Equipment Finance

Summary

1. Nature of Equipment Finance

• Type: Term loan, lease, or hire purchase.
• Purpose: Purchase of new or used machinery/equipment.
• Tenure: Usually 3–7 years.
• Collateral: Hypothecation of the equipment financed; sometimes additional collateral may be sought.

2. Applicable RBI Regulations & Guidelines

A. RBI Prudential Norms (NBFCs & Banks)

• Loan Classification: Equipment finance is classified as a Term Loan under commercial lending.
• Asset Classification: Loans must follow Income Recognition and Asset Classification (IRAC) norms.
  • NPA if overdue >90 days.
• Capital Adequacy: NBFCs and banks must maintain adequate CRAR (Capital to Risk-weighted Asset Ratio) as per RBI’s prudential norms.

B. Fair Practices Code (FPC)

• Applicable to NBFCs and Banks engaged in equipment financing.
• Must ensure:
  • Transparent loan terms and documentation.
  • No hidden charges.
  • Prior notice for recovery actions.

C. MSME Lending Guidelines

• Equipment finance provided to MSMEs is encouraged.
• Loans up to ₹1 crore may be extended under priority sector lending norms.
• RBI promotes digital and collateral-free MSME lending through schemes like:
  • Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE).

3. Types of Lenders Offering Equipment Finance

• Public & Private Sector Banks
• NBFCs (e.g., Srei Equipment Finance, L&T Finance, Shriram Equipment Finance)
• Cooperative Banks (for Agri-equipment)
• SIDBI (Special focus on MSME equipment needs)
• Leasing Companies (under RBI's NBFC regulations)

4. Key Guidelines from RBI for NBFCs in Equipment Finance

• Must be registered with RBI.
• Must follow:
  • NBFC-ND-SI or NBFC-ICC norms.
  • Maintain minimum NOF (Net Owned Funds).
  • Report to CICs (Credit Information Companies).
• Lending must comply with Loan-to-Value (LTV) ratios.
• Equipment should be properly valued and insured.

5. Regulatory Developments & Compliance

• Digital Lending Guidelines (2022 onward):
  • All digital equipment finance must ensure direct loan disbursal to borrower’s account.
  • Transparent disclosures and consent-based data usage are mandatory.
• KYC/AML Compliance: All lenders must ensure strict adherence to RBI's KYC and Anti-Money Laundering (AML) guidelines.

6. Schemes Supporting Equipment Finance

• PMEGP, MUDRA, and CGTMSE offer support/subsidies for equipment purchase.
• Interest Subvention Schemes for Agri & MSME sectors.
• Sector-specific incentives from Ministry of MSME, MoFPI, etc.

7. Risk Management Requirements

• Regular monitoring of asset usage and condition.
• Insurance is often mandatory.
• Equipment is hypothecated to the financier until repayment is complete.