These slides give an illustrative presentation of the overall NBFC sector in India and the regulatory mechanism guiding its growth.

1. Non-Banking
Financial
Companies

2. What is an NBFC?
▪ Non-Banking Financial Company (NBFC) is a company registered under the
Companies Act, 2013 defined under Section 45IA (c) of the RBI Act, 1934
▪ 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
▪ It 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.

3. Basic regulatory framework on NBFCs
▪ Basic regulatory instruments:
▪ RBI Act
▪ NBFC (Acceptance of Public Deposits) Directions, 1998
▪ NBFC (Deposit Accepting or Holding) Prudential Directions 2007
▪ NBFC (Non-Deposit Accepting or Holding) Prudential Directions 2007
▪ NBFCs Auditors Directions 2008
▪ Several circulars and press notes of the RBI
▪ issued from time to time

4. Applicablity of RBI Rules and Guidelines
▪ Only companies whose principal business relates financial activity are registered ,
regulated and supervised by RBI.
▪ What business constitutes Principal business?
▪ When a company’s financial assets constitute:
▪ more than 50 per cent of the total assets
▪ income from financial assets constitute more than 50 per cent of the gross income
▪ A company which fulfils both these criteria will be registered as NBFC by RBI.
▪ If there are companies engaged in agricultural operations, industrial activity, purchase
and sale of goods, providing services or purchase, sale or construction of immovable
property as their principal business and are doing some financial business in a small
way, they will not be regulated by the Reserve Bank.

5. Types of NBFCs by assets
Based on the nature of business
Asset Finance
Companies Loan Companies
Investment
Companies
Infrastructure
Finance Companies

6. Types of NBFCs
▪ Asset Finance Company (AFC):
▪ An asset finance company is a financial institution.
▪ The principal business of an AFC is financing of assets which are engaged in production or
economic activities.
▪ Such assets are like tractors, generator sets, automobiles, lathe machines, industrial
machines, etc.
▪ Principal business means:
▪ the total of financing the said assets which supports economic activity and
▪ income arising therefrom is not less than 60% of its total assets and total income,
respectively.
▪ Asset financing means getting a credit by using one or more assets as security for
availing that credit.

7. (Contd…)
▪ Investment Company (IC): IC means any company:
▪ which is a financial institution
▪ Which carries on the principal business of acquisition of securities,
▪ Loan Company (LC): LC means any company:
▪ which is a financial institution
▪ its principal business the providing of finance whether by making loans or advances or
otherwise for any activity other than its own
▪ It doesn’t include an Asset Finance Company.
▪ On 22 February 2019, RBI released a notification through which it harmonized above
three categories of NBFCs into one, based on the principle of regulation by activity
rather than regulation by entity.

8. (Contd…)
Infrastructure Finance Company (IFC):
▪ IFC is a non-banking finance company whose principal business providing loans to infrastructure
companies.
▪ Infrastructure Finance Companies are predominantly engaged in providing loan to the infrastructure
sector.
▪ Infrastructure Loan: It means the credit facility extended by NBFCs to a borrower for exposure in the
following categories of infrastructure sectors and sub-sectors.
▪ According to RBI, “an IFC is defined as a Non-Banking Financial Company if;
▪ A minimum of 75 percent of its total assets shall deploy in infrastructure loan.
▪ Net owned funds of Rs. 300 crore or above
▪ Minimum credit rating ‘A’ or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by other accrediting
rating agencies.
▪ CRAR of 15 percent (with a minimum Tier I capital of 10 percent)

9. (…putting infrastructure loans graphically)

10. ▪ Infrastructure Debt Fund: Non- Banking Financial Company (IDF-NBFC):
▪ Company registered as NBFC to facilitate the flow of long term debt into infrastructure projects.
▪ IDF-NBFC raise resources through issue of Rupee or Dollar denominated bonds of minimum 5 year maturity
▪ Only Infrastructure Finance Companies (IFC) can sponsor IDF-NBFCs.
▪ Non-Banking Financial Company - Micro Finance Institution (NBFC-MFI): NBFC-MFI is a non-deposit
taking NBFC having not less than 85% of its assets in the nature of qualifying assets.
▪ Non-Banking Financial Company – Factors (NBFC-Factors): NBFC-Factor is a non-deposit taking
NBFC
▪ Engaged in the principal business of factoring.
▪ Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable
(i.e., invoices) to a third party (called a factor) at a discount
▪ The financial assets in the factoring business should constitute at least 50 percent of its total assets and its
income derived from factoring business should not be less than 50 percent of its gross income
▪ Systematically Important Core Investment Company (CIC-ND-SI)- It is a financial company that is
principally engaged in the business of acquisition of shares and securities.
(Contd…)

