Pages

Subscribe:

Notification as amended upto June 30, 2013– “Non-Banking Financial (Non - Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007” . Part:- 2


Ozg NBFC Consultant

Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata

Back Office Phone # 09811415831-37-61-72-84-92-94

W: nbfc.in | Email: ask@nbfc.in



Income recognition
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 profit and loss account before the asset became non-performing and remaining unrealised, shall be reversed.
(4) 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.
Explanation
For the purpose of this paragraph, `net lease rentals’ mean 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).
Income from investments
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 non-banking financial company’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.
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)(a) The Board of Directors of every non-banking financial company shall frame investment policy for the company and implement the same;
(b) The criteria  to classify the investments into current and long term investments shall be spelt out by the Board of the company in the investment policy;
(c) Investments in securities shall be classified into  current and long term, at the time of making each investment;
(d) (i) There shall be no inter-class transfer on ad-hoc basis;
(ii) The inter-class transfer, if warranted, shall be effected only at the beginning of each half year, on April 1 or October 1,  with the approval of the Board;
(iii) The investments shall be transferred scrip-wise, from current to long-term or vice-versa, at book value or market value, whichever is lower;
(iv) The depreciation, if any, in each scrip shall be fully provided for and appreciation, if any, shall be ignored;
(v) The depreciation in one scrip shall not be set off against appreciation in another scrip, at the time of such inter-class transfer, even in respect of the scrips of the same category.
(2) Quoted current investments shall, for the purposes of valuation, be grouped into the following categories, viz.,
  (a)  equity shares,
  (b)  preference shares,
  (c)  debentures and bonds,
  (d)  Government securities including treasury bills,
  (e)  units of mutual fund, and
  (f) 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, non-banking financial companies 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.
(4) Unquoted preference shares in the nature of current investments shall be valued at cost or face value, whichever is lower.
(5) Investments in unquoted Government securities or Government guaranteed bonds shall be valued at carrying cost.
(6) Unquoted investments in the 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.
(7) Commercial papers shall be valued at carrying cost.
(8) A long term investment shall be valued in accordance with the Accounting Standard issued by ICAI.
Note:  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.
Need for Policy on Demand/Call Loans
7. (1) The Board of Directors of every non-banking financial company granting/intending to grant demand/call loans shall frame a  policy  for the company and implement the same.
(2) Such policy shall, inter alia, stipulate the following, -
  1. A cut off date within which the repayment of demand or call loan shall be demanded or called up;
  2. The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if the cut off date for demanding or calling up such loan is stipulated beyond a period of one year from the date of sanction;
  3. The rate of interest which shall be payable on such loans;
  4. Interest on such loans, as stipulated shall be payable either at monthly or quarterly rests;
  5. The sanctioning authority shall, record specific reasons in writing at the time of sanctioning demand or call loan, if no interest is stipulated or a moratorium is granted for any period;
  6. A cut off date, for review of performance of the loan, not exceeding  six months commencing from the date of sanction;
  7. Such demand or call loans shall not be renewed unless the periodical review has shown satisfactory compliance with the terms of sanction.
Asset Classification
8.  (1)  Every non-banking financial company 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.
Provisioning requirements
9.  Every non-banking financial company 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 outstanding 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 non-banking financial company 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 outstanding) shall be made on the following basis : -
Period for which the asset has been considered as doubtful
% of provision
Up to one year
20
One to three years
30
More than three years
50
 iii) Sub-standard assets A general provision of 10% of total outstanding shall be made.
Lease and hire purchase assets
(2)  The provisioning requirements in respect of hire purchase and leased assets shall be as under:
Hire purchase assets
(i)  In respect of hire purchase assets, the total dues (overdue  and  future instalments taken together)  as reduced by
(a) the finance charges not credited to the profit and loss account and carried forward as unma­tured finance charges; and
(b) the depreciated value of the underlying asset,
shall be provided for.
Explanation : For the purpose of this paragraph,
  1. the depreciat­ed value of the asset shall be notionally  computed as the original cost of the asset to be reduced by  deprecia­tion at the rate of twenty per cent per annum on a straight line method; and
  2. in the case of second hand asset, the original cost shall be the actual cost incurred for acquisition of such  second hand asset.
Additional provision for hire purchase and leased assets
(ii) In respect of hire purchase and leased assets, additional provision shall be made as under :
(a) Where hire charges or lease rentals are overdue upto 12 months  Nil
(b) where hire charges or lease rentals are overdue for more than 12 months but upto 24 months 10 percent of the net book value
(c)  where hire charges or lease rentals are overdue for more than 24 months but upto 36 months 40 percent of the net book value
(d)  where hire charges or lease rentals are overdue for more than  36 months  but upto 48 months 70 percent of the net book value
(e) where hire charges or lease rentals are overdue for more than 48  months 100 percent of the net book value
(iii)  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.
NOTES :
