Page 40 - DTPA Journal Aug 18

DTPA - J | 2017-18 | Volume 3 | August 2018

is defined as aggregate of financing not be less than 60% of its total assets and total income
real/physical assets supporting economic respectively. Further, an NBFC-AFC can either be
activity and income arising therefrom is not less registered as a deposit taking NBFC or a non-deposit
than 60% of its total assets and total income taking NBFC. Accordingly, the classification would be
respectively. incorporated in the Certificate of Registration issued by
the Bank as NBFC-Asset Finance Company; NBFC-D-
Currently, the Master Direction - Non-Banking
Financial Companies Acceptance of Public AFC if accepting deposits and NBFC-ND-AFC, if not
accepting deposits.List of AFCs registered with RBI is
Deposits (Reserve Bank) Directions, 2016 (updated
available at RBI official site. As on June 30, 2018, there
till May 31, 2018), (“Master Directions for NBFC-D”)
were a total of 362 Asset Finance Companies (AFCs) in
continues to use the same definition for“Asset Finance
Company” as mentioned above in the erstwhile India registered with RBI.
directions. RBI guidelines
Relevance of classification Master Directions for NBFC-Dprescribes the ceiling on
quantum of deposit and restrictions on investments
The category of AFCs was created by merging
in land and building and unquoted shares for an
leasing/hire purchase companies into a common
NBFC-AFC:
category. The intent of the AFC category is clearly to
distinguish AFCs from loan companies. Loan 1. An AFC having minimum Net Owned Fund
companies give monetary loans, whereas AFCs assist (NOF) as stipulated by the Bank, andcomplying
borrowers by providing funds directly linked with with all the prudential norms,shall accept or
physical assets used in economic/productive activity. renew public deposit, together with the
Therefore, the critical element in categorization as an amounts remaining outstanding in the books of
AFC is not the physical asset, but the use of the physical the company as on the date of acceptance or
asset acquired by the borrower, into a renewal of such deposit, not exceeding one
manufacturing/productive/economic activity, as and one-half times of its Net Owned Fund
opposed to consumer assets. (NOF).
Loan Company and AFC 2. An AFC, which is accepting public deposit,
cannot invest in land or building, except for its
Categorisation of a company as an NBFC depends on
own use, an amount exceeding ten per cent of
the principal business of the company.The principality
of business is defined by the RBI. Where the financial its owned fund; and in unquoted shares of
another company, which is not a subsidiary
assets of the companyare more than 50% of the total
company or a company in the same group of
assets and the financial income generated by the
company ismore than 50% of the its total income, then the non-banking financial company (excluding
the permitted limit in equity capital of an
the company is required to register itself as anNBFC.
insurance company), an amount exceeding ten
Where the principal business of any company is to carry
per cent of its owned fund.
out financial activity, thecompany shall be deemed to be
an NBFC and shall require registration with RBI. However, Master Direction - Non-Banking Financial
Company - Systemically Important Non-Deposit taking
Further, based on the type of activity conducted, there is
Company and Deposit taking Company (Reserve
a difference between a Loan Company (LC) and an
Bank) Directions, 2016 (“Master Directions for NBFC-
AFC. A LC means any company which is a financial
SI”) do not lay down any specific guidelines for NBFC-
institution carrying on as its principal business the
providing of finance whether by making loans or AFCs. The regulations as applicable on an NBFC-ND-
SI are as a whole applicable on NBFC-AFCs as well.
advances or otherwise for any activity other than its own
but does not include an AFC. On the other hand, any Benefits of Classification
NBFC carrying out asset-backed lending business is
Acceptance of External Commercial Borrowings
categorised as asset finance company or NBFC-AFC.
(ECBs)
However, the principality in case of NBFC-AFC is Earlier, AFCs were permitted to avail ECBs for financing
different from that of a LC. In case of an AFC the
the import of infrastructure equipment for leasing to
aggregate of financing real/physical assets supporting
infrastructure projects, however, LCs were not allowed
economic activity and income arising therefrom shall
to avail ECBs.Subsequently, NBFCs categorized as

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