NBFC - A Ready Reckoner

Introduction to NBFC's in India

Non-banking financial companies (NBFCs) are a vital part of the Indian financial service system. NBFC's have multiplied in large numbers and serving the public at large to support the financial inclusion program with affordable credit at home. NBFCs are playing a key role in meeting the credit demands unmet by the traditional banks, specifically focusing on peer to peer lending.

It is a Company as per Companies Act 2013 engaged in the businesses of providing financial services including loans & advances, leasing, hire purchase etc. They provide loans and advances and other credit facilities to business people or budding entrepreneur where Bank/Financial Institution are not comfortable, or say it is an alternative source of finance to businessman. Thus, they have widened the spectrum and array of products and services offered by the financial sector. Progressively, NBFC's are gaining increasing recognition due to their customer- oriented services; flexible products, abridged procedures; flexibility and timeliness in meeting the credit needs of the seekers of credit; etc.

NBFCs are regulated by the Reserve Bank of India (RBI) within the framework of the Chapter IIIB of the Reserve Bank of India Act, 1934 and any rules made thereunder or any directions issued by it under the Act. It is prima facie that the NBFC can be Companies registered under the Companies Act, 1956/2013 with the object clause of financial activity and the same need to take approval from Regulator Reserve Bank of India RBI) before commence the business of finance. Upon approval of RBI, Company can start the financial business and the entity should maintain the Principal Business Criteria (PBC) regularly.

FINANCIAL ACTIVITY as "Principal Business" implies that financial assets of the Company shall constitute more than 50% of the total assets of the Company and income from such financial assets shall constitute more than 50% of the gross revenue of the Company, is termed as "PBC".

Types of Non-Banking Financial Company (NBFC) in India

1) INVESTMENT AND CREDIT COMPANY (NBFC- ICC)

Any company with its principal business- asset finance, providing the finance for any activity other than its own and the acquisition of securities; also not in any other category of NBFC is called Investment and Credit Company.

2) INFRASTRUCTURE FINANCE COMPANY (NBFC- IFC)

The Infrastructure Finance Company is the kind of financial institution principally engaged in providing infrastructure loans. Such companies can issue the credit facility (term loans, project loans, etc.). A minimum of 75% total assets of the company should be invested in the infrastructure loans.

3) INFRASTRUCTURE DEBT FUND (IDF)- NBFC

IDFs NBFC channelize investment into the infrastructure sector, under this domestic/offshore institutional investors, especially insurance and pension funds can invest through units and bonds issued by the IDFs.

4) MORTGAGE GUARANTEE COMPANY (MGC)- NBFC

NGC company' has a principle objective of providing mortgage guarantee. Such companies shall comply with at least 90% of the business turnover form mortgage guarantee business or at least 90% of the gross income is from mortgage guarantee business

5) NBFC- NON OPERATIVE FINANCIAL HOLDING COMPANY [NOFHC]

A NOFHC is financial business entity through which Entities/groups will be allowed to set up a new bank, which will hold the bank and all other financial services companies regulated by RBI or other financial sector regulators,

6) Non-Banking Financial Company (NBFC)

Micro Finance Institution (NBFC- MFI) are the non- deposit taking the financial company with Minimum Net Owned Funds of Rs.5 crore and above (for North Eastern Region of india, it will be Rs. 2 crore). NBFC- MFI covers a wide range of services like credit, insurance, savings, remittance and also non- financial services like training, counseling etc.

7) NBFC – FACTORS (NBFC- FACTORS) 

NBFC- Factors to financial institution with minimum net worth of the Company Rs 5 Crores, having the principal business of acquisition of receivables on discount or financing against such receivables by way of loans or advances or by the creation of security interest over such receivables but excludes normal lending by a bank.

8) Systemically Important Core Investment Company (NBFC - CIC- ND- SI)

CIC- ND- SI NBFC are engaged in the business of acquisition of securities and shares which its holds 90% of its total assets in the form of investment in shares and equity. Such NBFC's shall compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.

