The Reserve Bank of India, having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to issue the directions relating to the prudential norms as set out below hereby, in exercise of the powers conferred by section 45JA of the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers enabling it in this behalf, and in supersession of the earlier directions contained in Notification No. DFC. 115/DG(SPT)/98 dated January 2, 1998 gives to every non-banking financial company the directions hereinafter specified.

1. (1) These directions shall be known as the "Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998".

(2) These directions shall come into force with immediate effect.

(3) (i) All the provisions of these directions save as provided for in clauses (ii) and (iii) hereinafter, shall apply to -

(a) a non-banking financial company, except a mutual benefit financial company, as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 (referred to in these directions as "NBFC") which is having net owned fund (referred to in these directions as "NOF") of rupees twenty-five lakh and above and accepting/holding public deposit;

(b) a residuary non-banking company as defined in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 (referred to in these directions as "RNBC") .

(ii) The provisions of paragraph 10 and 12 of these directions shall not apply to -

(a) a loan company;

(b) an investment company;

(c) a hire purchase finance company; and

(d) an equipment leasing company,

which is having NOF of rupees twenty-five lakh and above but not accepting/holding public deposit.

(iii) These directions shall not apply to an NBFC being an investment company;

Provided that, it is

(a) holding investments in the securities of its group/holding/ subsidiary companies and book value of such holding is not less than ninety per cent of its total assets and it is not trading in such securities; and

(b) not accepting/holding public deposit.

2. (1) For the purpose of these directions, unless the context otherwise requires :-

(i) "break up value" means the equity capital and reserves as reduced by intangible assets and revaluation reserves, divided by the number of equity shares of the investee company;

(ii) "carrying cost" means book value of the assets and interest accrued thereon but not received;

(iii) "current investment" means an investment which is by its nature readily realisable and is intended to be held for not more than one year from the date on which such investment is made;

(iv) "doubtful asset" means -

(v) "earning value" means the value of an equity share computed by taking the average of profits after tax as reduced by the preference dividend and adjusted for extra-ordinary and non-recurring items, for the immediately preceding three years and further divided by the number of equity shares of the investee company and capitalised at the following rate :-

If, an investee company is a loss making company, the earning value will be taken at zero;

(vi) "fair value" means the mean of the earning value and the break up value;

(vii) "hybrid debt" means capital instrument which possesses certain characteristics of equity as well as of debt;

(viii) "loss asset" means -

(a) an asset which has been identified as loss asset by the NBFC or its internal or external auditor or by the Reserve Bank of India during the inspection of the NBFC, to the extent it is not written off by the NBFC; and

(b) an asset which is adversely affected by a potential threat of non-recoverability due to either erosion in the value of security or non availability of security or due to any fraudulent act or omission on the part of the borrower;

(ix) "long term investment" means an investment other than a current investment;

(x) "net asset value" means the latest declared net asset value by the concerned mutual fund in respect of that particular scheme;

11. "net book value" means

1. in the case of hire purchase asset, the aggregate of overdue and future instalments receivable as reduced by the balance of unmatured finance charges and further reduced by the provisions made as per paragraph 8 (2) (i) of these directions;
2. in the case of leased asset, aggregate of capital portion of overdue lease rentals accounted as receivable and depreciated book value of the lease asset as adjusted by the balance of lease adjustment account.

[This para was replaced by May 12 Notification. Original text is as follows:

(xii) "non-performing asset" (referred to in these directions as "NPA") means :-

(a) an asset, in respect of which, interest has remained past due for six months;

(b) a term loan inclusive of unpaid interest, when the instalment is overdue for more than six months or on which interest amount remained past due for six months;

(c) a bill which remains overdue for six months;

(d) the interest in respect of a debt or the income on receivables under the head `other current assets' in the nature of short term loans/advances, which facility remained over due for a period of six months;

(e) any dues on account of sale of assets or services rendered or reimbursement of expenses incurred, which remained overdue for a period of six months;

(f) the lease rental and hire purchase instalment, which has become overdue for a period of more than twelve months;

(g) In respect of loans, advances and other credit facilities (including bills purchased and discounted), the balance outstanding under the credit facilities (including accrued interest) made available to the same borrower/beneficiary when any of the above credit facilities becomes non-performing asset :

Provided that in the case of lease and hire purchase transactions, an NBFC may classify each such account on the basis of its record of recovery;

(xiii) "owned fund" means paid up equity capital, preference shares which are compulsorily convertible into equity, free reserves, balance in share premium account and capital reserves representing surplus arising out of sale proceeds of asset, excluding reserves created by revaluation of asset, as reduced by accumulated loss balance, book value of intangible assets and deferred revenue expenditure, if any;

(xiv) "past due" means an amount of income or interest which remains unpaid for a period of thirty days beyond the due date;

(xv) "standard asset" means the asset in respect of which, no default in repayment of principal or payment of interest is perceived and which does not disclose any problem nor carry more than normal risk attached to the business;

