8/7/2019 NBFC4

1/18

Non banking Financial

Institutions

BY SUDEV JYOTHISI

FN-92SCMS-COCHIN

8/7/2019 NBFC4

2/18

Definition

NBFCs are financial institutions that provide

banking services without meeting the legal definitionof a bank i.e. one that doesnt hold a banking license.

Operations are regardless still exercised underbanking regulations.

8/7/2019 NBFC4

3/18

Features of NBFCs The company registered under company act,1956.

Registered under RBI act,1934, under section 45-IA.

Engaged in the business of loans and advances, acquisition ofshares/stocks/bonds/debentures/securities issued by govt. andlocal authority or other securities of like marketable nature,leasing, hire-purchase, insurance business, chit business, butdoesn't include any institutions whose principal business is thatof agricultural activity, industrial activity, sale/purchase

construction of immovable property.

8/7/2019 NBFC4

4/18

Prudential Norms of NBFCs

Income from NPA should be taken into account only when it isreceived i:e on receipt basis and not on accrual basis.

However income from Govt. securities/bonds may be taken intoaccount on a accrual basis.

NBFCs should classify their loans and advances and any otherforms of credit into four broad groups:

a. Standard assets - there is no default in the repayment ofPrincipal or interest, no NPA and is completely risk free.

b. Sub-Standard assets NPA period not exceeding two years.

8/7/2019 NBFC4

5/18

Cont.c. Doubtful assets Assets which has remained NPA for a period

more than one year.d. Loss Assets Assets whose loss has been identified by NBFCs or

the auditor or RBI inspection, but the amount has been written off

wholly or partially. Provision for doubtful debts.

a. Standard assets Nilb. Sub-standard assets 10%c. Loss assets 100%

d. Doubtful assets:* to the extent of advance not covered- 100%* Doubtful up to one year- 20%* One to three year- 30%* More than three year- 50%.

8/7/2019 NBFC4

6/18

Cont All registered NBFCs should achieve a minimum capital

adequacy norm.

NBFCs should not lend/invest more than 15% of its own fund toany single party or 25% of its own fund to a single group ofparties.

The total value of loan should not exceed 25% to single partyand 40% to a single group of parties.

8/7/2019 NBFC4

7/18

Leasing

A lease is a contact between the owner of an asset (thelessor) and the party desiring to use that asset (the lessee).

Generally, leases provide for the following terms:

1.The lessor allows the lessee the unrestricted right to usethe asset during the lease term.

2. The lessee agrees to make periodic payments to the lessorand to maintain the asset.

3. Title to the asset remains with the lessor, who usually

retakes possession of the asset at the conclusion of thelease.

8/7/2019 NBFC4

8/18

Advantages to Leasing

1. Leases often require much less equity investment thanbank financing.

2. Since leases are contracts between two willing parties,their terms can be structured in any way to meet theirrespective needs.

3. Convenience and Flexibility.

4. Shifting of Risk of Obsolescence.

5. Maintenance and Specialized Services.

8/7/2019 NBFC4

9/18

Leasing on the basis of Lease Rentals

Up- fronted lease- When more lease rentals are charged in theinitial years and less in the later year of the contract.

Back- ended lease- when more lease rentals are charged in thelater year than initial years.

8/7/2019 NBFC4

10/18

Types of Lease

Operating Lease

Financing Lease

Sale and Lease Back

8/7/2019 NBFC4

11/18

Operating Lease

Shot-term, cancelable lease agreements are calledoperating lease.

Tourist renting a car, lease contracts for computers,office equipments and hotel rooms.

The Lessor is generally responsible for maintenanceand insurance.

Risk of obsolescence remains with the lessor.

8/7/2019 NBFC4

12/18

Financial Lease

Long-term, non-cancelable lease contracts are knownas financial lease.

Examples are plant, machinery, land, building, shipsand aircrafts.

Amortise the cost of the asset over the terms of theleaseCapital or Full pay-out leases.

8/7/2019 NBFC4

13/18

Cash Flow Consequences of a Financial Lease

Avoidance of the purchase price.

Loss of depreciation tax shield.

Aftertax payments of lease rentals.

8/7/2019 NBFC4

14/18

Sale and Lease Back

Sometimes, a user may sell an (existing) asset

owned by him to the lessor (leasing company) andlease it back from him. Such sale and lease backarrangements may provide substantial tax benefits.

8/7/2019 NBFC4

15/18

Cross Border lease

It is an international lease .It relates to lease transactionbetween a lessor and lessee domiciled in different countries andinclude exports leasing.

e.g.- A leasing company in the USA makes available an Airbuson lease to Air India.

8/7/2019 NBFC4

16/18

Contents of Lease Agreements

Description of the lessor, the lesse, and the equipment.

Amount, time and place of lease rentals payments.

Time and place of equipment delivery.

Lessee responsibility for taking delivery and possession of the leasedequipments.

Lessee right to enjoy the benefits of the warranties provided by thelessor.

Insurance to be taken by the lesse on behalf of the lessor.

Variation in lease rentals if there is any change in certain external

factors like bank interest rates, depreciation rates, and fiscal incentives. Option of lease renewal for the lessee.

Return of equipment on expiry of the lease period.

Arbitration process in the event of disputes.

8/7/2019 NBFC4

17/18

Hire Purchase

The owner of the asset (the Hiree or the manufacturer) givesthe possession of the asset to the Hirer with an understandingthat the Hirer will pay agreed installments over a specified

period of time. The ownership of the asset will transfer to the hirer on the

payment of all installments.

The Hirer will have the option of terminating the agreement anytime before the transfer of ownership of assets.

( Cancelable Lease)

8/7/2019 NBFC4

18/18

DifferenceHire Purchase Financing Lease Financing

Hirer is entitled to claimDepreciation Tax Shield.

Lessee is not entitled toclaim depreciation tax

shield.

Hirer can charge onlyinterestPortion.

Lessee can charge theentire lease payments asexpense for taxcomputation.

Once the hirer has paid allinstallments, he becomesthe owner of the assetand can claim its salvagevalue.

Lessee does not becomethe owner of the asset.Therefore he has noclaim over the assetsalvage value.