11. ▪ Mortgage Guarantee Companies (MGC) - MGC are financial institutions for
which:
▪ at least 90% of the business turnover is mortgage guarantee business or
▪ at least 90% of the gross income is from mortgage guarantee business and net owned
fund is Rs 100 crore
▪ NBFC- Non-Operative Financial Holding Company (NOFHC): A financial
institution through which:
▪ promoter / promoter groups will be permitted to set up a new bank .
It’s a wholly-owned Non-Operative Financial Holding Company (NOFHC) which will hold
the bank as well as all other financial services companies regulated by RBI or other
financial sector regulators
(Contd…)

12. Corporate Governance guidelines
▪ May 8, 2007 notification
▪ Addressed to all NBFC – D with deposits of Rs 20 crore or more, and NBFC-ND-
SI
▪ Presumably applicable to these NBFCs only
▪ Audit committee required where:
▪ Assets are Rs 50 crore or more
▪ Deposits of Rs 20 crore or more
▪ Nomination committee in the above cases:
▪ To ensure directors are fit and proper

13. (Contd…)
▪ Connected lending relationships (not still enforced):
▪ Rules were intended to make regulations at par with banks
▪ Rotation of partners of Statutory Auditors firm where (desirable, not mandatory):
▪ Public deposits/Deposits are of Rs. 50 crore or above
▪ Partners of CA firm be rotated every 3 years
▪ Asset liability management committee required when:
▪ Asset are Rs. 100 crore or above
▪ Deposits are Rs. 20 crore or above
▪ To understand asset liability mismatch risk, etc
▪ A Risk management committee can be formed in addition to ALCO

14. Investments by NBFCs
(Notification No.DFC.121/ED(G)-98 dated January 31, 1998)
▪ All the non-banking financial companies In unencumbered approved securities
are exempt from the requirement to invest in unencumbered approved securities
an amount:
▪ Not less than 15% of public deposit
▪ 10% or more of public deposits in:
▪ Unencumbered approved securities
▪ Unencumbered term deposits with scheduled commercial bank, SIDBI or
NABARD
▪ Bonds issued by SIDBI or NABARD
▪ Aggregate amount not to be less than 15% of public deposits.

15. Leasing
▪ Leasing is a means of providing access to a fixed asset and may be defined as a
contract between two parties wherein one party (the lessor) provides an asset for
use to another party (the lessee) for a specified period (lease term) in return for
specified payments (rentals)
▪ Globally, there are two basic types of leases – financial and operating leases.
▪ A finance lease is a contract that allows the lessor, as owner, to retain legal ownership of
an asset while transferring substantially all the risks and rewards of economic ownership
to the lessee
▪ An operating lease is a contract that allows the lessor, as owner, to retain legal
ownership of an asset but allows the lessee to enjoy the economic use of the asset for a
predetermined period before returning the asset to the lessor.

16. Financial Lease
▪ Since a financial lease is regarded as a financial contract, any entity principally
engaged in the business of financial leases is considered to be a Non-Bank
Finance Company (NBFC).
▪ An entity is considered to be principally engaged in financial activities if it satisfies
the twin “principal business criteria” laid down by the RBI vide its press release
dated 8th April, 1999:
▪ At least 50% of the total assets of Company should be financial assets;
▪ At least 50% of the gross income should be derived from the financial assets

17. Operating Lease
▪ An operating lease is a contract that allows the lessor, as owner, to retain legal
ownership of an asset but allows the lessee to enjoy the economic use of the
asset for a predetermined period before returning the asset to the lessor.
▪ While the law does not specifically lay down distinction between financial and
operating leases, from the point of income tax incidence, it is generally believed
that it is only in case of operating leases that the depreciation is claimed by the
lessor. In case of a financial lease, it is the Lessee who claims the depreciation

18. Advantages of Leasing
▪ Leasing is usually preferred because it allows lessor to keep a lighter balance
sheet and free up resources for working capital, among others
▪ Leasing also has its potential of bringing down the cost of credit
▪ The lessor, with title over the asset, has better recovery rights, and therefore, has
lower risk which allows the lessor to impose lower risk premiums while extending
his financing

