Loan Exposure of NBFC Increased: A Complete Analysis

Savvy Midha

25 Aug, 2020

Non-Banking Financial Companies are registered under the Companies Act and are governed by the RBI^[1]. The activities of the NBFCs are similar to that of a bank but not exactly the same. They do not perform the primary activity of a bank which is accepting deposits from the public. NBFCs are engaged in providing financial services such as disbursement of loans and advances, acquisition of shares or bonds, etc. NBFCs have been contributing to the growth of the Indian economy by providing alternatives for transforming savings into investments.

Types of NBFCs

Broad categories of different types of NBFCs are:

NBFC ICC (Investment and Credit Company) – It is a financial institution carrying on its principal business – asset finance, the providing of finance whether by making loans or advances or otherwise for any activity other than its own and the acquisition of securities.

Infrastructure Finance Company: These are the NBFCs that fulfill the following conditions:

• Deploy 75% of its total assets in Infrastructure Loan
• Minimum Net Owned Fund of INR 300 Crore.
• The credit rating of  A or equivalent to A of CRISIL, FITCH, CARE, ICRA, BRICKWORK, etc.
• Has maintained a cash reserve ratio of 15%

Core Investment Company: These are the financial institutions that carry on the business of acquisition of shares and those satisfy the following conditions:

• Holds 90% of its Total Assets in the form of investment in equity shares,
• preference shares, etc. comprising at least 60% in equity shares.
• The asset size of the company exceeds INR 100 Crore.
• This company accepts the funds and borrowing from the public.

Infrastructure Debt Fund: These are registered as an NBFC for facilitating the longterm debt into infrastructure projects.

Role of NBFC in fostering Economic Development

NBFC has been emerging in the banking & financial sector by meeting the needs of under served segments of society. They are a prominent player in the financial market that fills the gap left by traditional banks. Following are the key roles of NBFC for Economic Development:

• Generation of Employment: NBFCs indirectly help in creating more jobs by granting loans & advances to SMEs and Private Industries that help to attain objectives of macroeconomic policies by promoting these industries.
• Developing Financial Market: Effective functioning & balance of Financial Market heavily rely upon NBFCs for raising fund. Start-ups and small-sized businesses are dependent on NBFCs for their funds as well for maintaining liquidity.
• Providing Long-Term Credit: NBFCs extend long-term loans & credit to Infrastructure, Commerce & Trade Industries. NBFCs also finance large projects that help in boosting and promoting economic growth. Traditional Banks expects timely and short term repayment of loans that do not meet the requirements of these industries. Thus NBFCs also allow the industries to participate in equity.
• Fund Mobilization: NBFCs helps in mobilization of funds in an economy by converting saving into investments. NBFCs help in shaping economic development by promoting rotation of resources, asset distribution & regulation of Income.

Guidelines on Bank Finance to NBFC

1) Bank Finance to registered NBFCs

• Banks extend finance & loans to meet the working capital needs of NBFCs along with term loans. Such loans are extended to meet the financial needs of NBFCs registered with RBI and NBFCs engaged in the following activities:

  Infrastructure

  Financing

  Equipment leasing

  Hire purchase

  Loans & advances

  Factoring

  Investments

• Banks frame the suitable lending policy with Board approval as per the guidelines & exposure norms prescribed by RBI for extending loans & credit facility for permitted activities of NBFCs.

2) Bank Finance to unregistered NBFCs

• Non-Banking Financial companies that do not require registration under RBI are:

  Insurance Companies registered as per Section 3 of the Insurance Act

  Nidhi Companies registered under the Companies Act

  Chit Fund Companies with the principal business of Chit Funds.

  Merchant Banking Companies registered under the SEBI Act.

  Housing Finance Company registered & regulated under National Housing Bank is being exempted from registration by RBI.

• Banks take their decision of granting credit & finance based on common factors such as the purpose of credits, nature of underlying assets, repayment capacity, risk perceptions, etc.

Activities exempted from Bank Credits

Following activities of NBFCs are exempted from being financed by banks:

• Bills discounted or pre-discounted
• Long term investment in any Company by way of shares, debentures, etc. by NBFCs
• Provision of Unsecured Loans to any Company or inter-corporate deposit in any Company
• All forms of loans & advances granted by NBFCs to any of it’s a subsidiary or group companies
• Lending to NBFCs who needs to lend the same to an individual for subscribing to an IPO

The ceiling on exposure to NBFCs

• Current Ceiling on Bank granting loans to NBFCs
• Lending & Investment loan exposure of banks granting to single NBFC shall not exceed 10% of Capital Funds of banks as per its latest audited balance sheet.
• Banks can assume exposure to NBFC up to 15% of their capital funds, provided that NBFC lent the excess of 10% of the fund to the Infrastructure sector.
• loan exposure of Banks provided to NBFC – IFC (Infrastructure Finance Company) shall not exceed 15% of its capital funds provided it can be increased up to 20% with the condition that such excess shall be lent by IFCs to the Infrastructure sector.

• Increased Bank Loan exposure limit to single NBFCs- New Norms

RBI has recently relaxed the lending norms of Banks to NBFCs and eases the bank’s exposure limits for helping the NBFC sector during the period of stress.

• Retail Loan Segment being hit due to the downfall in the liquidity of the NBFC sector has adversely affected consumer sector lending.
• The government is taking steps to increase the liquidity of the NBFC sector.
• Reserve bank of India has recently increased loan exposure of limits for single NBFC (excluding gold loan companies) from 15% to 20% of capital funds to increase the credit supply to cope up with the crisis of the ridden shadow banking sector.
• As per the revised guidelines on Large Exposure Framework effective from 1^st April 2019, the bank’s loan exposure of NBFC is restricted to 15% of its Tier I capital & for other sector entities, it is 20%. But as a step for harmonization of counterparty exposure limit, RBI has decided to raise the ceiling for single NBFCs to 20% of Tier-I Capital.