Indian Economy, 5th edition (63 page)

(ii)
ICRA
(Investment Information and Credit Rating Agency of India Ltd.) was set up in 1991 by IFCI, LIC, SBI and select banks as well as financial institutions to rate debt instruments.

(iii)
CARE
(Credit Analyses and Research Ltd.) was set up in 1993 by IDBI, other financial institutions, nationalised banks and private sector finance companies to rate all types of debt instruments.

(iv)
ONICRA
(Onida Individual Credit Rating Agency of India Ltd.) was set up by ONIDA
f
inance (a private sector finance company) in 1995 to rate credit-worthiness of non-corporate consumers and their debt instruments i.e. credit cards, hire-purchase, housing finance, rental agreements and bank finance.

(v)
SMERA
(Small and Medium Enterprises Rating Agency) was set up in September 2005, to rate the overall strength of small and medium enterprises (SMEs)—the erstwhile SSIs. It is not a credit rating agency precisely but its ratings are used for this purpose, too. A joint venture of SIDBI (the largest share-holder with 22 per cent stake), SBI, ICICI Bank, Dun & Bradstreet (an international credit information company), five public sector banks (PNB, BOB, BOI, Canara Bank, UBI with 28 per cent stake together) and CIBIL (Credit Information Bureau of India Ltd.).

A general credit rating service not linked to any debt issue is also availed by companies—already offered in India by rating agencies—CRISIL calls such ratings as
Credit Assessment.
51
International rating agencies such as Moody’s, S & P also undertake sovereign ratings i.e. of countries—highly instrumental in external borrowings of the countries.

Individuals are also covered by credit appraisal which is on useful information for the consumer credit firms. To maintain a database on the credit records of individuals the
c
redit Information Bureau of India Limited (CIBIL) was set up in May 2004 which makes credit informations available to banks and financial institutions about prospective individual borrowers.
52

NON-RESIDENT INDIAN DEPOSITS

Foreign Exchange Management (Deposit) Regulations, 2000 permits Non-Resident Indians (NRIs) to have deposit accounts with authorised dealers and with banks authorised by the Reserve Bank of India (RBI) which include
53
:

1.
Foreign Currency Non-Resident (Bank) Account [FCNR(B) Account]

2.
Non-Resident External account (NRE Account)

3.
Non-Resident Ordinary Rupee account (NRO Account)

FCNR(B)
accounts can be opened by NRIs and Overseas Corporate Bodies (OCBs) with an authorised dealer. The accounts can be opened in the form of term deposits. Deposits of funds are allowed in Pound Sterling, US Dollar, Japanese Yen and Euro. Rate of interest applicable to these accounts are in accordance with the directives issued by RBI from time to time.

NRE
accounts can be opened by NRIs and OCBs with authorised dealers and with banks authorised by RBI. These can be in the form of savings, current, recurring or fixed deposit accounts. Deposits are allowed in any permitted currency. Rate of interest applicable to these accounts are in accordance with the directives issued by RBI from time to time.

NRO
accounts can be opened by any person resident outside India with an authorised dealer or an authorised bank for collecting their funds from local bonafide transactions in Indian Rupees. When a resident becomes an NRI, his existing Rupee accounts are designated as NRO. These accounts can be in the form of current, savings, recurring or fixed deposit accounts.

There were two more NRI deposit accounts in operation, viz.
Non-Resident (Non-Repatriable) Rupee Deposit Account
and
Non-Resident (Special) Rupee Account –
an amendment to Foreign Exchange Management (Deposit) Regulations, in 2002, discontinued the acceptance of deposits in these two accounts from April 2002 onwards.

Repatriation
of funds in FCNR(B) and NRE accounts is permitted. Hence, deposits in these accounts are included in India’s
external debt
outstanding. While the principal of NRO deposits is non-repatriable, current income and interest earning is repatriable. Account-holders of NRO accounts are permitted to annually remit an amount up to US$ 1 million out of the balances held in their accounts. Therefore, deposits in NRO accounts too are included in India’s
external debt.

Guidelines for Licensing of New Banks

The RBI on
February 22, 2013
released the Guidelines for
‘Licensing of New Banks in the Private Sector’.
Key features of the guidelines are:

1.
Eligible Promoters:
A private sector/public sector/Non-Banking Financial Companies (NBFCs) entity/group eligible to set up a bank through a wholly-owned “Non-Operative Financial Holding Company (NOFHC)”.

2.
‘Fit and Proper’ criteria:
A past record of sound credentials, integrity and sound financial background with a successful track record of 10 years will be required.

3.
Corporate structure of the NOFHC:
The NOFHC to be wholly owned by the Promoter/Promoter Group which shall hold the bank as well as all the other financial services entities of the group.

4.
Minimum voting equity capital requirements for banks and shareholding by NOFHC:
The initial minimum
paid-up voting equity capital
54
for a bank shall be Rs. 5 billion. The NOFHC shall initially hold a minimum of 40 per cent of the paid-up voting equity capital of the bank which shall be locked in for a period of
five years
and which shall be brought down to 15 per cent within 12 years. Bank’s shares to be listed on the stock exchanges within
three years
of the business commencement.

5.
Regulatory framework:
The bank to be regulated by the relevant Acts/Statutes/Directives, issued by RBI and other regulators. The NOFHC shall be
registered as
a non-banking finance company (NBFC) with the RBI and will be governed by a separate set of directions issued by RBI.

