CHAPTER 19

ANON-BANKING FINANCE COMPANIES – NBFC’s

Non-Banking Finance Companies (Establishment and Regulation) Rules, 2003 (Rule 1 to 7)

NBFC’s & Notified Entities Regulations, 2008 (Regulations 2, 3, 9, 10, 15B, 16-18, 25)
A non-banking financial institution (NBFI) or non-bank financial company (NBFC) is a 
financial institution that does not have a banking license.

They provide similar like banking and financial services.

NBFCs are not subject to banking regulations by authorities adhered to by traditional banks.

EXAMPLES:
LEASING COMPANIES
HOUSING FINANCE COMPANIES
MICRO-FINANCE ORGANIZATIONS
LEASING: ORIX LEASING, GRAYS LEASING ETC.

HOUSING FINANCE: PAKISTAN HOUSING FINANCE LTD., TRELLIS HOUSING

FINANCE

MICRO-FINANCE: SARHAD RURAL SUPPORT PROGRAMME (SRSP), AKHUWAT

PENSION FUND: NATIONAL BANK ASSETS MANAGEMENT, MCB-ARIF HABIB

SAVINGS LTD.

Besides above Investment Management, Assets Management, Investment

Advisory Services are examples of NBFIs.
Non banking financial companies describe as companies "predominantly engaged
in a financial activity" when more than 85% of their consolidated annual gross
revenues or consolidated assets are financial in nature.

WHY NBFCS ARE NEEDED

NBFCs play an important role in promoting growth in country, by catering to
financial needs of “bank excluded customers”.
NBFCs Provide innovative financial services to Small & Medium Enterprises
SMEs.
NBFCs participate in development of an economy by providing a boost to
employment generation, wealth creation, bank credit in rural segments and to
support financially weaker sections of society.
Emergency services like financial assistance & guidance to customers.
Its about 4% of Pakistan’s GDP of 2020.
Eligibility Criteria for Establishment of NBFC Rule03
NBFC may be established, if each of its sponsors, proposed directors, CE and chairman of Board fulfills
(a) has not been associated with any illegal banking business, deposit taking or financial dealings;
(b) he and companies in which he is a director or major share holder
O have no over-due loans or installments outstanding
O has defaulted in payment of taxes

(c)has not been sponsor, director or CE of a defaulting co-operative finance society or company;

(e)has never been convicted of fraud or of an offence of moral turpitude or removed for misconduct;
(f)has neither been adjudged as insolvent; and
(g) his net-worth (except for a nominee director) is not less than twice amount to be subscribed.
Permission to form a NBFC Rule4
a) A person desirous of forming a NBFC shall make an application to Commission
b) Application must be as set out in Form-1
c) Non-refundable fee Rs. 100,000.
d) Commission if satisfied permit by an order in writing such person to establish NBFC.
e) Permission granted valid for 6 months
f) Permission can be extended for 3 months under special circumstances
g) During permission period NBFC to be incorporated as a public limited company under Companies Act.
Conditions for grant of licence Rule 05
O Separate applications to Commission for grant of licences for carrying on different forms of business.

O Application shall be submitted on Form-II

O Non-refundable processing fee of Rs. 100,000 for each such licence:

O Commission issue a single licence for both investment advisory & asset management services.

O Licence valid for 1 year & each licence shall be renewable annually on Form IV with fee of Rs. 25,000.

O Every existing company shall apply with fee of Rs. 50,000

Conditions for Grant of Licence (to company)
Commission shall grant licence in Form-III if
(a) company incorporated as a public limited company;
(b) it has separate layers of minimum equity in respect of following forms of business-
i)investment Finance services 300 million;
ii)leasing 200 million; iii)venture capital investment 5 million;
iv)discounting services 200 million; v)investment advisory & asset management 30 million;
vi)housing Finances services 100 million.