HOW NBFCs ARE DIFFERENT FROM A BANK?

Activities of an NBFC are similar to that of a bank; however, there are some differences between the two as stated below:

An NBFC cannot accept demand deposits;

• NBFCs are not a part of the payment and settlement system
• NBFC cannot issue cheques drawn on itself;
• Unlike a bank, Deposit insurance facility is not available to the depositors of NBFCs.

REQUIREMENTS FOR REGISTRATION OF AN NBFC

An NBFC should:

• Be a Company registered under the Companies Act;
• Should have a minimum net owned fund of INR 2 Crores;

NBFC REGISTRATION PROCESS

• Every company registered under the Companies Act, with the object clause of financial activity need to obtain a certificate of Registration (CoR) from Reserve Bank of India (RBI) to commence the business as NBFI.
• For the purpose of registration of an NBFC, an application is to be submitted in the prescribed form along with the necessary attachments with the RBI for its perusal. On being satisfied that the provisions of the RBI Act have been complied with then a CERTIFICATE OF REGISTRATION is issued to the institution.
• It is imperative to fulfill the following prerequisites for obtaining a certificate of registration of NBFC from RBI:

1. The applicant must be a Company registered under the Companies Act for the time being in force
2. The Company shall have a minimum NOF (Net Owned Funds) of INR 2 Crores who wish to set up an NBFC in India.
3. At least one of the directors should be an experience in a similar field of business or should be an experienced banker.
4. The CIBIL records of the Company, Director or Shareholder should be free from any irregularities.

• On satisfaction of the aforementioned essentials, the Company should go for its registration as NBFC in the form prescribed by the RBI along with all the mandatory documents and attachments. This application (COSMOS) can be filled on the website of RBI.
• On Successful submission of the application, an application reference number (ARN) is issued by the RBI to the applicant for the purpose of tracking the status of its application. Once, the ARN is obtained a physical copy of the application along with all the attachments should also be submitted with RBI.
• Once the application is received by the RBI, on scrutiny of Company Profile, Promoter/Director and Shareholder Profile then upon satisfaction the license of registration of NBFC is granted by the RBI.

DOCUMENTS FOR NBFC REGISTRATION

1) Certified copies of the Certificate of Incorporation of the Company.

2) Certified copies of main object clause of the Memorandum of Association of the Company.

3) Board resolution(s) stating the following:

• the company undertakes that it is not carrying on any NBFC activity or has not carried on and stopped any NBFC activities in the past activity and will not carry on or commence the same before getting registration from RBI
• the unincorporated bodies in the group where the director holds a substantial interest or otherwise
• which has not accepted any public deposits in the past; and
• does not hold any public deposit as on the date of application
• will not accept any public deposits in the future
• the "Fair Practices Code" as per RBI Guidelines has been formulated by the Company

4) the company:

• has not accepted public funds in the past and/or does not hold any public fund as on the date; and
• the Company will not accept any deposits in the future without the prior approval of Reserve Bank of India
• the company shall seek prior approval of RBI before creating any customer interface in the future

5) Copy of Fixed Deposit receipt & bankers certificate indicating Net Operating Fund.

6) The companies which are already in existence the following documents are to be submitted for the last 3 years OR from the period of incorporation of the Company till the closure date of the previous financial year:

• Audited balance sheet along with annexures
• Profit & Loss statement
• Directors Report
• Auditors report

7) Banker's report regarding:

• Directors of the applicant company having substantial interest in any other companies
• Applicant company along with the directors of its group, subsidiary, associate, holding company and related parties.
• The Banker's report should be about the dealings of these entities with these bankers as a depositing entity or a borrowing entity.

Note: Bankers report is to be obtained from all the bankers of each of these entities. This report should specifically mention the details of deposits and loans balances as on the date of application and the conduct of the account.

