Indian Financial Services Bangalore University B.com 3rd Semester NEP Notes

Unit 1 Overview of Financial System [Book]
Introduction to Financial System, Features VIEW
Constituents of Financial System VIEW
Financial Institutions VIEW VIEW
Financial Services VIEW VIEW
Financial Markets VIEW VIEW
Financial Instruments VIEW VIEW
VIEW VIEW

 

Unit 2 Financial Institutions [Book]
Financial Institutions, Characteristics VIEW
Broad Categories:
Money Market Institutions VIEW VIEW
Capital Market Institutions VIEW VIEW
Objectives and Functions of Industrial Finance Corporation of India VIEW
Industrial Development Bank of India VIEW
State Financial Corporations VIEW
Industrial Credit and Investment Corporation of India VIEW
EXIM Bank of India VIEW VIEW
National Small Industrial Development Corporation VIEW
National Industrial Development Corporation VIEW
RBI Measures for NBFCs VIEW VIEW

 

Unit 3 Financial Services [Book]
Financial Services, Meaning, Objectives, Functions, Characteristics VIEW
Types of Financial Services VIEW
**Fund based Services and Fee based Services VIEW
**Factoring Services VIEW
Merchant Banking: Functions and Operations VIEW VIEW
Leasing VIEW
Mutual Funds VIEW VIEW
Venture Capital VIEW
Credit Rating VIEW VIEW

 

Unit 4 Financial Markets and Instruments [Book]
Meaning and Definition, Role and Functions of Financial Markets VIEW VIEW
Constituents of Financial Markets VIEW
Money Market Instruments VIEW
Capital Market and Instruments VIEW VIEW
SEBI guidelines for Listing of Shares VIEW VIEW
Issue of Commercial Papers VIEW

 

Unit 5 Stock Markets [Book]
Meaning of Stock, Nature and Functions of Stock Exchange VIEW VIEW
Stock Market Operations VIEW VIEW
Trading, Settlement and Custody (Brief discussion on NSDL & CSDL) VIEW VIEW
BSE, NSE, OTCEI VIEW VIEW

Business Mathematics & Statistics Bangalore University B.com 3rd Semester NEP Notes

Unit 1 Commercial Arithmetic [Book]
Percentage VIEW
Cost, Profit and Selling price VIEW
Ratio Proportion VIEW
Problems on Speed and Time VIEW
Interest-Simple interest and Compound interest VIEW
Annuity VIEW

 

Unit 2 Theory of Equations [Book] No Update

 

Unit 3 Matrices and Determinants [Book] No Update

 

Unit 4 Measures of Central Tendency and Dispersion [Book]
Introduction Meaning and Definition, Objectives of measures of Central tendency VIEW
Types of averages: Arithmetic mean (Simple average only) VIEW
Median VIEW
Mode VIEW
Meaning and Objectives of measures of Dispersion VIEW
VIEW VIEW
Standard deviation and coefficient of Variation VIEW
Skewness VIEW VIEW
Problems on Direct method only VIEW

 

Unit 5 Correlation and Regression [Book]
Correlation: Meaning and definition-uses VIEW VIEW
VIEW
Karl Pearson’s coefficient of correlation (deviation from actual mean only) VIEW
Spearman’s Rank Correlation Coefficient VIEW
Regression Meaning VIEW
Regression Equations, Estimating x and y values VIEW
Finding correlation coefficient with Regression coefficient VIEW VIEW

Corporate Accounting Bangalore University B.com 3rd Semester NEP Notes

Unit 1 Issue of Shares [Book]
Shares Introduction, Meaning, features VIEW
Types of shares VIEW
Issue of shares VIEW VIEW
Subscription of shares, Minimum subscription, Over subscription VIEW
Pro-Rata allotment of Shares VIEW
Book Building procedure for issue of shares VIEW
Problems related to Journal entries on issue of shares at par, premium and discount VIEW
Unit 2 Underwriting of Shares [Book]
Introduction, Meaning and Need for underwriting VIEW
Advantages of Underwriting VIEW
SEBI Regulations regarding Underwriting VIEW
Underwriting Agreement VIEW
Underwriting Commission VIEW
Underwriter, Functions of Underwriter VIEW
Types of Underwriting VIEW
Marked and Unmarked Applications VIEW
Problems on determination of Liability of Underwriters VIEW
Underwriting Process VIEW
Unit 3 Valuation of Goodwill [Book]
Meaning, Circumstances, Factors of Valuation of Goodwill VIEW
Methods of Valuation of Goodwill:
Average Profit Method of Valuation of Goodwill VIEW
Super Profit Method of Valuation of Goodwill VIEW
Capitalization of Super Profit average Profit Method of Valuation of Goodwill VIEW
Annuity Method of Valuation of Goodwill VIEW
Capitalization of Profit Method VIEW
Annuity Method VIEW
Brand Meaning and features VIEW VIEW
Factors influencing value of brand VIEW
Circumstances of valuation of brand VIEW
Intellectual Property Rights (IPR): Meaning and features VIEW
Factors influencing value of IPR VIEW
Circumstances of valuation of IPR VIEW
Patents Meaning and features VIEW VIEW
Factors influencing value of patents VIEW
Circumstances of valuation of patent VIEW
Unit 4 Valuation of Shares [Book]
Meaning, Need for Valuation of Shares VIEW
Factors Affecting Valuation of Shares VIEW
Methods of Valuation:
Intrinsic Value Method of Shares VIEW
Yield Method of Shares VIEW
Earning Capacity Method of Shares VIEW
Fair Value of shares VIEW
Rights Issue VIEW
Valuation of Rights Issue VIEW
Valuation of Share Warrant VIEW
Unit 5 Company Final Accounts [Book]
Statutory Provisions regarding preparation of Company Final Accounts VIEW
Treatment of Special Items VIEW
Tax deducted at source VIEW
Advance payment of Tax VIEW
Provision for Tax VIEW
Depreciation VIEW
Interest on debentures VIEW
Dividends VIEW
Rules regarding payment of dividends VIEW
Transfer to Reserves VIEW
Preparation of Profit and Loss Account and Balance Sheet in vertical form VIEW

