The RBI conducts on-site inspection and off-site surveillance of NBFCs. Off-site surveillance is undertaken by calling for periodical returns. These are generally fortnightly, monthly or annual returns.
These returns help RBI to compare performance level at two different periods, increase or decrease in financial value of different items for ascertaining potential problem areas and issues and look for any weakness getting into the financial health of NBFC.
The on-site inspection is mainly used to ensure that the interest of the depositors is well protected and these funds are not in danger of vanishing through losses or otherwise.
For this purpose, the RBI ensures whether asset classification is done properly, whether provisioning and reserve requirements are done as per requirements, whether books of accounts truly reflect the financial health of the company, whether loan assessment has been made properly etc., and the inspection is carried on once a year or two depending upon the public deposit level of NBFC. The RBI conducts the inspection under the system known as the alphabets of CAMELS. It stands for
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C = Capital Adequacy requirements
A = Asset quality, like standard etc., assets
M = Management, the level and expertise and appraisal capacity of management.
E = Earning capacity of NBFC
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L = Liquidity, the level of liquidity and the components of liquidity are verified.
S = Systems and control exist in the NBFC, its effectiveness etc.
In 1997, about 40000 NBFCs were estimated to be in operation in India. When RBI introduced compulsory registration for NBFCs, around 37500 NBFCs seem to have applied for registration. RBI possibly granted registration certificates only for about 8000 – 8500 NBFCs. Commercial Banks are presently permitted to finance NBFCs for their business operations.
Agricultural and Industrial Finance
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In India, the Reserve Bank contributes to a great extent in the economic development in various ways. It assumes special responsibility in the development of agriculture and industry. The RBI concentrates more on these two vital sectors of the economy. RBI does not presently provide these finances directly.