(xvi) "sub-standard assets" means -

(a) an asset, which has been classified as non-performing asset for a period of not exceeding two years;

(b) an asset, where the terms of the agreement regarding interest and/or principal have been renegotiated or rescheduled after commencement of operations, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled terms;

(xvii) "subordinated debt " means a fully paid up capital instrument, which is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the NBFC. The book value of such instrument shall be subjected to discounting as provided hereunder:

Remaining Maturity of the instruments Rate of discount

to the extent such discounted value does not exceed fifty per cent of Tier I capital;

(xviii) "substantial interest" means holding of a beneficial interest by an individual or his spouse or minor child, whether singly or taken together in the shares of a company, the amount paid up on which exceeds ten per cent of the paid up capital of the company; or the capital subscribed by all the partners of a partnership firm;

(xix) "Tier-I Capital" means owned fund as reduced by investment in shares of other NBFCs and in shares, debentures, bonds, outstanding loans and advances including hire purchase and lease finance made to and deposits with subsidiaries and companies in the same group exceeding, in aggregate, ten per cent of the owned fund;

(xx) "Tier-II capital" includes the following :-

(2) Other words or expressions used but not defined herein and defined in the Reserve Bank of India Act, 1934 (2 of 1934) or the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 or the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987 shall have the same meaning as assigned to them under that Act or those Directions. Any other words or expressions not defined in that Act or those Directions, shall have the same meaning assigned to them in the Companies Act, 1956 (1 of 1956).

3. (1) The income recognition shall be based on recognised accounting principles.

2. Income including interest/discount or any other charges on NPA shall be recognised only when it is actually realised. Any such income recognised before the asset became non-performing and remaining unrealised shall be reversed.

 

3. In respect of hire-purchase assets, where instalments are overdue for more than 12 months, income shall be recognised only when hire charges are actually received. Any such income taken to the credit of the profit and loss account before the asset became non-performing and remaining unrealised, shall be reversed.

 

1. In respect of lease assets, where lease rentals are overdue for more than 12 months, the income shall be recognised only when lease rentals are actually received. The net lease rentals taken to the credit of profit and loss account before the asset became non-performing and remaining unrealised shall be reversed.

For the purpose of this paragraph, ‘net lease rentals’ mean the gross lease rentals as adjusted by the lease adjustment account debited/credited to the profit and loss account and as reduced by depreciation at the rate applicable under Schedule XIV of the Companies Act, 1956 (1 of 1956).

[Para (2) (3) and (4) were replaced by May 12 Notification and the Explanation was added. The original text is as follows:

4. (1) Income from dividend on shares of corporate bodies and units of mutual funds shall be taken into account on cash basis:

Provided that the income from dividend on shares of corporate bodies may be taken into account on accrual basis when such dividend has been declared by the corporate body in its annual general meeting and the NBFC's right to receive payment is established.

(2) Income from bonds and debentures of corporate bodies and from Government securities/bonds may be taken into account on accrual basis:

Provided that the interest rate on these instruments is pre-determined and interest is serviced regularly and is not in arrears.

(3) Income on securities of corporate bodies or public sector undertakings, the payment of interest and repayment of principal of which have been guaranteed by Central Government or a State Government may be taken into account on accrual basis.

5. Accounting Standards and Guidance Notes issued by the Institute of Chartered Accountants of India (referred to in these directions as "ICAI") shall be followed insofar as they are not inconsistent with any of these directions.

6. (1) Investments in securities shall be classified as current and long term investments.

2. Quoted current investments shall, for the purposes of valuation, be grouped into the following categories, viz.,

1. equity shares,
2. preference shares,
3. debentures and bonds,
4. Government securities including treasury bills,
5. units of mutual fund, and
6. others.

Quoted current investments for each category shall be valued at cost or market value whichever is lower. For this purpose, the investments in each category shall be considered scrip-wise and the cost and market value aggregated for all investments in each category. If the aggregate market value for the category is less than the aggregate cost for that category, the net depreciation shall be provided for or charged to the profit and loss account. If the aggregate market value for the category exceeds the aggregate cost for the category, the net appreciation shall be ignored. Depreciation in one category of investments shall not be set-off against appreciation in another category.

3. Unquoted equity shares in the nature of current investments shall be valued at cost or break up value, whichever is lower. However, NBFCs may substitute fair value for the break up value of the shares, if considered necessary. Where the balance sheet of the investee company is not available for two years, such shares shall be valued at one Rupee only.

 

1. Unquoted preference shares in the nature of current investments shall be valued at cost or face value whichever is lower.

 

2. Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.

 

3. Unquoted investments in units of mutual funds in the nature of current investments shall be valued at the net asset value declared by the mutual fund in respect of each particular scheme.

 

4. Commercial papers shall be valued at carrying cost.

 

5. A long term investment shall be valued in accordance with the Accounting Standard issued by the ICAI.

Unquoted debentures shall be treated as term loans or other type of credit facilities depending upon the tenure of such debentures for the purpose of income recognition and asset classification.