Advanced Accounting BU B.com Old Syllabus Notes

Unit 1 [Book]  
Business of Banking companies VIEW
Some important provisions of Banking Regulation Act of 1949, Brokerage, Discounts, Statutory Reserves, Cash Reserves VIEW
Minimum capital and reserves, Restriction on commission VIEW
Books of accounts VIEW
Special features of bank accounting VIEW
Final Accounts, Balance Sheet and Profit and Loss account VIEW
  VIEW
Interest on Doubtful debts VIEW VIEW
Rebate on bill Discounted VIEW
Acceptance, Endorsement and Other obligations VIEW
Problems as per new provisions  

 

Unit 2 Accounts of Insurance Companies [Book]  
(a) Life insurance: Accounting concepts relating to life insurance companies VIEW
Preparation of Final accounts of life insurance companies VIEW
Revenue account and Balance sheet VIEW
(b) General insurance: Meaning accounting concepts VIEW
Preparation of Final accounts VIEW

 

Unit 3 Inflation Accounting [Book]  
Need, Meaning, definition Importance, Role, Objectives, Merits, and Demerits of Inflation Accounting VIEW
Problems on Current purchasing power method (CPP) VIEW
Current cost accounting method (CCA) VIEW

 

Unit 4 Farm Accounting [Book]  
Meaning, Need and Purpose, Characteristics of farm accounting VIEW
Nature of Transactions, Cost and revenue VIEW
Apportionment of common cost VIEW
By product costing VIEW
Farm Accounting, Recording of transactions, problems VIEW

 

Unit 5 Investment Accounting [Book]  
Introduction, Nature of Investment Accounting VIEW
Investment Ledger VIEW
Different terms used; Cum dividend or Interest and ex-dividend or interest VIEW
Securities VIEW VIEW
Bonus Shares VIEW VIEW
Right Shares VIEW VIEW
Procedures of Recording shares VIEW

Income Tax – I BU B.com Old Syllabus Notes

Unit 1 Introduction to Income Tax [Book]  
Brief history of Indian Income Tax VIEW
Legal Framework:  
Types of taxes VIEW
Cannons of taxation VIEW
Definitions:  
Assessment, Assessment year, Income, Agricultural income, Assesses, Person, Casual income VIEW
Previous year including exception VIEW
Gross total income, Total income VIEW
Scheme of taxation VIEW
Meaning and Classification of Capital and Revenue VIEW
Income tax authorities: Powers & functions of CBDT, CIT & A.O VIEW

 

Unit 2 Exempted incomes[Book]  
Introduction, exempted incomes U/S 10. Only in the hands of individuals VIEW

 

Unit 3 Residential Status [Book]  
Residential status of an Individual’s, Determination of Residential status VIEW
Incidence of tax-problems on computation of Gross total Income VIEW

 

Unit 4 Income from Salary [Book]  
Meaning, definitions, Basis of charge, Advance salary, Arrears of salary, encashment of earned leave VIEW
All allowances VIEW
Perquisites VIEW
Profits in lieu of salary VIEW
Provident fund VIEW
Gratuity VIEW VIEW
Commutation of pension VIEW
Deductions from salary U/S 16 VIEW
Problems on computation of salary income VIEW

 

Unit 5 Income from House property [Book]  
Income from House property VIEW
Basis of charge VIEW
Deemed owners, Composite rent VIEW
Exempted income from house property VIEW
Annual value VIEW
Determination of Annual value, treatment of unrealized rent, loss due to vacancy, deductions from Annual value U/S 24 VIEW
Problems on computation of income from house property VIEW

Costing Methods BU B.com Old Syllabus Notes

Unit 1 Costing methods [Book]

 
Costing methods Meaning VIEW
Costing methods Importance VIEW
Costing methods Categories:  
Job Costing VIEW VIEW
Process or Operation costing VIEW VIEW

