Notifications

Short title, commencement and applicability of the directions :

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 -

1. a non-banking financial company as defined in the Non-Banking Financial Companies (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;

2. 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 -

1. a loan company;
2. an investment company;
3. a hire purchase finance company; and
4. an equipment leasing company,

(iii) These directions shall not apply to an NBFC being an investment company;
Provided that, it is

1. 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
2. not accepting public deposit.

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

1. "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;

2. "carrying cost" means book value of the assets and interest accrued thereon but not received;

3. "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;

4. "doubtful asset" means -
   1. a term loan, or
   2. a lease asset, or
   3. a hire purchase asset, or
   4. any other asset, which remains a substandard asset for a period exceeding two years.

5. "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 :-
   1. in case of predominantly manufacturing company, eight per cent;
   2. in case of predominantly trading company, ten per cent; and
   3. in case of any other company, including an NBFC, twelve per cent;
      NOTE :

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

6. "fair value" means the mean of the earning value and the break up value;

7. "hybrid debt" means capital instrument which possesses certain characteristics of equity as well as of debt;

8. "loss asset" means -
   1. an asset which has been identified as loss asset by the NBFC or its internal or external auditor or by the Reserve Bank during the inspection of the NBFC, to the extent it is not written off by the NBFC; and

   2. 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;

9. "long term investment" means an investment other than a current investment;

10. "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 lease assets, the depreciated book value of the lease asset plus/minus the balance in the lease adjustment account, and

    2. in the case of hire purchase asset, the amount of future instalments receivable as reduced by the balance of the unmatured finance charges;

12. "non-performing asset" (referred to in these directions as "NPA") means :-
    1. an asset, in respect of which, interest has remained past due for six months;

    2. 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;

    3. a bill which remains overdue for six months;

    4. the interest in respect of a debt or the income on a receivable 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;

    5. 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;

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

    7. balance outstanding under the credit facilities (including accrued interest) made available to the borrower/beneficiary in the same capacity, when any of the credit facilities becomes non-performing asset;

13. "owned fund" means paid up equity capital, 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;

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

15. "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;

16. "sub-standard assets" means -
    1. an asset, which has been classified as non-performing asset for a period of not exceeding two years;
    2. 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;

17. "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 : 20%

    Remaining Maturity of the instruments	Rate of discount
    (a) Upto one year	100%
    (b) More than one year but upto two years	80%
    (c) More than two years but upto three years	60%
    (d) More than three years but upto four years	40%
    (e) More than four years but upto five years

    to the extent such discounted value does not exceed fifty per cent ofTier-I capital;

18. "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; and

19. "Tier-I Capital" means owned fund as reduced by investment in shares of other NBFCs and in shares, debenture, 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;

20. "Tier-II capital" includes the following :-
    1. preference shares ;
    2. revaluation reserves at discounted rate of fiftyfive percent;
    3. general provisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted assets;
    4. hybrid debt; and
    5. subordinated debt
    to the extent the aggregate does not exceed Tier-I capital.

    (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 Companies (Reserve Bank) Directions, 1998 shall have the same meaning as assigned to them 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).

Income recognition

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

(2) Income on NPA shall be recognised only when it is actually realised.

(3) Interest on NPA shall not be booked as income, if such interest has remained past due for more than six months on and from March 31, 1998.

(4) The lease rentals or the hire purchase instalments in respect of non-performaing lease and hire purchase asset shall not be given credit in the profit and loss account.

Income from investments

4. (i) 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 revise payment is established.

(Ii) 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.

(iii) 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.

Accounting standards

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.

Accounting of investments

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

(2) Current investments shall be valued at cost or market value whichever is lower. Each category of such investments shall be valued scrip-wise and depreciation or appreciation be aggregated under each category. Net depreciation, if any, for each category of investments shall be provided for or charged to profit and loss account. Net appreciation, if any, shall be ignored. The depreciation in one category of investments shall not be set off against appreciation in another category.

(3) A long term quoted investment shall be valued in accordance with the accounting standards issued by ICAI.

(4) Unquoted equity shares shall be valued at cost or break up value, whichever is lower. However, NBFCs can substitute fair value for the break-up value of the shares if considered necessary. In case of non-availability of balance sheet for two years, such shares shall be valued at one rupee only:

(5) Unquoted preference shares are to be valued at cost or face value, whichever is lower.

(6) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.

(7) Investments in units of mutual funds shall be valued at market rates:

Provided where such market rate is not available, at the net asset value declared by the mutual fund in respect of each particular scheme.