8) Copy of the certificate of highest educational and professional qualification in respect of all the directors

Non-Banking Financial Company (NBFC) Compliance - A Complete Guide

Non-Banking Financial Company (NBFC) is one of the most renowned forms of financial institutions in India. NBFC participates in an outstanding role in the GDP of the country's economy. RBI and other related regulators set rules and regulations, which keep on altering because of changing needs and circumstances. It is important for the NBFC management to know about what to do and how to do it, and there is a strong need to keep abreast of the times. It is equally important for NBFC business owners to follow- up with the NBFC annual compliance checklist. By any chance any NBFC found noncompliance; would have to pay hefty penalties. It could also lead to the NBFC license cancellation and closure of the company. As you might have noticed on November 16, 2018 RBI cancels the registration of 65 NBFC's due to non- maintenance of the compliances

NBFCs as financial institutions refer to a set of rules and regulations which keep on changing on the basis of wavering needs and scenarios. It is important for the NBFC management to know about what to do and how to do, and there is a strong need to keep up with the present dynamic times."

Please find below the checklist of NBFC compliances, which will help you to file returns on time. Corpseed with expert compliance advisory can help you achieve the end- to- end compliances, let us take care of your Company's compliance & you enjoy your business!

In September 2016, RBI issued "Master Direction – NBFC–Non-Systemically Important Non-Deposit intriguing Company Directions, 2016", to be followed by all the NBFCs. There is an exclusive Master Direction for NBFCs which obtains public deposit or NBFCs with asset size above Rs five hundred crores (500cr). Therefore, this direction is irrelevant to such NBFCs."

Manual of Master Directions

The following are a list of the most imperative directions, enclosed in the said master directions. However, it is prudent for the readers to read the entire master direction."

Master Direction applicability and Exemption

• NBFC having an asset size below Rs five hundred crores and do not accept public deposits."
• Directions mentioned under Chapter four (Prudential Regulations), paragraph 68 (KYC Directions) and Chapter five (FPC guidelines) shall not pertain to those NBFCs who have not retrieved any public funds and customer interface."
• NBFCs having public funds but no customer interface are excluded from the applicability of paragraph sixty- eight (KYC Directions) and Chapter five (FPC procedure) of the directions."
• NBFCs having customer interface but not retrieving public funds are excluded from the applicability of Chapter four of the directions.
• NBFC- Factor, Micro Finance Institution, Infrastructure Finance Company having an asset size of less than Rs five hundred crores."

Important definition (i) customer interface and (ii) public funds"

• Public funds refer to the funds elevated through inter- corporate deposits, public deposits, bank finance and the funds received through outside sources such as funds raised by the issue of Commercial Papers, debentures and so on, however it excludes funds raised by issue of instruments mandatorily convertible into equity shares enclosed in a period not exceeding five years from the date of issue."

Prudential Regulations (Chapter IV)

• Accounting standards – Accounting standards & guidance notes released by ICAI must be convoyed along as far as they are not specious with any of these directions."
• Investments Accounting – The investment policy for the enterprise shall be defined by the Management of the company and must follow the same,
• Call loans - Management aiming to grant demand or call loans must define policies for the company and shall service the same for every NBFC.
• Categorization of Asset - Categorization of Assets shall be categorized as follows -

1. Standard assets

2. Doubtful assets and

3. Sub- standard assets

4. Loss assets"

• Provisioning of standard asset – A prerequisite must be created for standard assets at 0.25 percent of the outstanding assets for each NBFC."
• Various NBFCs – For the purpose of investigative, the perimeter of five hundred crore- asset size all the NBFCs must be merged.
• Balance sheet – The prerequisite for bad and uncertain debts and reduction in investment must be individually revealed by every NBFC.
• Schedule to the balance sheet – The facts in the schedule as set out in the directions shall be attached to the balance sheet of every NBFC.
• NBFCs own shares guideline – NBFC shall not fund against its own shares.
• Combine loans to the security of shares – NBFC with asset size of Rs 100 crores and above offering loan against the security of listed shares must, maintain a Loan to Value ratio of 50% for loans held against the security of shares. In case of fall it shall be made good within 7 days. Group 1 securities for loan above 5 lakh can be accepted, where loan is done for investment in capital market. Reporting prerequisite to stock exchanges on quarterly basis."
• Change in address, directors, auditors, etc. to be submitted – Incase of any change in the address, auditors or directors, The same shall be communicated by every NBFC within a period of 6 month.