Unit 2 Job and Batch Costing [Book]  
Job Costing: Meaning, prerequisites, Job costing procedures, Features, Objectives, Applications, Advantages and Disadvantages of Job costing VIEW
Batch Costing Meaning, Advantages, Disadvantages VIEW
Determination of economic Batch Quantity VIEW
Comparison between Job and Batch Costing VIEW

Unit 3 Process costing [Book]  
Introduction, Meaning and Definition, Features of Process Costing VIEW
Comparison between Job costing and Process Costing VIEW
Applications, Advantages and Disadvantages of Process Costing VIEW
Treatment of normal loss, Abnormal loss and Abnormal gain VIEW
Rejects and Rectification – Joint and by-products costing problems under reverse cost method VIEW

Unit 4 Contract Costing [Book]  
Meaning, Features, Applications of Contract costing VIEW
Similarities and Dissimilarities between Job and Contract costing VIEW
Procedure of Contract costing VIEW
Profit on incomplete contracts VIEW

Unit 5 Operating Costing [Book]  
Introduction, Meaning and Application of Operating Costing VIEW
Power house costing or Boiler house costing VIEW
Canteen or Hotel costing VIEW
Hospital costing and Transport Costing, Problems VIEW

Costing, Concepts, Meaning, Definition, Objectives, Methods and Importance

Costing is an important branch of accounting that deals with the determination, classification, recording, allocation, and analysis of costs associated with the production of goods or rendering of services. It provides detailed information about the cost of products, processes, jobs, and activities, enabling management to make informed decisions. Costing helps organizations control costs, improve efficiency, determine selling prices, and maximize profitability. In the modern business environment, costing serves as a vital tool for planning, budgeting, performance evaluation, and strategic decision-making. It forms the foundation of cost accounting and plays a crucial role in effective cost management.

Meaning of Costing

Costing refers to the technique and process of ascertaining costs. It involves collecting and analyzing cost data to determine the total cost and cost per unit of a product, service, process, or activity. Costing helps management understand how resources are consumed and where expenses are incurred. It provides valuable information for cost control, cost reduction, pricing decisions, and profit planning. By identifying the various elements of cost, organizations can improve efficiency and profitability. Thus, costing is a systematic method of determining and managing costs within an organization.

Definition of Costing

According to the Institute of Cost and Management Accountants (ICMA), London:

“Costing is the technique and process of ascertaining costs.”

This definition highlights that costing involves both the methods used for cost determination and the procedures followed to calculate costs accurately. It is a continuous process that assists management in planning and controlling business operations.

Objectives of Costing

  • Determination of Cost

The primary objective of costing is to determine the exact cost of producing goods or rendering services. It helps in identifying the amount spent on materials, labour, and overheads involved in production. Accurate cost determination enables management to know the cost per unit and total production cost. This information is essential for pricing decisions, profitability analysis, and financial planning. Cost determination also helps compare actual costs with estimated costs and identify inefficiencies. Therefore, ascertaining the true cost of products and services is the most fundamental objective of costing in any organization.

  • Cost Control

Costing aims to assist management in controlling costs by providing detailed information about various expenditures. It helps establish cost standards and compare actual costs with predetermined targets. Any deviations or variances are identified and analyzed so that corrective actions can be taken. Cost control prevents wasteful spending and promotes efficient utilization of resources. It also helps maintain costs within acceptable limits without affecting quality. By monitoring and regulating expenses, costing contributes to improved operational efficiency and profitability. Hence, cost control is a major objective of costing systems.

  • Cost Reduction

Another important objective of costing is to identify opportunities for cost reduction. Through detailed analysis of costs, management can locate areas of inefficiency, wastage, and unnecessary expenditure. Costing provides information that helps eliminate non-value-added activities and improve operational processes. The objective is to achieve a permanent reduction in costs while maintaining product quality and performance. Effective cost reduction enhances profitability and competitiveness. It also encourages innovation and continuous improvement. Therefore, helping organizations achieve lower costs is a significant objective of costing.

  • Pricing Decisions

Costing provides essential information for fixing selling prices of products and services. Accurate cost data help management determine prices that cover costs and generate desired profits. Pricing decisions based on reliable costing information reduce the risk of underpricing or overpricing. Costing also helps evaluate the impact of market conditions and competition on pricing strategies. It supports decisions related to discounts, tenders, and special orders. By ensuring that prices are both competitive and profitable, costing plays a crucial role in business success. Thus, assisting pricing decisions is a key objective of costing.

  • Profitability Analysis

One of the objectives of costing is to evaluate the profitability of products, services, departments, and business operations. Costing helps determine whether a product or activity is generating sufficient profit. Management can compare costs and revenues to identify profitable and unprofitable areas. This information supports decisions regarding product continuation, expansion, or discontinuation. Profitability analysis also helps improve resource allocation and strategic planning. By identifying the sources of profit and loss, costing contributes to better financial performance. Therefore, assessing profitability is an important objective of costing.

