•They should be subordinated to the claims of other creditors. This means that the bank's
holder's claims for their money will be paid at las t in order of preference as compared
with the claims of other creditors of the bank.
•The bonds should not be redeemable at the option of the holders. This means the
repayment of bond value will be decided only by the issuing bank.

28. Overview of Development Banking in India
An outstanding financial development of the post-in dependence period has
been the rapid growth of development banks in the c ountry. These banks are
specialized financial institutions which perform th e twin functions of providing
medium and long-term finance to private entrepreneu rs and of performing
various promo-tional roles conducive to economic de velopment. various promo-tional roles conducive to economic de velopment. As the name clearly suggests, they are development- oriented banks. As banks,
they provide finance. But they are unlike ordinary commercial banks in three
ways.
First, they do not seek or accept deposits from the public as ordinary banks do.
Second, they specialize in providing medium-and lon g-term finance, whereas
commercial banks have specialized in the provision of short-term finance.
Third and most important, they are not mere purveyo rs of long-term finance like
any ordinary term-lending institution.

29. As development banks (with emphasis on the word ‘de velopment’) their chief
distinguishing role is the promotion-of economic de velopment by way of
promoting investment and enter-prise (the two most scarce inputs in LDCs) in
their chosen (or allotted) spheres, whether manufac turing, agriculture, or some
other.
This promotional role may take a variety of forms, like provision of risk capital, This promotional role may take a variety of forms, like provision of risk capital, underwriting of new issues, arranging for foreign ( exchange) loans, identification
of investment projects, preparation and evalua-tion of project reports, provision
of technical advice, market informa-tion about both domestic and export
markets, and management services.
How much of these services a development bank is in a position to render
depends upon the technical expertise it has been ab le to build up, the
competence of its staff and their experience. The I ndian development banks
have as yet not developed so much as to be able to provide a whole gamut of
development services. But their contribution in the channeling of finance has
been sizeable and large-scale industry in the priva te sector has been the main
beneficiary.

30. The financial assistance to industry is given in the fo llowing four main forms:
(i) Term loans and advances,
(ii) Subscription to shares and debentures,
(iii) Underwriting of new issues, and
(iv) Guarantees for term loans and deferred payment s. (iv) Guarantees for term loans and deferred payment s. The first two forms place funds directly in the han ds of companies as
subscriptions to shares and debentures are subscrip tions to new issues. The last
two forms facilitate the raising of funds from othe r sources. For attracting risk
capital into the industry, such underwriting of sha res by development banks is at
least as important as the direct subscription to th ese shares.
Guarantees from develop-ment banks assure creditors (banks and others) that
their credit to industry whether in the form of loa ns or deferred payments is
secured. For development banks, it only involves ‘c ontingent liabilities,’ that is
liabilities which become payable only when the unde rlying agree-ments are not
fulfilled. Therefore, such liabilities do not lock up funds of development banks,
but are instrumental in attracting funds from other sources.

31. The development banks in India are a post-independe nce phenomenon (except
the land development banks). Their structure is ind icated in Figure 8.1. Some of
them are for promoting industrial development; some for the development of
agriculture; and one for foreign trade. Some are al l-India institutions; others are
state or lower level institutions.
At present, at the all
-
India level, there are five industrial development banks,
At present, at the all
-
India level, there are five industrial development banks,
one agricultural development bank and one export-im port bank. The
development banks for the industry are the Industri al Development Bank of
India (IDBI), the Industrial Finance Corporation of India (IFCI), the Industrial
Credit and Invest-ment Corporation of India (ICICI) , and the Industrial
Reconstruction Corporation of India (IRCI) for larg e industries and the National
Small Industries Development Bank of India (SIDBI) for small-scale industries. For
agriculture, it is the National Bank for Agricultur e and Rural Development
(NABARD).
The National Industrial Development Corporation (NI DC), which was set up by
the Government of India in 1954 for the promotion a nd development of
industries, had also provided some finance till 196 3. But since then it has been
acting as only a consulting agency.

32. The “state level industrial development banks are t he State Financial
Corporation’s (SFCs), the State Industrial Developm ent Corporation (SIDCs) and
the State Industrial Investment Corpora-tions (SIIC s). For promoting agricultural
development, there are main district-level banks, c alled land development
banks. The pre-sent article is devoted to a discuss ion of these several
development
banks.
development
banks.