(8) Commercial papers and treasury bills shall be valued at carrying cost.

Note

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

Asset Classification

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, -

1. Standard assets;
2. Sub-standard assets;
3. Doubtful assets; and
4. 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 upgrdation.

Provisioning requirements

8. Every NBFC shall, after taking into account the time lag between an account becoming doubtful of recovery, 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 :

Lease and hire purchase assets

(2) The provisioning requirements in respect of the lease and hire purchase assets shall be as under:-

1. The amount of caution money/margin money or value of any other security to which the NBFC has valid recourse may, however, be deducted against the additional provisions necessary (but not against the provisions made for overdues) and only the balance additional provision shall be made for the amount as mentioned above.

2. It is clarified that income recognition on NPA and provisioning against sub-standard assets are two different aspects of prudential norms and provisions as per the norms are required to be made on sub-standard assets by the NBFCs 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 thereagainst.

Disclosure in the balance sheet

9. (1) Every NBFC shall, separately disclose in its balance sheet the provisions made as per paragraph 7 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 :-

1. provisions for bad and doubtful debts; and
2. 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.

Requirement as to capital adequacy

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

1. ten per cent on or before March 31, 1998; and
2. twelve per cent on or before March 31, 1999

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

Explanations :

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 :

Notes:

1. Netting may be done only in respect of assets where provisions for depreciation or for bad and doubtful debts have been made.

2. Assets which have been deducted from owned fund to arrive at net owned fund shall have a weightage of `O'.

Off-balance sheet items

(2) In these directions, degrees of credit risk exposure attached to off-balance sheet items have been expressed as percentage of credit conversion factor. Hence, the face value of each item requires to be first multiplied by the relevant conversion factor to arrive at risk adjusted value of off-balance sheet item. The aggregate shall be taken into account for reckoning the minimum capital ratio. This shall have to be again multiplied by the risk weight of 100. The risk adjusted value of the off-balance sheet items shall be calculated as per the credit conversion factors of non-funded items as detailed hereunder : -

Note: Cash margins/deposits shall be deducted before applying the conversion factor.

Loans against NBFC's own shares prohibited

11. (1) No NBFC shall lend against its own shares.

(2) Any outstanding loan granted by an NBFC against its own share on the date of commencement of these directions shall be recovered by the NBFC as per the repayment schedule.

Concentration of credit/investment

12. (1) No NBFC shall,

1. lend to
   1. any single borrower exceeding fifteen per cent of its owned fund; and
   2. any single group of borrowers exceeding twenty five per cent of its owned fund.
2. invest in
   1. the shares of another company exceeding fifteen per cent of its owned fund; and
   2. the shares of a single group of companies exceeding twenty five per cent of its owned fund.

3. lend and invest (loans investments taken together) exceeding
   1. twenty five per cent of its owned fund to a single party; and
   2. forty per cent of its owned fund to a single group of parties.

(2) Any loan granted and investment made by the NBFC in excess of the ceilings specified hereinabove and existing on the date of commencement of these directions, shall be brought down by the NBFC as per the repayment schedule in due course.

Notes :

(1) For determining the abovementioned limits, off-balance sheet exposures be converted into credit risk by applying the conversion factors explained hereinabove.

(2) The investments in debentures for the above purpose be treated as credit and not investment.

(3) The above ceilings on credit/investments shall be applicable to the own group of the NBFC as well as to the other group of borrowers/investee companies.

Submission of half yearly return

13. NBFCs including RNBCs referred to in para 1(3)(i)(a) and (b) shall submit a half-yearly return within three months of the expiry of the relative half-year as on September and March every year, commencing from the half year ending March 31, 1998, in the format annexed hereto to the Regional Office of the Department of Non-Banking Supervision of the Reserve Bank of India under whose jurisdiction the registered office of the company is located as per Second Schedule to the Non-Banking Financial Companies (Reserve Bank) Directions, 1998 and Schedule B to Residuary Non-Banking Companies (Reserve Bank) Directions, 1987.

Exemptions

14. The Reserve Bank may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, grant extension of time to comply with or exempt any NBFC or class of NBFCs, from all or any of the provisions of these directions either generally or for any specified period, subject to such conditions as the Reserve Bank may impose.

Interpretations

15. For the purpose of giving effect to the provisions of these directions, the Reserve Bank may if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these directions given by the Reserve Bank shall be final and binding on all the parties concerned.

(S.P. Talwar)
Deputy Governor