  • Budget Preparation and Planning

Costing assists in preparing budgets and financial plans by providing accurate cost information. Historical cost data and cost estimates help management forecast future expenses and revenues. Budget preparation becomes more realistic and effective when supported by reliable costing information. Costing also helps allocate resources efficiently and establish financial targets. Through proper planning, organizations can control costs and achieve their objectives. Budgeting based on costing information improves coordination among departments and enhances financial discipline. Hence, supporting budget preparation and planning is a major objective of costing.

  • Managerial Decision-Making

Costing provides valuable information that assists management in making informed decisions. Managers use cost data for decisions related to production, pricing, outsourcing, expansion, investment, and product mix. Accurate costing information reduces uncertainty and improves the quality of decisions. It helps evaluate alternative courses of action and select the most profitable option. Costing also supports strategic planning and performance improvement initiatives. By providing relevant and timely information, costing strengthens managerial effectiveness. Therefore, facilitating sound decision-making is one of the most significant objectives of costing.

  • Performance Evaluation

Costing helps evaluate the performance of departments, processes, and employees by comparing actual costs with predetermined standards or budgets. This comparison highlights areas of efficiency and inefficiency. Performance evaluation enables management to identify strengths, weaknesses, and opportunities for improvement. It also promotes accountability and motivates employees to achieve organizational goals. Costing information supports variance analysis and performance measurement systems. Through continuous monitoring and evaluation, organizations can improve productivity and profitability. Thus, performance evaluation is an essential objective of costing that contributes to effective management and operational excellence.

Methods of Costing

1. Job Costing

Job costing is a method used where production is carried out according to specific customer orders. Each job is treated as a separate cost unit, and costs are accumulated individually for every job. Materials, labour, and overheads are recorded separately for each assignment. This method is commonly used in construction companies, printing presses, repair workshops, and interior design firms. Job costing helps determine the exact cost and profitability of each job. It provides detailed cost information and supports effective cost control. Therefore, it is suitable for customized and non-repetitive production activities.

2. Batch Costing

Batch costing is an extension of job costing where a group of identical products is treated as a single cost unit. Costs are accumulated for the entire batch and then divided by the number of units produced to determine the cost per unit. This method is suitable for industries producing goods in batches, such as pharmaceutical companies, bakeries, garment manufacturing, and electronic component production. Batch costing helps simplify cost calculations and improve production efficiency. It is particularly useful when products are manufactured in lots rather than individually.

3. Contract Costing

Contract costing is used for large-scale projects that extend over a long period and are usually carried out at specific sites. Each contract is treated as a separate cost unit, and costs are recorded individually for each contract. This method is commonly used in construction, shipbuilding, road development, and engineering projects. Contract costing helps monitor project expenses and determine contract profitability. It also assists management in controlling costs and evaluating project performance. Due to the size and duration of contracts, detailed records are maintained throughout the project period.

4. Process Costing

Process costing is used in industries where production is continuous and products pass through various stages or processes. Costs are accumulated for each process or department and then allocated to units produced. This method is suitable for industries such as oil refining, chemical manufacturing, cement production, paper mills, and food processing. Since products are identical and produced continuously, individual cost identification is not possible. Process costing helps determine the average cost per unit and supports efficient cost management. It is one of the most widely used costing methods in manufacturing industries.

5. Unit or Single Costing

Unit costing, also known as single costing, is used where only one type of product is manufactured. The cost per unit is determined by dividing total production cost by the number of units produced. This method is suitable for industries producing homogeneous products such as bricks, cement, sugar, coal, and steel. Unit costing provides simple and accurate cost information for cost control and pricing decisions. It is easy to apply because the products are identical in nature. Therefore, it is commonly used in industries with standardized production.

6. Operating Costing

Operating costing, also called service costing, is used in service organizations rather than manufacturing concerns. It determines the cost of providing services to customers. This method is commonly applied in transport companies, hospitals, hotels, educational institutions, and power supply organizations. Costs are collected and analyzed according to the nature of services rendered. Operating costing helps management fix service charges, control operating expenses, and evaluate efficiency. Since services cannot be stored like products, cost determination focuses on the cost of service units such as passenger-kilometers or room occupancy.

7. Multiple Costing

Multiple costing is used when a product consists of several components manufactured through different processes and costing methods. It combines two or more costing methods to determine the total cost of a product. This method is commonly used in industries such as automobile manufacturing, aircraft production, and machinery manufacturing. For example, process costing may be used for certain parts while job costing may be used for assembly operations. Multiple costing provides comprehensive cost information and ensures accurate cost determination for complex products.

8. Operation Costing

Operation costing is a combination of job costing and process costing. It is used when products pass through a series of operations and some degree of customization is involved. Costs are accumulated for each operation and assigned to products accordingly. This method is suitable for industries such as footwear manufacturing, textile production, and engineering industries. Operation costing helps determine costs accurately where production involves repetitive operations but products differ in specifications. It provides a balance between process costing and job costing, making it useful for semi-standardized production systems.