33. Overview of NBFCs in India
•Non-Banking financial companies(NBFCs)means only th ose non-banking institutions
which are registeredunder theCompanies Act, 2013and is working in the section of
loans business and advances, acquisition of shares/ bonds/debentures/securities/stock
issued by the governmentor non-government authoriti es. It is of marketable nature,
leasing, hire-purchase, insurance business, chit bu siness but doesn’trelate to such
institutions that are engaging in the business acti vity of agriculture, industry or institutions that are engaging in the business acti vity of agriculture, industry or sale/purchase/construction of immovable property. T his article focuses on the
classification of NBFCs in India.
•The principal business ofNon-Banking financial comp any(NBFCs)is to receive deposits
under any scheme or arrangement or any other way, o r lending in any way. Under section
45-1A, it has been written that without obtaininga certificate of Registration issued as
per the chapter-III B and not having a Net OwnedFun d of rupees two hundred lakhs
(200,00,000), no NBFC is entitled to commence or ca rry on the business of Non-Banking
Financial Institution.

34. Types of Non-Banking Financial Company The Non-Banking financial institutions (NBFCs) are mainly classified under the
following categories:
•LOAN COMPANY:itincludes a company which is not an asset financec ompany
but a financial institution principally engaged in the business of lending funds but a financial institution principally engaged in the business of lending funds (other than itsown) by loans or advances, or otherw ise for any activity.
•INVESTMENT COMPANY:it consists of those companies or institutions whos e
main business is to acquire and manage securities f or investment purposes.
•ASSET FINANCE COMPANY:asset finance company are the financial
institutions carrying on its businessmainly in the financing of physical assets
that correspond to productive/ economic activity fo r example-automobile,
lathe machines,tractors, generator system, earth mo ving and material
handling equipment moving on the power and general purpose
industrialmachines.

35. •INFRASTRUCTURE FINANCE COMPANY: it is the kind of financial institution
principally engaged in providing infrastructure loa ns.
•MUTUAL BENEFITS FINANCIAL COMPANY: mutual benefit financial
companyrefers to the financial institution which is notified by the central
government under the companies act, 2013 whose prim ary aim is to enable its
members to pool their money with a
precalculated
investment objectives. Its
source of fund is share capital, deposits from its members and the general members to pool their money with a
precalculated
investment objectives. Its
source of fund is share capital, deposits from its members and the general public.
Classification of NBFCs When it comes to aquestion of whether the company i s a financialinstitution or
not, then the RBI (Reserve Bank of India) shall dec ide such questions in
consultation with the Central Government and its de cision shall be final and be
binding on all the parties concerned.
When it comes to a question of whether a particular financial company is a loan
Company or an asset finance company, such question’ s declaration shall be
announced by the Reserve Bank of India (RBI) on the basis of principal business
of a specific company and other relevant factors al so. The decision of RBI shall be
final and be binding on all the parties concerned.

36. Sub-Classification of NBFCs •Deposit-takingNon-Banking Financial Company[NBFC-D]
•Non-Deposit taking Non-Banking Financial Company [ NBFC_ND]
•Systematically important Non-Banking Financial Comp any should have assets
size of Rs. 100
Crore
or more
[NBFC
-
ND
-
S1]
size of Rs. 100
Crore
or more
[NBFC
-
ND
-
S1]
•These are Core investment Non-Deposit companies and systematically
important who has already redistributed its 90% ass ets as an investment in
shares or debts instruments or loan in group compan ies and out of 90%, 60%
should be invested in equity shares or those instru ments which can be
compulsorily converted into equity shares. It accep ts public funds also [CIC-
ND-SI]

37. Registration of Non-Banking Financial Company: No NBFC is entitled to carry forward its business u ntil it satisfies the various
conditions laid down under the chapter 45-1A of the RBI Act, 1934.
There are following steps that need to be followed:
•
FORMATION OF A COMPANY:
the first and foremost step is to register a new
•
FORMATION OF A COMPANY:
the first and foremost step is to register a new
company name under theCompanies Act, 2013reflecting the characters of
NBFC which should contain words such as Investment, Finance etc. as a part of
the name.
•MINIMUM NET OWNED FUND:the minimum paid-up capital on equity shares
should be 2 crore.
•OPENING OF A BANK ACCOUNT:while considering the application for the
grant of Certificate of registration, the RBI verif ies that the company must have
its own separate account free from all liens. Gener ally, funds are kept in Fixed
Deposit Account.