Page 41 - DTPA Journal Aug 18

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

AFCs, along with NBFC-IC and CICs, havebeen economy by generating incomes, employment, etc. On
allowed to avail of ECBunder the three tracks, i.e. Tack I, the contrary, general purpose lending or pure consumer
Track II and Track III, whereas all other remaining credit may lead to expansion of credit, without any direct
NBFCs coming under the regulatory purview of the RBI, consequential economic benefits. In addition, the use of
fall under Track III. The end-use prescriptions for ECB the asset should be directly into economic or productive
raised under the respective track has also been activity; indirect or consequential economic benefit may
prescribed. arguably appear in every case, however, that is not the
intent of the AFC classification.
Further, the individual limits of ECB that can be raised
by eligible entities under the automatic route per Based on the above rationale, various asset types that
financial year is up to USD 750 million or equivalent for are usually funded by an NBFC can be evaluated for
NBFC-AFCs under Track I, however, for remaining consideration as an eligible asset under AFC:
NBFCs falling under Track III, the limit is up to USD 500
Infrastructure Sector
million or equivalent.
As the market is holding a very bullish view on the
Bank's finance
development of the infrastructure being a sine quo non
As per the Basel III framework, commercial banks are to the development of the economy, the sector offers
required to assign risk weights on their investments in huge demand. Assets like dumpers, excavators,
NBFCs for the purpose of determining capital crushers, utility assets like cranes etc are being leased
adequacy. The risk weighting of the investments made out. Since mining activity is looking to revive demand for
by the banks in AFCs, is done on the basis of the credit earth moving mining equipment is on a rise as well. All
rating of the Company. Thus, investments in an AFC such asset are eligible to be considered under AFC
with higher rating will attract lower risk weight and is classification.
more favoured by the banks to make investments. On Office Infrastructure/Furniture and Fittings
the other hand, any exposure of the banks in NBFCs
other than IFC and AFC are subject to a risk weighting of The financing towards office equipmentis not to acquire
100%. This is a very significant advantage enjoyed by an asset supporting productive/economic activity. Even
deposit taking NBFC-AFCs over other NBFCs, for if the property is used for commercial purpose but is not
availing bank finance. supporting any productive or economic activity. Hence,
financing towards such furniture and fixtures cannot be
Qualifying Assets under AFC- Treatment of various
regarded as an eligible asset for AFC classification.
financing transactions
Automobile Financing
Asset finance by NBFCs predominantly takes the form
Passenger Vehicle (Auto lease)
of secured loan or leasing. Asset financing has a wide
coverage from cars to healthcare, education, IT Most of the larger corporates enable acquisition of
equipments, commercial vehicles, used vehicles, vehicles by their employees through the leasing route.
construction equipment, air-planes, windmills, solar At the end of lease term the asset gets transferred to the
panels, etc. However, it is significant to examine employee. This is being used as a device to encourage
whether such financing is directly linked with physical employees to own up their cars. These cars used by
assets used in economic/productive activity. employees are not supporting any economic activity. It
Thoughthe category of AFCs was created by merging is a means of communication used for convenience of
leasing/hire purchase companies, however, the criteria the employees and is not directly or indirectly linked with
for an asset to qualify under AFC, as mentioned earlier, any productive/economic activity and seeming is
suggests that the physical assets must support merely a facility provided to the employees by the
productive/economic activity. By applying the rule of employer. The same cannot be considered as an
interpretation, i.e. ejusdem generis, it can be inferred eligible asset under AFC.?
that the term 'physical asset supporting Commercial Vehicle (finance/refinance)
productive/economic activity' is describing asset such
Commercial vehicle such as those used by small
as automobiles, tractors, lathe machines, generator
contractors, taxi operators and small road transport
sets, earth moving and material handling equipments,
operators, are also financed by NBFCs. The owner of
moving on own power and general purpose industrial
machines. The assets that support productive or such asset earns revenue by plying these vehicles.
economic activity have a multiplier effect on the Funding is given usually for the acquisition of such
commercial vehicle, including used cars, and refinance

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