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Unit 14: Regulatory Environment
(f) It also collects periodic reports and has the powers to collect information on any aspects Notes
relating to the functioning of the NBFCs, conduct inspection of the books of NBFCs and
investigate on any aspects relating to the activities of the NBFCs.
(g) Finally, it has the powers to punish the erring NBFCs either imposing penalties or
suspending or cancelling the license or registration and initiate appropriate actions against
the management of NBFCs.
The RBI has issued three major directions to regulate different forms of non-banking financial
companies and other financial institutions. They are:
(a) Non-banking Finance Companies Directions, 1977;
(b) Miscellaneous Non-Banking Finance Companies Directions, 1977; and
(c) Residuary Non-Banking Companies Directions, 1987.
The mushroom growth of non-banking financial companies’ causes hardship in regulating
these companies in an effective manner since the infrastructure requirement is so high that RBI
is presently lacking. In order to overcome the difficulties in implementing the regulation, RBI
has recently taken a number of measures especially after the failure of many such companies in
meeting the deposit holders liabilities. The compulsory registration, capital adequacy norm
and mandatory credit rating are some of the recent measures aimed to restrict the growth of
such companies which raise funds from the public.
In addition to the regulation prescribed by the RBI, there are several Acts and regulations that
govern different types of non-banking financial companies. For example, leasing companies
have to take into account the provisions of Indian Contract Act, Motor Vehicles Act, Indian
Stamp Act, etc. Similarly, hire-purchase transactions are governed by the Indian Contract Act,
Sale of Goods Act and Hire- Purchase Act. Though the Hire-Purchase Act is yet to be enforced, in
the absence of any specific law on hire-purchase transactions, the provisions of the Act can be
followed as guideline particularly, where no provisions exist in the general laws. The National
Housing Bank (NHB) is empowered under the provisions of the NHB Act, 1987 to regulate the
housing finance companies. The SEBI also regulates all these companies whenever they approach
the market to raise capital.
Self Assessment
Fill in the blanks:
1. ……………………regulations are often in the nature of demanding larger disclosure of
information.
2. Savings and ………………………..are two important activities of the economy.
3. The Banking Regulation Act, 1949 also regulates the activities of…………………...
4. ……………………………………Act, 1963 was introduced to regulate the NBFCs.
5. The central bank also effectively regulates the credit flows through ………………policy.
14.4 Regulations on Insurance Services
14.4.1 Brief History
1818 saw the advent of life insurance business in India with the establishment of the Oriental
Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras
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