Fair Practices Code for NBFC

A fair practice code shall be adopted by every applicable NBFC having a customer interface which interalia shall include Loan appraisal and terms/conditions, Disbursement of loans, and General, Responsibility of Board of Directors. "

Governance Issues/ Misc Instructions

• Acquisition of Authority of Applicable NBFCs: Prior written approval from the bank is
• required.
• Open a Branch or Joint Venture or Supplementary or Representative Office or commission Investment Abroad: Prior permission for RBI is necessary.
• Ratings of NBFCs: In case of any amendment in rating same information shall be reported within 15 days of such change.

Checklist for Proper NBFCs compliance

• The Return to be file by NBFCs before its due date that is within 60 days from the end of the financial year.
• The financial Assets and income from them should be more than 50%.
• The Auditor certificate needs to be uploaded on RBI Official Website"

NBFC TAKEOVER PROCEDURE

NBFC stands for NON BANKING FINANCIAL COMPANY which is registered under the Companies Act, 2013. The main business activity of NBFC is giving loans and advances, asset financing, investing in shares, debentures and other marketable securities.

While commissioning the basic compliance requirement, RBI at the same time is making the business of NBFCs smoother. The smaller NBFCs have been liberalized from the RBI regulations whereas the larger NBFCS are still in the clutches of RBI. It is continuously monitoring them so that they could be brought up on a par with global standards.

NBFC TYPES

• Deposit accepting
• Non Deposit Accepting

In this whole dynamic corporate world, the concept of merger and takeover is taking a roll. And now NBFCs are also a part of these arrangements and compromises. The procedure for taking over an NBFC is being laid down by the RBI. Takeover of an NBFC refers to purchase of one NBFC by another company. Only registered NBFC under the Act shall undertake to acquire the control of another NBFC.

Companies involved in the process of takeover

• Target Company: It is the company which targeted by the other companies to acquire.
• Acquirer Company: It is the company that acquires the other company. It is prudent for the acquirer company to gather all the information regarding the target company in order to prevent any ambiguity in future.

Takeover can be done in two different ways

• Friendly Takeover: It is a kind of takeover that takes place between the companies with their mutual consent. The acquirer company offers the target company to be acquired and the same offer is being accepted by the target company.
• Hostile takeover: In this kind of takeover the acquirer company furtively tries to acquire the target company. This scenario develops when the target company is not interested in the takeover offer of the acquirer company.

Highlights and Challenges of NBFC Takeover

Highlights

• Increase in profitability of Target Company.
• The decrease in competition.
• Increase in sales/revenue.
• Expansion of a distribution network.
• Economies of scale.

Challenges

• Amount paid for goodwill is often less as compared to its actual price.
• Conflict in new management.
• Cultural clashes between two companies.
• Reduce employee's morale.
• Hidden liabilities of Target Company.

The Requirement of Prior RBI Approval

If there are negligible changes in the management then it is outside the ambit of takeover whereas in case if there are some major changes in either the control or the management then the prior approval of RBI is required.

The following are the conditions where the prior approval of RBI is required –

• The takeover of NBFC may or may not bring a change in the management.
• In case there is a variation in the shareholding of the NBFC that results in 26% acquisation or transfer of paid- up capital including progressive increase over a period of time.
• If in case there is a change of more than 30% of the directors of the NBFC.