  1.  The amount of caution money/margin money or security deposits kept by the borrower with the non-banking financial company in pursuance of the hire purchase agreement may be deducted against the provisions stipulated under clause (i) above, if not already taken into account  while arriving at the equated monthly instalments under the agreement. The value of any other security available in pursuance to the hire purchase agreement may be deducted only against the provisions stipulated under clause (ii) above.
  2. The amount of security deposits kept by the borrower with the non-banking financial company in pursuance to the lease agreement together with the value of any other security available in pursuance to the lease agreement may be deducted only against the provisions stipulated under clause (ii) above.
  3. 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.
  4. An  asset  which  has been renegotiated or rescheduled as referred to in paragraph (2) (1) (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.
  5. The balance sheet to be prepared by the NBFC may be in accordance with the provisions contained in sub-paragraph (2) of paragraph 10.
  6. All financial leases written on or after April 1, 2001 attract the provisioning requirements as applicable to hire purchase assets.
“9A. Every Non Banking Financial Company shall make provision for standard assets at 0.25 percent of the outstanding, which shall not be reckoned for arriving at net NPAs. The provision towards standard assets need not be netted from gross advances but shall be shown separately as ‘Contingent Provisions against Standard Assets’ in the balance sheet.” 
Disclosure in the balance sheet
10. (1) Every non-banking financial company shall separately disclose in its balance sheet the provisions made as per paragraph 9 above without netting them from the income or against the value of assets.
(2) The provisions shall be distinctly indicated under separate heads of account 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 non-banking financial company.
(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.
 ["(5) Every systemically important non-deposit taking non-banking financial company shall disclose the following particulars in its Balance Sheet
Capital to Risk Assets Ratio (CRAR)
Exposure to real estate sector, both direct and indirect; and
Maturity pattern of assets and liabilities."]
Constitution of Audit Committee by non-banking financial companies
11. A non-banking financial company having assets of Rs. 50 crore and above as per its last audited balance sheet shall constitute an Audit Committee, consisting of not less than three members of its Board of Directors.
Explanation I: The Audit Committee constituted by a non-banking financial company as required under Section 292A of the Companies Act, 1956 (1 of 1956) shall be the Audit Committee for the purposes of this paragraph. 
Explanation II:  The Audit Committee constituted under this paragraph shall have the same powers, functions and duties as laid down in Section 292A of the Companies Act, 1956 (1 of 1956).
Accounting year
12. Every non-banking financial company shall prepare its balance sheet and profit and loss account as on March 31 every year. Whenever a non-banking financial company intends to extend the date of its balance sheet as per provisions of the Companies Act, it should take prior approval of the Reserve Bank of India before approaching the Registrar of Companies for this purpose.
Further, even in cases where the Bank and the Registrar of Companies grant  extension of time, the non-banking financial company shall furnish to the Bank a proforma balance sheet (unaudited ) as on March 31 of the year and the statutory returns due on the said date.
"Every non-banking financial company shall finalise its balance sheet within a period of 3 months from the date to which it pertains".
Schedule to the balance sheet
13. Every non-banking financial company shall append to its balance sheet prescribed under the Companies Act, 1956, the particulars in the schedule as set out in Annex.
Transactions in Government securities
14. Every non-banking financial company may undertake transactions in Government securities through its CSGL account or its demat account:
provided that no non-banking financial company shall undertake any transaction in government security in physical form through any broker.
Submission of a certificate from Statutory Auditor to the Bank
15. Every non-banking financial company shall submit a Certificate from its Statutory Auditor that it is engaged in the business of non-banking financial institution requiring it to hold a Certificate of Registration under Section 45-IA of the RBI Act. A certificate from the Statutory Auditor in this regard with reference to the position of the company as at end of the financial year ended March 31 may be submitted to the Regional Office of the Department of Non-Banking Supervision under whose jurisdiction the non-banking financial company is registered, [“within one month from the date of finalization of the balance sheet and in any case not later than December 30th of that year."]Such certificate shall also indicate the asset / income pattern of the non-banking financial company for making it eligible for classification as Asset Finance Company, Investment Company or Loan Company.
"For an NBFC-MFI, such Certificate will also indicate that the company fulfils all conditions stipulated to be classified as an NBFC-MFI in the notification DNBS.PD.No.234/CGM(US)-2011 dated December 02, 2011".
For an NBFC-Factor, such Certificate will indicate the requirement of holding the certificate under section 3 of the Factoring Act. The certificate will also indicate the percentage of factoring assets and income, the compliance that it fulfils all conditions stipulated under the Act to be classified as an NBFC-Factor and compliance to minimum capitalization norms, if FDI has been received.
Requirement as to capital adequacy
16. (1) Every systemically important non-deposit taking non-banking financial company shall maintain, with effect from  April 1, 2007,  a minimum capital ratio consisting of Tier I  and Tier II capital which shall not be less than ten per cent of its aggregate risk weighted assets on balance sheet and of risk adjusted value of off-balance sheet items. Such ratio shall not be less than 12% by March 31, 2010 and 15% by March 31, 2011.
(2) The total of Tier II capital, at any point of time, shall not exceed one hundred per cent of Tier I capital.
(3) NBFCs primarily engaged in lending against gold jewellery (such loans comprising 50 percent or more of their financial assets) shall maintain a minimum Tier l capital of 12 percent by April 01, 2014.
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:
Weighted risk assets - On-Balance Sheet items
Percentage weight
(i) Cash and bank balances including fixed deposits and certificates of deposits with banks
0
(ii) Investments

