Please refer to our Master circular No. 9 /08.12.01/2003-04 dated March 11, 2004 on the captioned subject. The enclosed Master Circular consolidates and updates all the instructions issued by the Department on the subject till date.

Yours faithfully,

Encl. As above

In the context of mandatory registration of NBFCs with the Reserve Bank, as also consistent with the policy of bestowing greater operational freedom to banks in the matter of credit dispensation, the ceiling on bank credit linked to Net Owned Fund (NOF) of such companies has been withdrawn in respect of all NBFCs which are statutorily registered with RBI and are engaged in principal business of equipment leasing (EL), hire-purchase (HP), loan and investment activities.

In respect of NBFCs which do not require to be registered with RBI, [viz. i) Insurance Companies registered under Section 3 of the Insurance Act, 1938; ii) Nidhi Companies notified under Section 620A of the Companies Act, 1956; iii) Chit Fund Companies carrying on Chit Fund business as their principal business as per Explanation to Clause (vii) of Section 45-I(bb) of the Reserve Bank of India Act, 1934; iv) Stock Broking Companies/Merchant Banking Companies registered under Section 12 of the Securities & Exchange Board of India Act; and v) Housing Finance Companies being regulated by the National Housing Bank (NHB) which have been exempted from the requirement of registration by RBI], banks may take their credit decisions on the basis of usual factors like the purpose of credit, nature and quality of underlying assets, repayment capacity of borrowers as also risk perception, etc.

4.1 Residuary Non-Banking Companies (RNBCs) are also required to be mandatorily registered with Reserve Bank of India. In respect of such companies registered with RBI, bank finance would be restricted to the extent of their Net Owned Fund (NOF).

4.2 Net Owned Fund (NOF)

6. Activities Not Eligible for Bank Credit

1. commercial vehicles (including light commercial vehicles), and
2. two wheeler and three wheeler vehicles, subject to the following conditions:
• the bills should have been drawn by the manufacturer on dealers only;
• the bills should represent genuine sale transactions as may be ascertained from the chassis/engine number; and
• before rediscounting the bills, banks should satisfy themselves about the bona fides and track record of NBFCs which have discounted the bills.

1. Investments of NBFCs both of current and long-term nature, in any company/entity by way of shares, debentures, etc. However, Stock Broking Companies may be provided need-based credit against shares and debentures held by them as stock-in-trade.
2. Unsecured loans/ inter-corporate deposits by NBFCs to/in any company.
3. All types of loans and advances by NBFCs to their subsidiaries, group companies/entities.
4. Finance to NBFCs for further lending to individuals for subscribing to Initial Public Offerings (IPOs)
5. Banks are precluded from granting term loans for acquisition of existing assets (except imported second hand machinery). Bank finance to leasing concerns should cover purchases of only new equipment. Banks should not extend finance against existing assets whether by way of term loans for purchase of such assets or by way of finance to leasing companies for purchase and release of such assets.

6.2 Leased and Sub-Leased Assets

1. Banks should not enter into lease agreements departmentally with equipment leasing companies as well as other Non-Banking Financial Companies engaged in equipment leasing.
2. As banks can only support lease rental receivables arising out of lease of equipment/machinery owned by the borrowers, lease rentals receivables arising out of sub-lease of an asset by a Non-Banking Non Financial Company (undertaking nominal leasing activity) or by a Non-Banking Financial Company should be excluded for the purpose of computation of bank finance for such company.