9. Departmental Costing

Departmental costing is a method where costs are collected and analyzed separately for each department within an organization. Each department is treated as a cost center, and the cost of operations performed by that department is determined individually. This method helps management evaluate departmental efficiency and control costs effectively. It is commonly used in large manufacturing organizations where production activities are divided among various departments. Departmental costing provides detailed information for performance evaluation and resource allocation. Therefore, it supports better managerial control and decision-making.

10. Composite Costing

Composite costing is used when a business produces a combination of products that are closely related or jointly manufactured. Costs are accumulated collectively and then allocated among the different products using suitable methods. Industries such as petroleum refining, dairy processing, and chemical manufacturing commonly use composite costing. This method helps determine the cost of multiple products produced simultaneously from the same raw materials. It ensures fair cost allocation and supports profitability analysis. Composite costing is especially useful where joint products and by-products are generated during production.

Importance of Costing

  • Determination of Accurate Cost

Costing helps in determining the exact cost of producing goods or rendering services. It records and analyzes all expenses related to materials, labour, and overheads. Accurate cost information enables management to know the cost per unit and total production cost. This information is essential for effective planning and control. It also helps organizations avoid underestimation or overestimation of costs. By providing reliable cost data, costing supports financial management and operational efficiency. Therefore, accurate cost determination is one of the most important contributions of costing to business organizations.

  • Facilitates Cost Control

Costing plays a significant role in controlling costs by providing detailed information about various expenditures. Management can compare actual costs with standard or budgeted costs and identify variances. This helps in detecting inefficiencies, wastage, and unnecessary expenses. Corrective measures can then be taken to prevent cost overruns. Cost control improves resource utilization and operational efficiency. It also contributes to better financial discipline within the organization. Therefore, costing serves as an effective tool for monitoring and regulating business expenses.

  • Assists in Pricing Decisions

One of the major benefits of costing is its assistance in pricing decisions. Accurate cost information helps management determine appropriate selling prices for products and services. Pricing decisions based on cost data ensure that all costs are covered and desired profits are earned. Costing also helps evaluate the impact of market conditions and competition on pricing strategies. It supports decisions regarding discounts, tenders, and special orders. Thus, costing enables businesses to establish competitive and profitable prices in the marketplace.

  • Improves Profitability

Costing helps improve profitability by identifying areas where costs can be reduced and efficiency can be increased. Through cost analysis, management can eliminate wasteful activities and optimize resource utilization. Better cost control and cost reduction result in higher profit margins. Costing also assists in selecting the most profitable products, services, and business activities. By providing insights into cost behavior and profitability, costing supports effective financial management. Therefore, improving profitability is an important aspect of the significance of costing.

  • Supports Managerial Decision-Making

Costing provides valuable information for managerial decision-making. Managers use cost data when making decisions regarding production levels, product mix, outsourcing, expansion, and investments. Reliable cost information helps evaluate alternative courses of action and select the most beneficial option. It reduces uncertainty and improves the quality of decisions. Costing also supports strategic planning and performance improvement initiatives. Consequently, it plays a crucial role in helping management achieve organizational objectives and long-term success.

  • Aids in Budgeting and Planning

Costing is an important tool for budgeting and planning activities. Historical cost data and cost estimates help management prepare realistic budgets and financial forecasts. Costing information supports the allocation of resources and establishment of financial targets. Effective budgeting enables organizations to control costs and achieve planned objectives. Costing also helps coordinate activities across departments and improve financial discipline. Therefore, it contributes significantly to efficient planning and budget preparation within an organization.

  • Measures Performance Efficiency

Costing helps evaluate the efficiency of departments, processes, and employees. By comparing actual costs with standards or budgets, management can assess performance and identify areas requiring improvement. Performance measurement promotes accountability and encourages employees to work efficiently. Costing also supports variance analysis and performance reporting systems. Regular evaluation helps organizations improve productivity and operational effectiveness. Thus, costing serves as a valuable tool for measuring and enhancing performance throughout the organization.

  • Assists in Inventory Valuation

Costing helps determine the value of raw materials, work-in-progress, and finished goods inventory. Accurate inventory valuation is essential for preparing financial statements and determining business profits. Costing methods ensure that inventory is valued consistently and fairly. Proper inventory valuation also assists management in controlling stock levels and reducing carrying costs. It supports effective inventory management and financial reporting. Therefore, costing plays a vital role in maintaining accurate records of inventory and ensuring sound financial management.

  • Enhances Resource Utilization

Costing promotes the efficient utilization of resources such as materials, labour, machinery, and capital. By identifying wastage and inefficiencies, it helps management improve operational processes. Efficient resource utilization reduces costs and increases productivity. Costing information enables managers to allocate resources where they generate maximum value. Better utilization of resources strengthens competitiveness and profitability. Thus, costing contributes significantly to achieving operational excellence and organizational effectiveness.