RBI Regulations in Regards To NBFC Takeover

RBI has specified certain regulations that are to be followed by NBFCs

• Whether there is change in management or not the RBI approval is required in case of acquisition or takeover of NBFC.
• The approval must be in writing.
• If in case of acquisition or transfer of shareholding for more than 10% then prior approval of RBI will be required.
• If in case there is a change in shareholding for more than 26% for the reason of buyback/reduction in share capital but this reduction/buyback should have been approved by the competent authority then in that case no RBI approval shall be required.
• If in case there is more than 30% of change in the directors of the company then the prior written approval of RBI is required.
• If in case there is a change in direction of the company then it requires a prior public notice at least 30 days prior to the announcement of such change.

In the following conditions the prior approval of RBI is not required

• In case shareholding goes beyond 26% due to the buyback of shares or reduction in capital by obtaining the approval of a competent court.
• Change in the management by 30 % inclusive of Independent Directors or by rotation of the directors on Board.

Application for Prior Approval of RBI

The next step involves making an application to the RBI for approval on the letterhead of the company along with the following documents.

• Information regarding proposed directors and shareholders
• Information regarding sources of funds required for acquiring shares in the NBFC by the proposed shareholders.
• Declaration by all the proposed directors and shareholders stating their non- association with any entity accepting deposits.
• Declaration by all the proposed directors and shareholders stating their non- association with any entity to whom Certificate of Registration is denied by the RBI.
• Statement regarding non- criminal background as well as non- conviction under section 138 of the Negotiable Instruments Act by all the proposed directors as well as shareholders.
• Bankers' Report with regard to proposed directors and shareholders.

An application has to be submitted to the Regional Office of the Department of Non-Banking Supervision in whose clutches the Registered Office of the NBFC is located. The queries raised by the RBI regarding the takeover must be answered timely so as to avoid any unforeseen delay in the approval. Usually it takes three to four months in normal course of business for an NBFC takeover application to process.

The prerequisite of Prior Public Notice in Case of Change in Management/Control

In case of transfer of ownership or control by the sale of shares or whether with or without transfer of shares a public notice shall be given in one of the leading national and one of the local newspapers, it shall be given at least 30 days prior to effecting such sale or transfer.

Following are the indications of the public notice:

• There has to be an intention to transfer the control /ownership.
• It shall contain the particulars of the transferee
• In case there are any other remaining considerations then it shall be paid off within 31 days of the public notice in the newspaper or as mutually agreed upon by all the parties.

Eventually, all the assets of the targeted company shall be liquidated and the liabilities shall be paid off and the acquirer company will receive a clean balance in the bank on the name of the company that will be calculated on the basis of net worth as on the date of takeover.

NBFC Takeover Procedure

1. Memorandum of Understanding

The very first step involves the signing of the MOU i.e. Memorandum of Understanding with the projected company specifies that both the companies agree to come into an agreement of the takeover. It is signed by both the directors of the Acquirer Company as well as the Target Company. While signing the MOU, token money is given by Acquirer Company to the target company. It shall also specify the responsibilities and requisite of each company.

2. Convene Board Meeting

Following the signing of the MOU, Board Meeting shall be convened in both the companies to discuss following matters:

• To fix day, date, time and place of convening Extra Ordinary General Meeting.
• For passing a resolution in EGM.
• In relation to takeover scheme, reply to the query of RBI.

3. Public Notice

After obtaining the RBI sanction, public notice shall be made to invite any objection of the public which is taking place due to take over in two newspaper within 30 days of such approval.

4. The signing of Share Transfer agreement

After the termination of the 31st day of the notice in the newspaper, share transfer agreement shall be signed and outstanding consideration shall be paid by the acquired company.

5. NOC from Creditors

Target Company shall acquire NOC from its creditors before the transfer of business from Target Company to Acquirer Company.

6. Transfer of Assets

After this, transfer of assets shall take place in case no objections have been received and RBI permitted the scheme. But the transfer should not breach any clause of the agreement.

