NBFC Insurance, Pan shops and Payday lending

16/05/2021 0 By indiafreenotes

NBFC Insurance

A Non-Banking Financial Company (NBFC) is a company registered under the Companies Act, 1956 engaged in the business of loans and advances, acquisition of shares/stocks/bonds/debentures/securities issued by Government or local authority or other marketable securities of a like nature, leasing, hire-purchase, insurance business, chit business but does not include any institution whose principal business is that of agriculture activity, industrial activity, purchase or sale of any goods (other than securities) or providing any services and sale/purchase/construction of immovable property. A non-banking institution which is a company and has principal business of receiving deposits under any scheme or arrangement in one lump sum or in installments by way of contributions or in any other manner, is also a non-banking financial company (Residuary non-banking company). The depositor must bear in mind that public deposits are unsecured and Deposit Insurance facility is not available to depositors of NBFCs.

Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in case of banks. The Deposit Insurance and Credit Guarantee Corporation pays insurance on deposits up to ₹ One lakh in case a bank failed.

Eligibility Criteria to set up Joint Venture (“JV”)

Fulfilling the criteria below will allow the NBFCs to set up a joint venture company for undertaking insurance business with risk participation.

  • It should be registered with the RBI.
  • It should have a net worth of Rs. 500 Crores.
  • The ‘Capital Adequacy Ratio’ of the NBFC, engaged in loan and investment activities, should be more than 15% and for other NBFCs should be more than 12%.
  • NPAs should not be more than 5% of the total outstanding leased/hire purchase assets and advances.
  • NBFC should have a net profit for the last 3 consecutive years.

Eligibility Criteria to act as Insurance Agent

  • Not all NBFCs are required to get registered with the RBI as per Section 45 of the RBI Act, 1934. However, if an NBFC wants to enter the market of the insurance business, then it has to get itself registered with the RBI.
  • It should have a net worth of Rs. 5 Crores as per the latest audited balance sheet. Fulfilling these two criteria allows the NBFC to undertake insurance business, on a fee basis, as an agent of the insurance companies without any risk participation.

Pan shops and Payday lending

A pawnbroker offers loans on items that are not accepted as collateral by traditional banks or lenders. Items that typically show up in pawn shops include jewelry, electronics and collectible items.

The second complaint, more specific to the pawn industry, is that unscrupulous pawn shops sometimes don’t ask enough questions about where the goods they are buying or offering loans on actually came from. Regulations require that pawnbrokers request proof of ownership before making a deal with a potential customer but the less reputable players in the industry have a nasty habit of forgetting to ask. It is far from the entire industry, or even close to a majority of it, but the image is there and tends to make pawn lending unique among short-term loans in its connection to seediness.

Which is why it might be surprising to note that 2018 and 2019 have in many ways been strong growth years for the pawn industry in the U.S. and around the world. Consumers are leveraging pawn shops more frequently and investors are taking the industry more seriously as a vehicle for growth.

A payday loan (also called a payday advance, salary loan, payroll loan, small dollar loan, short term, or cash advance loan) is a short-term unsecured loan, often characterized by high interest rates.

The term “payday” in payday loan refers to when a borrower writes a postdated check to the lender for the payday salary, but receives part of that payday sum in immediate cash from the lender. However, in common parlance, the concept also applies regardless of whether repayment of loans is linked to a borrower’s payday. The loans are also sometimes referred to as “cash advances,” though that term can also refer to cash provided against a prearranged line of credit such as a credit card. Legislation regarding payday loans varies widely between different countries, and in federal systems, between different states or provinces.

To prevent usury (unreasonable and excessive rates of interest), some jurisdictions limit the annual percentage rate (APR) that any lender, including payday lenders, can charge. Some jurisdictions outlaw payday lending entirely, and some have very few restrictions on payday lenders. Payday loans have been linked to higher default rates.

The basic loan process involves a lender providing a short-term unsecured loan to be repaid at the borrower’s next payday. Typically, some verification of employment or income is involved (via pay stubs and bank statements), although according to one source, some payday lenders do not verify income or run credit checks. Individual companies and franchises have their own underwriting criteria.

In the traditional retail model, borrowers visit a payday lending store and secure a small cash loan, with payment due in full at the borrower’s next paycheck. The borrower writes a postdated check to the lender in the full amount of the loan plus fees. On the maturity date, the borrower is expected to return to the store to repay the loan in person. If the borrower does not repay the loan in person, the lender may redeem the check. If the account is short on funds to cover the check, the borrower may now face a bounced check fee from their bank in addition to the costs of the loan, and the loan may incur additional fees or an increased interest rate (or both) as a result of the failure to pay.

In the more recent innovation of online payday loans, consumers complete the loan application online (or in some instances via fax, especially where documentation is required). The funds are then transferred by direct deposit to the borrower’s account, and the loan repayment and/or the finance charge is electronically withdrawn on the borrower’s next payday.