London Inter-Bank Offer Rate (“LIBOR”) fixing
LIBOR is set through a process involving various banks submitting daily the interest rates at which they are willing to lend, to the respective trade organization in their regions. This results in interbank offered rates which are a benchmark for pricing of financial products worth hundreds of trillion Dollars and which include floating rate mortgages, interest rate swaps, student and corporate loans etc.
LIBOR fixing involved a series of fraudulent actions by banks. It was noted that various major banks globally inflating and deflating their rates to create a false impression on their creditworthiness which was in reality much worse than shown. Bob Diamond, CEO Barclays had admitted to manipulation of these rates at Barclays incurring it a 450 Million Dollar Fine. Various banks including Citigroup, JP Morgan HSBC, UBS were investigated.
Barclays and certain other banks submitted artificially low rates to pretense strength and to boost traders’ profits. Earliest suggestions of the underlying condition was by the Wall Street Journal as early as in 2008 April.
Non-Banking Financial Companies (“NBFC”)
According to the Reserve Bank of India (“RBI”) a NBFC is a company 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 the 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). When a registered company’s financial assets constitute more than 50% of the total assets and its income from financial assets constitutes more than 50%, it can be registered with RBI as an NBFC. Though NBFCs lend and make investments, similar to banks, the similarity ends here. NBFCs cannot accept demand deposits nor do they form a part of the payment and settlement system and hence they cannot issue cheques drawn on itself. Further, Deposit insurance facility of Deposit Insurance and Credit Guarantee Corporation is not available to depositors of NBFCs, unlike in the case of banks. Though RBI has supervisory and regulatory oversight on NBFCs, an Insurance company holding a valid IRDAI issued Registration Certificate are regulated by IRDAI.
The idea of NBFCs was first categorized under the American Dodd-Frank Wall Street Reform and Consumer Protection Act as companies that are predominantly engaged in financial activities and encompassed companies offering services similar to banks such as, credit unions, insurance companies, asset managers, hedge funds, Private Equity firms etc. It has been claimed that easy lending environment created by NBFCs was of the causes of the subprime mortgage meltdown. Lehman Brothers and Bear Stearns were most notorious NBFCs at the center of the meltdown. Traditional banks saw themselves under tightened regulations post the 2008 crisis leading to a slowdown in lending. As a result, NBFCs being able to operate outside constraints of banking regulations saw a rise in number.
The Reserve Bank in India classified enterprises handling Peer-to-Peer (“P2P”) Lending as NBFCs and this segment is growing tremendously all over the world.
At present there are 18 categories of NBFCs registered with the RBI:
- On basis of liability, Deposit Taking NBFCs, and Non-Deposit Taking NBFC.
- On basis of size, Non-Deposit Taking NBFC can be systematically important (“NBFC-SI”) and non-deposit holding companies (“NBFC-ND”).
- On basis of activities, NBFCs are categorized as follows:
- Asset Finance Company (AFC)
- Investment Company (IC)
- Loan Company (LC)
- Infrastructure Finance Company (IFC)
- Systematically Important Core Investment Company (CIC-ND-SI)
- Infrastructure Debt Fund NBFC (IDF-NBFC)
- Mortgage Guarantee Companies (MGC)
- NBFC Non-Operative Financial Holding Company (NOFHC)
- Peer-to-Peer Lending Platforms (P2P)
- Non-Banking Financial Company-Micro Financial Institutions (NBFC-MFI)
Further, Chit Fund Companies are NBFCs regulated by the State Government, Venture Capital Fund, Stock Brokering, and Merchant Banking are regulated by the SEBI, Housing Finance by the National Housing Board and Nidhi Companies are regulated by the Ministry of Corporate Affairs.
[This Page will be updated regularly introducing various fundamental concepts in Securities Law]