7. Valuation of the entity

The Valuation shall be done in accord with the rules provided by the RBI. The procedure adopted for valuation shall be Discounted Cash Flow (DCF) Method, this will represent the net present value of the entity. Subsequent to the evaluation, a certificate shall be obtained by the Chartered Accountant briefing the method adopted for valuation.

8. Notice to Regional Office

After the process of valuation and authorization of the takeover scheme, NBFC shall submit an application to the Regional Office of RBI. The application must be on the letterhead of the company. Any change in management of the NBFC after the takeover should also be communicated on a constant basis to RBI.

Application made to the Regional Office shall include the following details

• Information about the anticipated directors and shareholders.
• Source of funds of Acquirer.
• Declaration by the shareholders and directors regarding their association with any unincorporated entity which is accepting deposit.
• Declaration by the directors concerning no criminal proceedings has been initiated against them in past or are pending against them in any court of law.

EVERYTHING ABOUT NBFC FUNDING IN INDIA

The NBFCs or the Non-Banking Financial Companies as the name itself suggests are not banking companies. They do not depend on CASA or the Current Account Savings Account deposits for raising funds. As CASA deposits are only significant for banks, wherein the banks are provided with licenses by the RBI in order to accept monies from the public. NBFCs do not have those prosperities, which means that the NBFCs need alternate sources of the money supply, which are higher than the deposits taken by banks, where the interest rate offered is between 4%- 6%.

Unlike banks, these financial institutions lack the ability to raise funds, they end up raising funds at a higher interest rate, thereby causing the barrier rate on their funds to increase correlatively in order to sustain Net Interest Margins between 1- 3%. This causes NBFCs to look for substituted strategies for the distribution of funds in order to produce a higher return (in order to take on an elevated risk pattern).

Source of Fundraising in an NBFC

1. BANK FINANCE TO NBFCs: Banks are allowed to cover working capital facilities along with term loans to all NBFCs registered with RBI. Between Sep 2018 and 2019, banks have funded Rs 1.9 lakh crore to the non- bank sector, growing their portfolios by nearly 40 per cent, as per the latest data of RBI.
2. PRIVATE EQUITY AND VENTURE CAPITAL FUNDS TO NBFC: Private equity and venture capital firms still keen on NBFC, Since banks are under the burden of high non- performing assets (NPAs), investors have started focusing on non- banking financial companies (NBFCs), and alternative banking structures such as small finance banks for deployment of funds, as they continue to eat into the share of state- run banks. The investment, according to experts, endorses the potential of the evolving financial services ecosystem in India.

Sources of Funds in an NBFCs

There are three key sources of funds looking to raise money without deposits:

1. Long Term: These are through term loans acquired from banks in a single portion, after finalizing the amount of funds to be stationed in the normal course of operations of the NBFC. The benefit of doing so is that banks can generally lend at much lower rates delinquent to the nature of the CASA deposits, which favors the business model of NBFCs that have a more hostile risk- return profile. These kind of loans can be unsecured or secured through G- secs (monitored by the Treasury Department), and repayment can be done in bullet or a structured schedule. This repayment should preferably be mirrored with the repayment schedules of the assets on the balance- sheet. A good credit rating is compulsory for raising huge sums at a competitive interest rate.
2. Long Term: Bonds are used as a general method to diminish the interest rate on the sources of funds. The coupon rate on the bond is chosen in order to reflect the rating profile of the NBFC as well as a return better than the G- Secs. In some cases, tax- free bonds are also issued for priority sectors such as infrastructure and roads. The maturity profiles of these bonds concur with the repayment or interest schedules of the investments made by the NBFCs. Bonds can be issued to retail investors as well, which is a prime benefit for NBFCs during bond placement.
3. Short Term: Short term loans offered by a non- banking financial company can be issued by raising funds through Commercial Paper. CP's are short term unsecured promissory notes issued by companies, with a time period of 3 to 12 months.