19. Is your business is engaged in Financial Lease
or Operating lease?
▪ It’s an important question to answer because of applicablity of regulations.
▪ As per RBI regulations, it is mandatory for a company that is in the business of
financing to have a certificate of registration classifying it as a financial services
company.
▪ As per the National Industrial Classification Code
(http://dipp.nic.in/English/acts_rules/Press_Notes/NIC-2008.pdf), financial leases
are regarded as financial transactions, considered under “financial services
activities” while operating leases, are regarded as rental contracts, and dealt with
in a separate section on “renting and leasing activities

20. …putting it
graphically
Therefore, the need for a leasing
company to register itself with the RBI
as an NBFC has been summarised
graphically

21. Lease Vis-a-Vis Hire Purchase
▪ Hire-purchase transaction is also almost similar to a lease transaction with the basic
difference that the person using the asset on hire-purchase basis is:
▪ The owner of the asset and full title is transferred to him after he has paid the agreed
instalments.
▪ The asset will be shown in his balance sheet and he can claim depreciation and other
allowances on the asset for computation of tax during the currency of hire-purchase
agreement and thereafter.
▪ In a lease transaction:
▪ The ownership of the equipment always vests with the lessor and lessee only gets the right to
use the asset.
▪ Depreciation and other allowances on the asset will be claimed by the lessor and the asset
will also be shown in the balance sheet of the lessor.
▪ The lease money paid by the lessee can be charged to his Profit and Loss Account. However,
the asset as such will not appear in the balance sheet of the lessee. Such asset for the
lessee is, therefore called ‘off the balance sheet asset’.

22. Sales and Lease Back Leasing
▪ Under this arrangement an asset which already exists and in use by the lessee is
first sold to the lessor for consideration in cash.
▪ The same asset is then acquired for use under financial lease agreement from
the lessor. Ibis is a method of raising funds immediately required by lessee for
working capital or other purposes.
▪ The lessee continues to make economic use of assets against payment of lease
rentals while ownership vests with the lessor.

23. Sale and Leaseback
▪ Sale and leaseback allows a company to sell back an asset that it owns (and this
could even include a commercial property,) to a funder or a bank, in return for a
cash sum, but the funder can lease it back to the company at a cost over an
agreed period of time.
▪ It is secure from a lender's perspective, due to the collateral offered and allows
companies without a detailed credit history and record to gain access to more
traditional capital sources.
▪ Assets that back these types of loans can be fixed assets, which can be plant,
vehicles and property or current assets (e.g., circulating capital) such as accounts
receivable (debtors – without or with recourse to the original ‘borrower’) and stock

24. Advantages of sale and leaseback
▪ An agreement can happen in a relatively short time frame, as the security is the
asset itself
▪ once the asset is sold and taken off the books of the lessee, the lessee is able to ,
account for an immediate accounting profit without having to pay tax on it
instantly
▪ Funders are generally flexible in what assets they can finance (from artwork, to
cars and complex machinery)
▪ Releases cashflow into the business relatively quickly and injects cash into the
business
▪ Amortization and depreciation of the product is still taken into consideration

25. Direct Taxation Issues- Sale and Leaseback
▪ In case of operating leases while the depreciation claim by the lessor is mostly an
established scenario, the depreciation claims in case of financial leases have
been swinging like a pendulum in favour of lessor and lessee over years and
several judicial pronouncements.
▪ The sale proceeds of the assets sold are deducted from the written down value of
the block (of assets)( as defined under Section 2(11) of the Income Tax Act, 1961)
▪ In case of SLB transaction, assets are sold at higher than written down value,
and the gain made on such a sale results in reduction in depreciable value of the
block of assets. The reduction in depreciation will be allowed over a number of
years.
▪ Similar would be the case in case the asset was sold at less than written down
value, it sale consideration would be reduced from the block of the assets

26. (Contd…)
▪ Explanation 3 and 4A of Section 43 (1) restricts the consideration at which the
lessor purchases the assets to written down value of the asset as appearing in
the books of the lessee before it was sold and taken back on lease.
▪ Explanation explicitly states that the sale value for such sale and lease back
transactions will be ignored and depreciation will be allowed on the first seller’s
depreciated value
▪ For example: A (lessor) purchased machinery for Rs. 150 crores from B (selling
lessee), though the WDV in the books of B is Rs. 100 crores. A can claim
depreciation on Rs. 100 crores and not on Rs. 150 crores.