  • Strengthens Competitive Position

In today’s competitive business environment, costing helps organizations maintain and strengthen their market position. Accurate cost information enables businesses to offer products at competitive prices while maintaining profitability. Costing also supports continuous improvement and cost reduction initiatives. Organizations that manage costs effectively can respond better to market challenges and customer expectations. By improving efficiency and financial performance, costing enhances competitiveness and long-term sustainability. Therefore, strengthening the competitive position of the organization is a major importance of costing.

Changing role of NBFI in present environment

NBFCs (Non Banking Financial Companies) play an important role in promoting inclusive growth in the country, by catering to the diverse financial needs of bank excluded customers. Further, NBFCs often take lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. NBFCs do play a critical role in participating in the development of an economy by providing a fillip to transportation, employment generation, and wealth creation, bank credit in rural segments and to support financially weaker sections of the society. Emergency services like financial assistance and guidance is also provided to the customers in the matters pertaining to insurance.

NBFCs are financial intermediaries engaged in the business of accepting deposits delivering credit and play an important role in channelizing the scarce financial resources to capital formation. They supplement the role of the banking sector in meeting the increasing financial needs of the corporate sector, delivering credit to the unorganized sector and to small local borrowers. However, they do not include services related to agriculture activity, industrial activity, sale, purchase or construction of immovable property. In India, despite being different from banks, NBFC are bound by the Indian banking industry rules and regulations.

NBFC focuses on business related to loans and advances, acquisition of shares, stock, bonds, debentures, securities issued by government or local authority or other securities of like marketable nature, leasing, hire-purchase, insurance business, chit business.

The banking sector would always be the most important sector in the field of business because of its credibility in supporting manufacturing, infrastructural development and even being the backbone for the common man’s money. But despite this, the role of NBFCs is critical and their presence in a country would only boost the economy in the right direction.

Game Changers

  • Size of sector: The NBFC sector has grown considerably in the last few years despite the slowdown in the economy.
  • Growth: In terms of year-over-year growth rate, the NBFC sector beat the banking sector in most years between 2006 and 2013. On an average, it grew 22% every year. This shows, it is contributing more to the economy every year.
  • Profitability: NBFCs are more profitable than the banking sector because of lower costs. This helps them offer cheaper loans to customers. As a result, NBFCs’ credit growth; the increase in the amount of money being lent to customers is higher than that of the banking sector with more customers opting for NBFCs.
  • Infrastructure Lending: NBFCs contribute largely to the economy by lending to infrastructure projects, which are very important to a developing country like India. Since they require large amount of funds, and earn profits only over a longer time-frame, these are riskier projects and deters banks from lending. In the last few years, NBFCs have contributed more to infrastructure lending than banks.
  • Promoting inclusive growth: NBFCs cater to a wide variety of customers – both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. All these help promote inclusive growth in the country.

NBFCs aid economic development in the following ways

  • Mobilization of Resources: It converts savings into investments
  • Capital Formation: Aids to increase capital stock of a company
  • Provision of Long-term Credit and specialised Credit
  • Aid in Employment Generation
  • Help in development of Financial Markets
  • Helps in Attracting Foreign Grants
  • Helps in Breaking Vicious Circle of Poverty by serving as government’s instrument

Policies & practices regarding mobilization & management of funds in NBFCs, their performance

Financial activity as principal business is when a company’s financial assets constitute more than 50 per cent of the total assets and income from financial assets constitute more than 50 per cent of the gross income. A company which fulfils both these criteria will be registered as NBFC by RBI. The term ‘principal business’ is not defined by the Reserve Bank of India Act. The Reserve Bank has defined it so as to ensure that only companies predominantly engaged in financial activity get registered with it and are regulated and supervised by it. Hence if there are companies engaged in agricultural operations, industrial activity, purchase and sale of goods, providing services or purchase, sale or construction of immovable property as their principal business and are doing some financial business in a small way, they will not be regulated by the Reserve Bank. Interestingly, this test is popularly known as 50-50 test and is applied to determine whether or not a company is into financial business.

The Reserve Bank has been given the powers under the RBI Act 1934 to register, lay down policy, issue directions, inspect, regulate, supervise and exercise surveillance over NBFCs that meet the 50-50 criteria of principal business. The Reserve Bank can penalize NBFCs for violating the provisions of the RBI Act or the directions or orders issued by RBI under RBI Act. The penal action can also result in RBI cancelling the Certificate of Registration issued to the NBFC, or prohibiting them from accepting deposits and alienating their assets or filing a winding up petition.

NBFCs lend and make investments and hence their activities are akin to that of banks; however there are a few differences as given below:

  • NBFC cannot accept demand deposits;
  • NBFCs do not form part of the payment and settlement system and cannot issue cheques drawn on itself;
  • Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks.

The Bank has issued detailed directions on prudential norms, vide Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, Non-Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 and Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Applicable regulations vary based on the deposit acceptance or systemic importance of the NBFC.

The directions inter alia, prescribe guidelines on income recognition, asset classification and provisioning requirements applicable to NBFCs, exposure norms, disclosures in the balance sheet, requirement of capital adequacy, restrictions on investments in land and building and unquoted shares, loan to value (LTV) ratio for NBFCs predominantly engaged in business of lending against gold jewellery, besides others. Deposit accepting NBFCs have also to comply with the statutory liquidity requirements.

