NBFC- Asset Finance Company
There are different types of Non Banking Financial Companies (NBFCs) licensed by RBI. NBFCs are classified (a) by the type of liabilities into Deposit and Non-Deposit accepting NBFCs, (b) by their size of non-deposit taking NBFCs into systemically important and other non-deposit holding companies (NBFC-NDSI and NBFC-ND) and c) by the kind of activity they conduct.
In the modern approach based on the assets, NBFCs are classified into three categories:
- Asset Finance Company
- Investment Company
- Loan Company
Asset Finance Company (AFC): An AFC is an NBFC carrying on, as its principal business, the financing of physical assets supporting productive/economic activity, such as automobiles, tractors, generator sets, lathe machines, material handling, and earthmoving equipments moving on own power and general purpose industrial machines.
AFCs finance various assets for individuals and businesses including machinery, heavy industrial, production and farming equipment, and large power generators for utility providers, among others.
—Divya Gupta (Market Analyst, MUDS Management Pvt. Ltd)
What is meant by AFC’s principal business?
The principal business for the above purpose is referred to as aggregate of financing real/physical assets supporting economic activity and income arising therefrom is not less than 60% of its total assets and total income respectively.
What is asset financing?
Asset financing generally means getting credit by using one or more assets as security for availing that credit. It refers to the act of pledging company’s assets viz. bills receivables, short-term inventories, or investments to borrow loan or cash. This type of financing is used when the company seeks the short-term borrowing like working capital; often the cash is borrowed against the bills receivables.
How an NBFC is classified as AFC?
As per RBI, any NBFC can act as an AFC, when the income arising from the aggregate of physical assets supporting the economic activity is not less than 60% of its total assets and total income respectively. Once the companies meet this condition, they can apply for classification of their company as an AFC. For this, they need to visit their regional office in the jurisdiction where their office is registered, along with the certificate of registration issued by the RBI.
The documents of the companies should be supported by the certificate from the statutory auditor; the certificate should clearly mention the asset/income pattern of the company.
— Isha Malik (Company Secretary, MUDS Management Pvt. Ltd.
Once all the conditions have been met, the change in the classification in the certificate of registration issued by the RBI can be incorporated as NBFC-D-AFC (if, accepting deposits) or NBFC-ND-AFC (if, not accepting deposits).
The Master Direction of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 2016 (as updated till August 14, 2017) prescribes the Ceiling on the quantum of deposit in the following terms:
“An AFC (a) having minimum Net Owned Fund (NOF) as stipulated by the Bank, and
(b) complying with all the prudential norms shall accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its Net Owned Fund (NOF).
# provided that an asset finance company holding public deposits in excess of the limit of one and one-half times of its Net Owned Fund (NOF) shall not renew or accept fresh deposits till such time it reaches the revised limit.
# provided no matured public deposit shall be renewed without the express and voluntary consent of the depositor.”
One could find the complete list of NBFC-AFCs, registered with RBI, at the official site of RBI. By 30th April, 2018, a total of 399 NBFC-AFCs had registered with RBI.
—Shweta Gupta, Founder and CEO, MUDS