27. Indirect Taxation Issues- Sale and Leaseback
▪ SALE and leaseback transactions are financing transactions structured in two
legs
▪ In the first leg of the transaction, the asset is sold to a buyer for cash wherein there is
transfer of title from the seller to the buyer.
▪ In the second leg of the transaction, the same asset is taken back on lease by the seller
of the asset.
▪ The first leg of the sale and leaseback transaction involves a sale of the asset to
the lessor who thereafter leases it back. The sale of the asset to the lessor will fall
under the scope of supply of goods under Section 9 of the Central Goods and
Services Tax Act, 2017 (CGST Act) and will be chargeable to GST.

28. ▪ In the second leg of the transaction, the buyer immediately contracts to lease the
asset either on operating lease or financial lease basis to the original owner.
▪ Clause 5(f) of Schedule II of the CGST Act, 2017 provides that transfer of right to
use any goods for any purpose, for cash, deferred payment or other valuable
consideration is a supply of services.
▪ In view of the same, a finance lease will be a transfer of right to use goods under
5(f) of Schedule II and will be taxed as a supply of service
(Contd.)

29. Regulatory
authorities in case of
non-financing NBFC

30. Restriction on NBFCs
▪ Loan against NBFC’s own shares prohibited
▪ NBFC accepting public deposits, not allowed to invest:
▪ in land & building (more than 10% of its owned fund)
▪ Unquoted shares of another company (more than 20% of its owned fund)
▪ NBFC which has defaulted in repaying public deposit are prohibited from making
loans and investments as long as the default continues

31. Types of NBFCs by regulatory
intensity
Based on acceptance or
non-acceptance of deposit
Deposit taking
NBFC (D)
Non - Deposit taking
NBFC (ND)
NBFC- ND-SI
(Systematically
Important NBFCs-ND)
NBFC -ND

32. New set of NBFC Regulations
▪ Pursuant to the Governor’s mid-term credit policy 2006-7, there was a proposal for
comprehensive review of NBFC directions
▪ The basic object of the Govt was to remove regulatory arbitrage between NBFCs and banks,
such that if the activities are substantially similar, the regulation applicable is similar too
▪ Consequently, a new class of NBFCs, called “systemically important NBFCs” was envisaged by
the Nov 3 2006 draft rules.
▪ Deposits accepting NBFCs: All NBFCs are not entitled to accept public deposits. Only those
NBFCs holding a valid CoR with authorisation to accept Public Deposits can accept/hold public
deposits
▪ Finally, in Feb 2007, two different sets of Regulations were announced.
▪ NBFC- D
▪ NBFC – ND

33. (Contd…)
▪ Consequently, we now have 4 classes:
▪ NBFC –D – SI: Systemically important deposit taking non-banking financial company
▪ a non banking financial company not accepting/holding public deposits and having total assets of
Rs 100 crore and above as shown in the last audited balance sheet.
▪ NBFC –D : Deposit taking Non-Banking Financial Company
▪ NBFC – ND : Non Deposit taking Non-Banking Financial Company
▪ NBFC –ND – SI: Systemically important Non Deposit taking Non-Banking
Financial Company
▪ The existing “equipment lease” and “hire purchase” classification was dropped in
Dec 2006, and “asset finance company” was brought in:
▪ If the company qualifies as asset finance company, it may approach the regional office
for reclassification

34. (Contd...)
▪ Further vide circular dated Sept 15, 2008 three categories of NBFCs emerged
▪ Asset finance company
▪ Loan company
▪ Investment company
▪ Through later circulars, more categories on NBFCs were added:
▪ Infrastructure Finance Company (IFC)
▪ SI-Core Investment Company (CIC-ND-SI)
▪ Infrastructure Debt Fund (IDF)
▪ Micro Finance Institution (NBFC-MFI)
▪ Factors (NBFC-Factors)
▪ Mortgage Guarantee Companies
▪ Non-Operative Financial Holding Company (NOFHC)

35. Share of NBFCs
Source: RBI Data (2015)

36. What are the additional regulatory/
reporting requirements for NBFC-ND-SI
▪ All prudential norms apply to NBFC-ND-SI
▪ Monthly reporting requirement
▪ Primarily capital market exposure
▪ Asset liability management framework applies
▪ Additional disclosures in balance sheet apply
▪ CRAR required for these companies is 12%
▪ Liquidity adjustment facility of the RBI extended to NBFC-ND-SI
▪ Capital Adequacy for NBFC-ND-SI was enhanced to 12% on 31.03.2010 & 15% on
31.03.2011

37. New regulations for NBFC - D
▪ Not much of a change
▪ The word ‘asset finance companies’ seems to be replacing the erstwhile “equipment
leasing” and “hire purchase companies”
▪ Limit on investment in unquoted equity shares and real estate:
▪ Was there earlier
▪ 20% in case of asset finance companies
▪ 10% in case of loan/investment companies
▪ SI companies have to make monthly disclosure of their capital market exposure within
7 days of the end of the month
▪ Several new provisions about project loans