[ Para 6 was substituted by May 12, 1998 Notification. The original text is as under:

7 (1) Every NBFC shall, after taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes namely, -

(i) Standard assets;

(ii) Sub-standard assets;

(iii) Doubtful assets; and

(iv) Loss assets.

(2) The class of assets referred to above shall not be upgraded merely as a result of rescheduling, unless it satisfies the conditions required for the upgradation.

8. Every NBFC shall, after taking into account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder :-

Loans, advances and other credit facilities including bills purchased and discounted

(1) The provisioning requirement in respect of loans, advances and other credit facilities including bills purchased and discounted shall be as under :

(i) Loss Assets The entire asset shall be written off.

If the assets are permitted to remain in the books for any reason, 100% of the outstandings should be provided for;

(ii) Doubtful Assets

(a) 100% provision to the extent to which the advance is not covered by the realisable value of the security to which the NBFC has a valid recourse shall be made. The realisable value is to be estimated on a realistic basis;

(b) In addition to item (a) above,

depending upon the period for which the asset has remained doubtful, provision to the extent of 20% to 50% of the secured portion (i.e. estimated realisable value of the outstandings) shall be made on the following basis : -

Period for which the asset has been considered as doubtful % of provision Upto one year 20

One to three years 30

More than three years 50

iii) Sub-standard assets A general provision of 10% of total outstandings shall be made.

2. The provisioning requirements in respect of hire purchase and leased assets shall be as under:-

1. In respect of hire purchase assets, the total dues (overdue and future instalments taken together) as reduced by

1. the finance charges not credited to the profit and loss account and carried forward as unmatured finance charges; and
2. the depreciated value or net realisable value of the underlying asset whichever is lower, shall be provided for.

Additional provision in case of hire-purchase and lease assets:

2. In respect of hire-purchase and leased assets, additional provision shall be made as under:

3. On expiry of a period of 12 months after the due date of the last instalment of hire purchase/leased asset, the entire net book value shall be fully provided for.

Note:

1. The amount of caution money /margin money or value of any other security to which the NBFC has a valid recourse may be deducted only against the provisions stipulated under clause (ii) above.
2. It is clarified that income recognition on and provisioning against NPAs are two different aspects of prudential norms and provisions as per the norms are required to be made on NPAs on total outstanding balances including the depreciated book value of the leased asset under reference after adjusting the balance, if any, in the lease adjustment account. The fact that income on an NPA has not been recognised cannot be taken as reason for not making provision.
3. An asset which has been renegotiated or rescheduled as referred to in paragraph 2 (xvi) (b) of these directions shall be a sub-standard asset or continue to remain in the same category in which it was prior to its renegotiation or reschedulement as a doubtful asset or a loss asset as the case may be. Necessary provision is required to be made as applicable to such asset till it is upgraded.

[ Para (2) was substituted by May 12, 1998 Notification. The original text of is as under:

9. (1) Every NBFC shall, separately disclose in its balance sheet the provisions made as per paragraph 8 above without netting them from the income or against the value of assets.

(2) The provisions shall be distinctly indicated under separate heads of accounts as under :-

(i) provisions for bad and doubtful debts; and

(ii) provisions for depreciation in investments.

(3) Such provisions shall not be appropriated from the general provisions and loss reserves held, if any, by the NBFC.

(4) Such provisions for each year shall be debited to the profit and loss account. The excess of provisions, if any, held under the heads general provisions and loss reserves may be written back without making adjustment against them.

10. (1) Every NBFC shall, maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be less than -

(i) ten per cent on or before March 31, 1998; and

(ii) twelve per cent on or before March 31, 1999

of its aggregate risk weighted assets and of risk adjusted value of off-balance sheet items.

(2) The total of Tier II capital, at any point of time, shall not exceed one hundred per cent of Tier I capital.

On balance sheet assets

(1) In these directions, degrees of credit risk expressed as percentage weightages have been assigned to balance sheet assets. Hence, the value of each asset/item requires to be multiplied by the relevant risk weights to arrive at risk adjusted value of assets. The aggregate shall be taken into account for reckoning the minimum capital ratio. The risk weighted asset shall be calculated as the weighted aggregate of funded items as detailed hereunder :

Weighted risk assets - On-Balance Sheet items

(i) Cash and bank balances including fixed deposits and certificates of deposits with banks 0

(ii) Investments

[ This clause was substituted by the May 12, 1998 Notification. Original text read as under:

(iii) Current assets

(a) Stock on hire (net book value) 100

(b) Intercorporate loans/deposits 100

(c) Loans and advances fully 0

secured against deposits held by the company itself

(d) Loans to staff 0

(e) Other secured loans and advances considered good 100

(f) Bills purchased/discounted 100

(g) Others (To be specified) 100

(iv) Fixed Assets (net of depreciation)

(a) Assets leased out (net book value) 100

(b) Premises 100

(c) Furniture & Fixtures 100