UNIT - 24

MICRO FINANCE INSTITUTIONS

(ii) Disclosures in loan agreement/loan card
(a) All NBFC-MFIs shall have a Board-approved, standard form of
loan agreement. The loan agreement shall preferably be in
vernacular language.
(b) In the loan agreement the following shall be disclosed:
i. all the terms and conditions of the loan,
ii. that the pricing of the loan involves only three components viz; the interest charge,
the processing charge and the insurance premium (which includes the administrative
charges in respect thereof),
iii. that there will be no penalty charged on delayed payment,
iv. that no Security Deposit/Margin is being collected from the borrower,
v. that the borrower cannot be a member of more than one SHG/JLG,
vi. the moratorium period between the grant of the loan and the due date of the
repayment of the first instalment would be as guided by RBI's directives for NBFC-
MFIs, and
vii. an assurance that the privacy of borrower data will be respected.
(c) The loan card should reflect the following details:
i. the effective rate of interest charged,
ii. all other terms and conditions attached to the loan,
iii. information which adequately identifies the borrower and
acknowledgements by the NBFC- MFI of all repayments including
instalments received and the final discharge,
iv. The loan card should prominently mention the grievance redressal
system set up by the MFI and also the name and contact number of the
nodal officer,
v. Non-credit products issued shall be with full consent of the borrowers
and fee structure shall be communicated in the loan card itself,
vi. All entries in the Loan Card should be in the vernacular language.
(iii) Non-Coercive Methods of Recovery
As specified in RBI's directions for NBFC-MFIs, recovery should normally be made
only at a central designated place. Field staff shall be allowed to make recovery at the
place of residence or work of the borrower only if borrower fails to appear at central
designated place on two or more successive occasions.
NBFC-MFIs shall ensure that a Board approved policy is in place with regard to Code
of Conduct by field staff and systems for their recruitment, training and supervision.
The Code should lay down minimum qualifications necessary for the field staff and
shall have necessary training tools identified for them to deal with the customers.
Training imparted to field staff shall include programmes to inculcate
appropriate behaviour towards borrowers without adopting any abusive or
coercive debt collection/recovery practices.
Compensation methods for staff should have more emphasis on areas of
service and borrower satisfaction than merely the number of loans mobilised
and the rate of recovery.
Penalties may also be imposed in cases of non-compliance by field staff
with the Code of conduct. Generally, only employees and not the out-
sourced recovery agents be used for recovery in sensitive areas.
(iv) Internal control system
As the primary responsibility for compliance with the directions rests with the
NBFC-MFIs, they shall make necessary organisational arrangements to assign
responsibility for compliance to designated individuals within the company and
establish systems of internal control, including audit and periodic inspection to
ensure the same.
 UNIT-25
NON-BANKING FINANCIAL
COMPANIES (NBFCS)
MODULE C
 INTRODUCTION

■ NBFC's have been an important contributor to the growth of the

Banking, Financial Services and Insurance (BFSI) sector of the country.
On the banking side, they have emerged as a suitable alternative for
banks, in terms of raising funds for businesses.
■ They offer credit facilities in remote locations and support those
individuals who are often not serviced by the banks. Non-Banking
Financial Companies underpins the weaker sections of the society,
thereby bringing equilibrium to the economy.
 WHAT IS A NON-BANKING FINANCIAL
COMPANY (NBFC)?
■ A Non-Banking Financial Company (NBFC) is a company registered
under the Companies Act, engaged in the business of loans and
advances, acquisition of shares/stocks/bonds/debentures/securities
issued by Government or local authority or other marketable
securities of a like nature, leasing, hire-purchase, insurance
business, chit business, but does not include any institution, whose
principal business is that of agricultural activity, industrial activity,
purchase or sale of any goods (other than securities) or providing
any services and sale/purchase/construction of immovable
property.
 WHAT IS A NON-BANKING FINANCIAL
COMPANY (NBFC)?

■ A non-banking institution, which is a company and has

principal business of receiving deposits under any
scheme or arrangement, in one lump sum, by way of
contributions or in any other manner, is also a non-
banking financial company (Residuary NBFC), NBFCs are
not a part of the payment and settlement system and as
such, they cannot issue cheques drawn on itself and they
cannot also borrow from the RBI.
■ According to the amendment of 1997 to the Reserve Bank of India
Act, 1934, a Non-Banking Finance Company means:
(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 lending in any manner;
(iii) Such other non-banking institution or class of such institutions as the
RBI may, with the previous approval of the Central Government, specify.
■ In terms of Section 45-IA of the RBI Act, a non-banking
financial company can commence or carry on the business of
non-banking financial institution subject to:
• Obtaining a Certificate of Registration (COR) from the Bank
(RBI)
• Having net owned funds of minimum of Rs 2 crores.
 EVOLUTION OF NBFCS IN INDIA
■ NBFCs commenced operations in a small way, in the 1960s, as an
alternative for savers and investors, whose financial needs were not
sufficiently met by the existing banking system. The NBFCs initially
operated on a limited scale, without making much impact on the
financial industry. They invited fixed deposits from investors and
worked out leasing deals, for big industrial firms.
■ In the first stages of development, the Companies Act regulated
NBFCs.
■ However, the unique and complex nature of operations and with
financial companies acting as financial intermediaries, there was a
call for a separate regulatory mechanism.
■ Hence, Chapter III B was added in the Reserve Bank of India
Act, which assigned the RBI, with limited authorities, to
regulate deposit-taking companies.
■ Since then, the RBI has initiated measures to regulate the NBFC
sector. RBI directed that hire purchase and leasing companies
could accept deposits to the extent of their Net Owned Funds,
as per the key recommendations of the James S. Raj Study
Group (1975).
■ The NBFCs were also required to maintain liquid assets in the
form of unencumbered approved government securities.
■ Between the 1980s and 1990s, NBFCs, with their customer-
friendly reputation, began to attract a huge number of investors.
The number of NBFCs rose swiftly from a mere 7,000, in 1981, to
around 30,000, in 1992, which made the RBI feel the need to
regulate the industry, more effectively.
■ In 1992, RBI constituted a committee headed by Mr. A. C. Shah,
former Chairman of Bank of Baroda, to suggest measures for
effective regulation of the industry. The Shah Committee's
recommendations included aspects ranging from compulsory
registration to prudential norms.
■ In January 1997, there were major changes in the Reserve Bank of
India Act, especially the Chapters III-B, III-C, and V of the Act,
seeking to put in place, a complete regulatory and supervisory
structure, which would protect the interests of NBFCs' customers
and also ensure the smooth functioning of NBFCs.