38. New regulations for NBFC-ND
▪ The most significant change is that there is no exemption from prudential guidelines
for NBFC – ND- SI
▪ In other words, capital adequacy and concentration limits apply to such companies.
▪ Also required to make additional disclosures in Balance Sheet from the year ending March
31, 2009 relating to:
▪ CRAR,
▪ exposure to real estate sector and
▪ assets and liabilities mismatches.
▪ Further three new reports have also been introduced for ALM reporting:
▪ Statement of short-term dynamic liquidity – monthly
▪ Statement of structural liquidity – half yearly
▪ Statement of Interest Rate Sensitivity - half yearly
▪ In case of systematically unimportant companies, existing exemption from capital
requirements and concentration continues to apply

39. Capital Adequacy Requirement
▪ Minimum capital ratio consisting of Tier I and Tier II capital:
▪ 12% in case of NBFC-D
▪ 10% in case of NBFC-ND-SI of its aggregate risk weighted assets on balance sheet and
of risk adjusted value of off-balance sheet items. To be increased to 12% CRAR by
March 31, 2009 and 15% CRAR by March 31, 2010.
▪ Total of Tier II capital: Not exceeding 100% of Tier I capital
▪ Risk Weights
▪ On balance sheet items
▪ Off balance sheet items viz. guarantees, underwriting obligations, lease contracts

40. What is systemically important?
▪ In case of depository and non-depository companies, mean companies holding
assets of Rs 100 crore or more as per last balance sheet
▪ Assets mean total assets
▪ Assets mean book value of assets
▪ On the face of it, current liabilities cannot be netted off from current assets
▪ In case of subsidiaries, assets do not have to be consolidated
▪ Miscellaneous expenditure pending write off is not an asset
▪ Is it as per last balance sheet? A 4th July 2009 circular makes a departure. Says as
and when NBFCs attain asset size of Rs 100 crore, they may start complying with the
norms.
▪ However, if size of assets comes down, it will remain SI company “till specific
dispensation is obtained from the RBI”.

41. SI-ND- Core Investment Companies
(CICs)
▪ CIC defined as:
▪ not less than 90% of their net assets were in investments in shares or debentures for the
purpose of holding stake in the investee companies
▪ Its investment in group companies constitute not less than 60% of its net assets
▪ not trading in these shares except for block sale (to dilute or divest holding)
▪ not carrying on any other financial activities,
▪ not holding / accepting public deposits

42. Regulatory framework for CICs
▪ Notification dated 5th January 2011
▪ CICs with asset size < Rs 100 crore exempted from the requirement of
registration with RBI
▪ All CICs having an asset size of Rs.100 crore or more would be required to obtain
CoR from the RBI
▪ CICs-ND-SI should apply to RBI within six months, for obtaining CoR
▪ Every CIC shall apply to RBI for CoR within 3 months from date of becoming
CICs-ND-SI

43. Regulatory framework for CICs
▪ 90 per cent of the total assets of CICs-ND-SI should be in investments in equity,
debt, or loans in group companies, provided that the investment in equity shares
of Group companies for the purpose of holding stake in these companies is not
less than 60% of total assets
▪ CICs should not carry on any other financial activities, except investments in bank
deposits, Govt. securities, loans to and investments in debt issuances of group
companies, or guarantees issued on behalf of group companies;
▪ Capital requirements:
▪ Minimum Capital Ratio to be always maintained
▪ Adjusted Net Worth shall not be less than 30% of its aggregate risk weighted assets on
balance sheet and risk adjusted value of off-balance sheet items as on the date of the
last audited balance sheet.

44. ▪ Leverage ratio: The Outside liabilities of a CIC-ND-SI shall not exceed 2.5 times
of its Adjusted Net Worth calculated as on the date of the last audited balance
sheet;
▪ Adjusted Net worth means-
▪ Aggregate of owned funds as appearing in the last balance sheet:
▪ Increased /reduced by-
▪ 50% of unrealized appreciation /diminution in the book value of quoted investments
▪ Increase /reduction, if any, in equity share capital
▪ Systematically important CIC
▪ Company having asset not less than Rs. 100 Crore
▪ Either individually or with other group CICs
▪ Which raises or holds public deposits

45. Quick review of CICs

46. THANK YOU
For any queries:
e-mail: pra_k_har@hotmail.com