(c) the company has allotted at least 15% of the paid-up share capital to promoters;
(d) promoters & directors shall not dispose shares for 3 years except with approval of Commission;
(e) company appoints its chief executive who does not hold such office in any other company.
Conditions applicable to a NBFC Rule 07 Maintenance of record
NBFC to maintain below books of accounts and other records for 10 years:
(i)journals, cash books and other records of original entry forming basis of entry in any ledger;
(ii) ledgers reflecting assets, liabilities, income & expenses along with supporting documents;
(iii) ledgers showing securities in portfolio;
(iv) record of transactions with banks;
(v) record of meetings of BoD and all relevant committees audit / credit / investment committee;
(vi) original record of all reports, analysis & memoranda for investment advice distributed;
(vii) prepare accounts in conformity with the IAS and technical releases issued by ICAP
(viii) furnish to Commission quarterly and annual financial statements in accordance with Schedule I;
(ix) ensure that its statutory auditors are from approved list of auditors circulated by the Commission;
Appointment of Financial or Chief Accounting Officer
NBFC shall appoint as financial or chief accounting officer, having minimum 3 years experience who is
(i)a chartered accountant; or (ii)a cost and management accountant; or
(iii)a member of a recognized foreign accountancy organization;
iv)a person having master’s degree in commerce or business administration with specialization in finance,

Appointment of Internal Auditor

NBFC shall appoint an individual as internal having minimum three years relevant experience who is
i. a chartered accountant; or ii. a cost and management accountant; or
iii. a certificated internal auditor; or iv. a certified information system auditor; or
v. a member of recognized foreign accountancy organization;
vi. individual with master degree in commerce or business administration with specialization in finance;
or
vii. CA firm having satisfactory QCR and not being statutory auditors to whom this function is
outsourced.
Appointment of other officers
An NBFC shall
i. appoint a compliance officer to ensure reporting of status of compliance with regulatory framework

ii. non-deposit taking and unlisted Lending NBFC may designate another officer as its compliance officer

Credit Rating
i. obtain rating as and when it becomes eligible for rating as per the rating criteria of a rating agency.
ii. such rating shall be updated at least once every financial year
iii. Within 1 year of decrease in rating from the grade specified by Commission, obtain a fresh rating and during the
period that its rating is below the grade so specified,
iv. NBFC may be allowed by Commission to continue its operations on such conditions as are deemed appropriate;
v. publish the rating in its annual report and quarterly reports
vi. acquire membership of relevant association and follow code of conduct specified by said association approved by
Commission.”;
A NBFC shall not,
(a)appoint or elect more 25% of its directors from same family
(b) purchase/sell to director, employee or from a person who beneficially owns 10% or more equity
(c)transfer ownership of controlling shares, merge with, acquire or take-over any other company without
prior approval of Commission;

(d)make loan / advance to any person except in connection with ordinary course of business of NBFC;
(e)employ as broker, its directors / officers / employees or a person who beneficially owns 10% of equity
(f) remove any of its records from Pakistan to a place outside without prior permission of Commission;
(g) change its chief executive & BoD excluding director nominated by creditors etc without approval.
(h) make investment in un-quoted shares of any company without approval of Commission; and
(i) offer any of its own or other securities for any consideration other than cash nor make any loan
against these securities.
Which of following business can be carried out by NBFC after taking license from SECP?
a. Investment finance b. Leasing c. House finance services
d. Discounting services e. Venture capital investment f. Investment advisory
g. Asset management services h. All are correct

A NBFC may be established, if each of its sponsors, proposed directors, chief executive and chairman of
the Board of Directors fulfills the following terms and conditions, namely:
a. Has not been associated with any illegal banking business
b. Has not been director / chief executive of a defaulting co-operative society / finance company
c. Has never been convicted of fraud or breach of trust or removed from service for misconduct
d. All are correct
e. Has neither been adjudged as insolvent
Permission granted by SECP shall be valid for a period of _______ months:
a. 9 b. 6 c. 12 d. 3

During validity of permission, promoters of NBFC shall get it incorporated as a ___company under Companies Act

a. Private limited b. Public limited c. SMC d. NPO

Application shall be submitted along with non-refundable processing fee of Rs___ for each licence:
a. 100,000 b. 120,000 c. 150,000 d. 200,000