Sources of business funding for NBFCs

Non-Banking Financial Companies can raise funds through various sources with deposits; some of them include:

  • Long term loans at low-interest rates: Once NBFC creates an amount required for deployment in its course of operations, it can apply for a long term loan from the bank. It is beneficial for NBFC’s as banks lend at much lower interest rates owing to the nature of CASA deposits. Such type of loans can be secured or unsecured through Government Securities and its repayment can be made in a structured or bullet schedule. NBFC must record the repayment of long term loans in the Balance Sheet along with the asset section. NBFC’s must have a good credit rating to raise a large sum of funds at competitive interest rates.
  • Foreign Direct Investment (FDI): One of the best funding options for NBFC is foreign investment. In 1991, the era of post-liberalization in the Indian economy, a tremendous increase of foreign investors in the NBFC was perceived. Recently, up to 100%, foreign investment is permitted under the automatic route in FDI. Thus, foreign investors don’t require approval from RBI or FIPB and invest directly in NBFC’s.
  • Issue Commercial Paper for small-term loans: Non-Banking Financial Companies can raise the required funds by issuing Commercial Paper. It is a short term unsecured Promissory Note issued by the financial Companies that have tenure of 3 to 12 months. NBFC’s with a minimum net worth of INR100 crores are eligible to list Commercial Papers as per Reserve Bank of India.
  • Issue Bonds: NBFC’s can avail considerable money at the lowest costs by issuing Bonds. It is a common practice that helps to reduce the rate on the sources of funds. The coupon rate on the Bonds is selected to reflect the rating profile of NBFC. The maturity profile of Bonds corresponds to the repayment of interest schedules made by the NBFC’s. Bonds can also be issued to the retail investors, which is a huge advantage for NBFC’s during Bond placement.
  • Securitization of loans: NBFC’s have raised INR 2.36 lakh crore between the period of October 2018 and September 2019 by selling their loans in the market through Securitization. HFC’s and NBFC’s heavily rely upon Securitization as an effective tool to manage liquidity, raise funds and correct ALM mismatch.

NBFCs that can avail automatic route in FDI

Non-Banking Financial Companies that offer the following services can have an access to the automatic route in FDI:

  • Merchant Banking
  • Asset Management
  • Factoring
  • Underwriting
  • Portfolio Management Services
  • Stock Broking
  • Venture Capital
  • Custodian Services
  • Leasing & Finance
  • Housing Finance
  • Credit Card Business
  • Financial Consultancy
  • Micro and Rural Credit
  • Non-fund based activities
  • Investment Advisory Services
  • Forex Broking
  • Credit Rating
  • Money Changing Activities

Promotional role of NBFI, Management of fund

A robust banking and financial system are essential components to channelize the growth of an economy. NBFC’s are financial intermediaries that play a vital role in developing Indian economy. It offers credit facilities to remote areas and supports those individuals who are often overlooked by the banks. Non-Banking Financial Companies underpins the weaker sections of the society, thereby bringing equilibrium in the nation. This write-up underlines the role of NBFC in the economic development of India.

NBFC Marketing is the procedure in which the activities are operated by a Non-Banking Financial Company are marketed to potential and upcoming customers of the Non-Banking Financial Company. There is no specific procedure to consider for NBFC Marketing. But, Non-Banking Financial Companies are becoming essential in the customer’s eyes considering the development of technology and AI (Artificial Intelligence). There are various ways to consider marketing the potential financial products of the Non-Banking Financial Company.

The key goal of setting up this prestigious sector has not been profitability. These institutions work with the sole aim of making financial services accessible to one and all. The unique objective set them apart from the banks and made them the prime drivers of growth.

NBFC sector plays an extremely crucial role in the development of the country’s core infrastructure. By offering quicker funds and credit to the Indian trade and commerce industry, these entities are enabling the nation-wide growth of large infrastructure projects. Furthermore, small businesses, start-ups, and MSMEs/SSIs are dependent on funds offered by NBFCs. As these small businesses expand their operations, their need for skilled and unskilled labor goes up to fulfill the increase in operations. Thus, indirectly, each new NBFC registration creates more job opportunities at the macro-economic level.

The customer base of NBFC vs bank is pretty wide. NBFCs cater to the urban, as well as unorganized rural areas, offering loans to satisfy different requirements. Whereas banks provide finance to the organized sector only. This has resulted in the amount of money lent by the NBFCs to the consumers has been phenomenally more as against banks. Over the last few years, consumer lending has seen a continuous rise, with NBFCs catering to a large portion. With the growth in the economy, the requirement for loans is bound to surge. And NBFCs, along with banks, can give a strong push to the growth and development of the Indian economy.

