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Unit 8: Financial Institutions

debt capital. They target 48 to 50 per cent return in the business. Several institutional investors Notes
are involved in venture capital such as IDBI, UTI, etc.

Factors

A factor is a financial institution which manages the collection of accounts receivables of the
companies on their behalf and bears the credit risk associated with those accounts. In general,
factoring means selling, with or without recourse, the receivables by the firm to a factor. By
factoring, the company relieves itself of the organization, procedures and internal expenses of
collecting its receivables. Banks and other financial organizations are largely involved in factoring
in India. The common type of factoring in India is 'full recourse factoring' where, the factor gets
the full right to collect the accounts receivables of the client (the seller) from their customers.

Credit Rating

Credit rating agencies are properly individual organizations which are given assignment to
find the credibility of debt and equity issues in terms of the risk involved in them. Their services
are used by various parties including the investors, the regulators, the market intermediaries,
the merchant banks, etc. In India, there are three main credit raters which include CRISIL, ICRA
and CARE. Besides that, there is ONIDA individual credit rating agency ltd (ONICRA).

Depository and Custodial Services

The change in trading of securities market to electronic form, and the huge growth in the
electronic trading has resulted in creating the depository and custodial function in India. They
largely hold the stock in electronic forms (dematerialized account or demat account) of the
physical stocks. They facilitate the stock market in a paperless manner and help in the
bookkeeping of the stock and security market (including the debt market). NSDL is the first
depository company which came up in 1996 as a joint effort of NSE, IDBI and UTI. However, a
beginning had been made in 1988 with the establishment of Stock Holding Corporation of India
Ltd. (SHCIL).
Concluding the whole issue, the NBFCs are important links in the financial segments of the
business and they form and serve the missing links which the banks and major financial services
can not promote in India.

8.5.5 Liberalization of Non-banking Financial Companies

The four categories of non-banking financial companies, that is, equipment leasing companies
(ELCs), Hire Purchase Companies (HPs) Investment Companies (ICs) and Leasing Companies
(LCs) submit statutory annual reports to the RBI along with the schedule of expense and income.
The RBI has issued a separate set of directions for financial, miscellaneous and residuary non-
banking and non-banking deposit accepting companies.
The activities of the NBFC are regulated by the Government of India, under the (Acceptance of
Deposit) Rules 1975, framed under section 58A of the Companies Act 1956.

In order to moderate the deposit mobilization of NBFCs and protect investors' funds, the quantum
of deposits have been linked to the Net Owned Funds (NOF) which is the aggregate of the paid
up capital and free reserve reduced by balance of loss, deferred revenue expenditure and other
intangible assets. As of now, all NBFCs are not allowed to raise any fund from the public if the
NOF is less than ` 25 lakh. It has been made mandatory for all NBFCs to receive credit rating on
public deposit that they float. The NBFCs have been subjected to 16 per cent per annum interest

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