6.
Foreign shareholding in the bank:
Foreign shareholding upto 49% for the first 5 years after which it will be as per the extant policy.

7.
Corporate governance of NOFHC:
At least 50 per cent of the Directors of the NOFHC should be independent directors. The corporate structure should not impede effective supervision of the bank and the NOFHC by RBI.

8.
Prudential norms for the NOFHC:
The
prudential norms
will be applied to NOFHC on similar lines as that of the bank.

9.
Exposure norms:
The Bank/NOFHC allowed no
exposure
to the Promoter Group – the bank shall not invest in the equity/debt capital instruments of any financial entities held by the NOFHC.

10.
Business Plan for the bank:
The business plan should be realistic and viable and should address how the bank proposes to achieve
financial inclusion
.

11.
Additional conditions for NBFCs promoting/converting into a bank :
Existing NBFCs, if considered eligible, may be permitted to promote a new bank or convert themselves into banks.

12.
Other conditions for the bank :

a.
To open at least 25 per cent of its branches in unbanked rural centres (population upto 9,999 as per the latest census).

b.
To comply with the
priority sector lending
targets applicable to the existing domestic banks.

d.
Banks promoted by groups having 40 per cent or more assets/income from non-financial business will require RBI’s prior approval for raising paid-up voting equity capital beyond Rs. 10 billion.

e.
Any non-compliance of terms and conditions will attract penal measures including cancellation of licence of the bank.

Non-Operative Financial Holding Company (NOFHC)
55

The difference between an
operating company
and a
holding company
lies in the fundamental structures of the two, in their management and their interactions with one another. Business goals are often different, and both business types are after profits, but holding companies can still benefit from operating company losses under certain conditions.

The primary function of a
holding company
is to invest in other companies, commonly known as subsidiaries. Holding companies are usually not involved in day-to-day operations of the operating company, but lend initial or ongoing financial support via cash reserves or stock sales, and may assist in restructuring the operational model to ensure profits. Holding companies are normally structured as
corporations
(limited liability firms i.e. known as a
Ltd.
company in India) to protect assets and absorb financial losses.

Operating companies
are owned by the holding company, but are responsible for all day-to-day operations of the company. When a holding company creates or purchases an operating company, they are sometimes allowed to conduct business as usual – especially, if they are profitable. Net profits after expenses are then handed over to the holding company.

Ownership
of operating companies, even when purchased, revert to the holding company. Former owners who are kept on-board are often given control of the operating company in the form of executive management responsibility, but have no ownership rights. All major decisions that may affect profitability or involve large expenditures must first be approved by the holding company.

Although operating company
profitability
should make sense for the holding company, this is not always the case. Especially for larger holding companies with heavy tax burdens, owning one or more operating companies that lose money can benefit the parent company in the form of a business loss when tax time rolls around. This does not benefit the operating company, as it is responsible for operating income to run the business. If the losses become too great, operating companies can go out of business, but the holding company can still benefit because the operating company can help to balance overall profits and stock prices.

There are
three basic types
of holding companies –

i.
A
pure holding company
that is non-operating and exists solely to invest in and hold the voting shares of its subsidiaries. This type of holding company derives its income from the dividends earned from its ownership of the shares of its subsidiaries and from any gains realised from other investments.

ii.
A
general
or
operating holding company
that earns its income from selling goods and services in addition to the income derived from its ownership of subsidiaries.

iii.
A
pyramid holding company
that owns controlling interest in its subsidiaries with less invested capital than the two other categories.

Nidhi

Nidhi in the Indian context ‘treasure’. However, in the Indian financial sector it refers to any
mutual benefit society
56
notified by the Central / Union Government as a Nidhi Company. They are created mainly for cultivating the habit of
thrift
and
savings
amongst its members. The companies doing Nidhi business, viz. borrowing from members and lending to members only, are known under different names such as
Nidhi, Permanent Fund, Benefit Funds, Mutual Benefit Funds
and
Mutual Benefit Company.

Nidhis are more popular in
South India
and are highly localized single office institutions. They are mutual benefit societies, because their dealings are restricted only to the members; and membership is limited to individuals. The principal source of funds is the contribution from the members. The loans are given to the members at relatively reasonable rates for purposes such as house construction or repairs and are generally secured. The deposits mobilized by Nidhis are not much when compared to the organized banking sector.

Nidhis are companies registered under the Companies Act, 1956 and are regulated by Ministry of Corporate Affairs (MCA). Even though Nidhis are regulated by the provisions of the Companies Act, 1956, they are exempted from certain provisions of the Act, as applicable to other companies, due to limiting their operations within members.

Nidhis are also included in the definition of Non- Banking Financial companies or
(NBFCs)
which operate mainly in the
unorganized money market
. However, since 1997, NBFCs have been brought increasingly under the regulatory ambit of the RBI. Non-banking financial entities partially or wholly regulated by the RBI include:

i.
NBFCs comprising equipment leasing (EL), hire purchase finance (HP), loan (LC), investment (IC) [including primary dealers (PDs] and residuary non-banking (RNBC) companies;

ii.
Mutual benefit financial company (MBFC), i.e.
nidhi company
;

iii.
Mutual benefit company (MBC), i.e. potential nidhi company; i.e., a company which is working on the lines of a Nidhi company but has not yet been so declared by the Central Government; has minimum net owned fund (NOF) of Rs.10 lakh, has applied to the RBI for certificate of registration and also to Department of Company Affairs (DCA) for being notified as Nidhi company and has not contravened directions / regulations of RBI/DCA.