Measuring the Effectiveness of Fund Raising

The main points to keep in mind while raising funds are,

1. Examining the mismatch between assets & liabilities;
2. Reducing the mismatch.

In this case assets are defined as the investments made by way of equity or debt or structured products in the operations of an NBFC as a financing entity, while liabilities are referred to as the amount owed to parties that have supplied the monies for the financing activity. The interest rate levied between both leads to an arbitrage, thereby resulting in a Net Interest Margin. The arbitrage so created is the value derived from the capability and experience of the officials in the NBFC to identify correct segments for investment at a higher risk- reward ratio and give extra- ordinary returns in the Indian or Corporate context.

Treasury and Rupee Resources Departments

Largely, the process of taking up the money supply lies within the realm of the rupee resources department that administers long and short term instruments used within a non banking finance company to match the supply with the demand. After the resources are elevated and the funds are with the company, the Treasury department is accountable for the disposal, any asset liability variance and call or money market instruments to be determined when the funds are parked.

Major Performance Indicators in Examining Asset/Liability match in an NBFC

For the same purpose, the treasury and rupee resources departments rely on the following vital risk factors:

1. Liquidity Risk: There is a risk of an investment that cannot be marketed or sold off effortlessly to the third party, for minimizing the losses.
2. Interest Rate Risk: Risk in interest rate while elevating monies that affects the Net Interest Margin adversely, and wears down the value of the net worth of the NBFC.
3. Foreign Exchange Risk: Risk of bearing losses in detrimental exchange rate movements such as the demonetization that took place in 2016, especially during an open position, either spot or forward or a combination.
4. Equity Price Risk: There is a risk that a loss may crop up on account of public or private equity shares held in the portfolio, for the equity investments made by the NBFC. NBFCs administer and control their treasury activities on the basis of the various risks involved rather than on the basis of the particular type of financial instrument dealt with. Broad IT systems are put in place to determine these risks along with value at risk, and a suitable trim is made to the investment when needed. At all times, a chance of default and a Loss given Default is estimated, that varies with the change in the profile of the company that is invested in. The VaR method would be engaged to evaluate potential loss that could solidify the trading position or portfolio due to variations in market interest rates and prices within a defined tenure.

The variations in market interest rates have impact on the economic value on the institution's banking balance sheet. Given the range of loan product offerings of an NBFC, it would be endeavored to determine IRR on the banking book that assesses the effects of the rate changes on both earnings and economic value. As the simplest measure, the Treasury Mid- Office may compute simple maturity gaps, re- pricing gaps and duration gaps. Taking the volume of data into consideration.

Asset Liability Committees in NBFCs

The ALCO would mainly be responsible to deal with liquidity and interest rate risk of the organization. Such committees are usually headed by the CXOs in the organization, to keep an eye on the cost they should spiral out of control and impact the profitability, especially in a down market.

Role of the ALCO

1. Balance sheet planning for suitable risk- return, and the management of interest rate and liquidity risks.
2. Product pricing for loans and advances, and estimation of a base rate.
3. Deciding on preferred maturity profile and mix of assets and liabilities that can be added on in the future.
4. Developing a viewpoint on the interest rate and deciding on the future business strategy to contain interest rate risk.
5. Reviewing the funding policy to reduce liquidity risk.

Liquidation: Treasury Ops

1. The Treasury Ops are categorized into The Front, the Mid and the Back Office. The Treasury Front Office within the institution is the clearing house for matching, running and controlling market risks. It also imparts investment support for the assets and liabilities given by regular business of an NBFC. All the dealers vigorously involved in day- to- day trading activities have to hold on to FEDAI and FIMMDA and other regulatory codes of conduct. The dealers must also hold on to the Internal Stop Loss Limit.
2. The back office secures compliance of transactions undertaken. Moreover, prompt settlement of all dealing accounts is an important control to ensure the exact identification of risk exposures.
3. The mid office is an on- site tracking department and to give value added support to Front office activities. It acts as an independent risk monitoring functionary.