Growth of NBFC & Their Role

In the last two decades, the capital market in India has witnessed significant ups and downs. The volume of capital market transactions has increased sharply. The functioning diversified. New financial institutions like merchant banks, mutual funds, and venture capital companies have come up and become essential. New financial instruments, such as Fully and Partly Convertible Debentures (FCDs and PCDs), commercial papers, CDs, etc., have emerged. These reflect the growing diversification and measure of the sophistication of the financial services sector catering to the needs of growth capital and money markets. The volume of new issues is presently between Rs. 15,000 crores and Rs.20,000 crores. The number of shareholders runs into several million, indicating the growth of the cult of equity. Commercial banks that deal in the money market are entering the capital market through their merchant banks and mutual funds subsidiaries. They are going to leasing and venture finance also.

They are responsible for providing financial services but are not regulated by a separate governing body and do not hold a full-fledged license for conducting banking operations. Unlike banks, they do not accept demand drafts and are not a part of the Payment and Settlement system.

Further, NBFCs often take a lead role in providing innovative financial services to Micro, Small, and Medium Enterprises (MSMEs) most suitable to their business requirements. An NBFC would often take a lead in innovating and customizing the financial services to fund various industries. Such as transportation, employment generation, wealth creation, bank credit in rural segments, and aid financially weaker sections of the society. Their role in providing assistance and guidance during emergencies cannot be ignored either.

NBFC Role in Revolutionising the Economy

  • Growth: In terms of year-on-year (YoY) growth rate, the NBFC sector beat the banking sector in contributing to the economy every year. On average, this segment grew by 22% every year, in its initial stages. Despite the slowdown in the economy and various setbacks faced in the last few years, the sector is still growing and enhancing operations.
  • Profitability: NBFCs have been more profitable than the banking sector because of lower costs. This enabled them to offer cheaper credit to customers. As a result, the amount of money lent to customers by NBFCs is higher than that of the banking sector with more customers opting for NBFCs.
  • Enhancing the Financial Market: An NBFC caters to the urban and rural poor companies and plays a complementary role in financial inclusion. These financial companies bring much-needed diversity to the market by diversifying the risks, increasing liquidity in the markets thereby bringing efficiency and promoting financial stability to the financial sector. They highlight the public issues of corporations as well as providing funds needed by the start-up companies as capital. The financial market is dependent on the functions that are taken care of by these lending companies.
  • Infrastructure Lending: NBFCs by lending to infrastructure projects, contribute largely to the economy. This is very important for the growth of a developing country like India. The amount involved is quite large, the projects being risky, with no surety of returns, and profits occurring after a longer time-frame. These factors deter banks from financing these projects. Since their inception, NBFCs have contributed more to infrastructure lending than banks.
  • Promoting Inclusive Growth: All the top NBFC in India cater to a wide variety of customers; both in urban and rural areas. They finance projects of small-scale companies, which is important for the growth in rural areas. They also provide small-ticket loans for affordable housing projects. Microfinance provided by them plays an important role to attain stable financial inclusions. All these activities by the institution with an NBFC License help promote inclusive growth in the country.
  • Upliftment in the Employment Sector: With the growth in operations of the small industries and businesses, the policies of NBFCs are uplifting the job situation. More opportunities for employment are arising with the influence of the NBFCs in the private as well as government sectors. The business activities in the private sector provide more employment opportunities and occupation practices. And NBFC plays a key role in their growth and stability.
  • Mobilization of Assets: With more public preferring to deposit in NBFCs because of their higher rate of interest, NBFCs allow mobilization of resources; funds, and capitals. Due to their easier norms for investing, these companies create a balance between intra-regional income and asset distribution. Turning the savings into investments, these companies contribute to economic development as compared to traditional bank practices. Proper organization of capital helps in the development of the trade and industry, leading to economic progress. They operate not intending to maximize their profit and are, therefore, engaged in activities that generate zero or very low revenue.
  • Financing for Long-Term: NBFC plays a key role in providing firms with funds through equity participation. As against traditional banks, NBFCs supply long-run credit to the trade and commerce industry. They facilitate to fund large infrastructure projects and boost economic development. Long-term finance permits growth with stable and soft interest rates. The economy thrives when businesses of SSIs and MSMEs flourish.
  • Raising the Standard of Living: NBFCs collaborate with the government for the upliftment of the society. The NBFCs attract deposits from the general public and convert it into capital for industrial and other sectors for smooth economic development. The rise in businesses consequently raises the demand for workforce and creates employment opportunities raises the purchasing power of individuals and, subsequently, raising demands. This works to upgrade the living standards of a society. Also, foreign deposits are attracted to these financial institutions and support economic process and development.
  • Innovative Products: NBFCs, by being flexible in terms of lending and investment opportunities than banks, are more proactive in innovating financial products. This facilitates their growth in an exceedingly prudent manner. They fine-tune their selling campaigns in regard to their target customers. These corporations are the game changers within the developing economy. For instance, the factorization & bill payment service has been revolutionized. NBFC P2P is a relatively new segment in India that is already creating waves by providing considerably higher margins and facilitating loans at a lower cost.
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