(a) Approved securities [Except at (c) below]
0
(b) Bonds of public sector banks
20
(c) Fixed deposits/certificates of deposits/ bonds of public financial institutions
100
(d) Shares of all companies and debentures/bonds/commercial papers of all companies and units of all mutual funds
100
(iii) Current assets

(a) Stock on hire (net book value)
100
(b) Intercorporate loans/deposits
100
(c) Loans and advances fully secured against deposits held by the company itself
0
(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
(v)  Other assets

(a) Income tax deducted at source (net of provision)
0
(b) Advance tax paid (net of provision)
0
(c) Interest due on Government securities
0
(d) Others (to be specified)
100
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 `zero’.
(3) While calculating the aggregate of funded exposure of a borrower for the purpose of assignment of risk weight, such non-banking financial companies may net off the amount of cash margin/caution money/security deposits (against which right to set-off is available) held as collateral against the advances out of the total outstanding exposure of the borrower.
Deleted
Off-balance sheet items
(2)
Deleted
A. General
NBFCs will calculate the total risk weighted off-balance sheet credit exposure as the sum of the risk-weighted amount of the market related and non-market related off-balance sheet items. The risk-weighted amount of an off-balance sheet item that gives rise to credit exposure will be calculated by means of a two-step process:
(a) the notional amount of the transaction is converted into a credit equivalent amount, by multiplying the amount by the specified credit conversion factor or by applying the current exposure method; and
(b) the resulting credit equivalent amount is multiplied by the risk weight applicable viz; zero percent for exposure to Central Government/State Governments, 20 percent for exposure to banks and 100 percent for others.
B. Non-market-related off- balance sheet items
i. The credit equivalent amount in relation to a non-market related off-balance sheet item will be determined by multiplying the contracted amount of that particular transaction by the relevant credit conversion factor (CCF).
Sr. No.
Instruments
Credit Conversion Factor
i.
Financial & other guarantees
100
ii.
Share/debenture underwriting obligations
50
iii.
Partly-paid shares/debentures
100
iv.
Bills discounted/rediscounted
100
v.
Lease contracts entered into but yet to be executed
100
vi.
Sale and repurchase agreement and asset sales with recourse, where the credit risk remains with the NBFC.
100
vii.
Forward asset purchases, forward deposits and partly paid shares and securities, which represent commitments with certain draw down.
100
viii.
Lending of NBFC securities or posting of securities as collateral by NBFC, including instances where these arise out of repo style transactions
100
ix. Other commitments (e.g., formal standby facilities and credit lines) with an original maturity of
up to one year
over one year


20
50
x.
 ‘Similar commitments that are unconditionally cancellable at any time by the NBFC without prior notice or that effectively provide for automatic cancellation due to deterioration in a borrower’s credit worthiness’.
0
xi.
Take-out Finance in the books of taking-over institution


(i) Unconditional take-out finance
100

(ii) Conditional take-out finance
50

Note : As the counter-party exposure will determine the risk weight, it will be 100 percent in respect of all borrowers or zero percent if covered by Government guarantee.
xii.
Commitment to provide liquidity facility for securitization of standard asset transactions
100
xiii.
Second loss credit enhancement for securitization of standard asset transactions provided by third party
100
xiv.
Other contingent liabilities (To be specified)
50
Note:
i. Cash margins/deposits shall be deducted before applying the conversion factor
ii. Where the non-market related off-balance sheet item is an undrawn or partially undrawn fund-based facility, the amount of undrawn commitment to be included in calculating the off-balance sheet non-market related credit exposures is the maximum unused portion of the commitment that could be drawn during the remaining period to maturity. Any drawn portion of a commitment forms a part of NBFC’s on-balance sheet credit exposure’.
‘For example:
A term loan of Rs. 700 cr is sanctioned for a large project which can be drawn down in stages over a three year period. The terms of sanction allow draw down in three stages – Rs. 150 cr in Stage I, Rs. 200 cr in Stage II and Rs. 350 cr in Stage III, where the borrower needs the NBFC’s explicit approval for draw down under
Stages II and III after completion of certain formalities. If the borrower has drawn already Rs. 50 cr under Stage I, then the undrawn portion would be computed with reference to Stage I alone i.e., it will be Rs.100 cr. If Stage I is scheduled to be completed within one year, the CCF will be 20 percent and if it is more than one year then the applicable CCF will be 50 per cent’.
C. Market Related Off-Balance Sheet Items
i. NBFCs should take into account all market related off-balance sheet items (OTC derivatives and Securities Financing Transactions such as repo / reverse repo/ CBLO etc.) while calculating the risk weighted off-balance sheet credit exposures.
ii. The credit risk on market related off-balance sheet items is the cost to an NBFC of replacing the cash flow specified by the contract in the event of counterparty default. This would depend, among other things, upon the maturity of the contract and on the volatility of rates underlying the type of instrument.
iii. Market related off-balance sheet items would include :
a. interest rate contracts - including single currency interest rate swaps, basis swaps, forward rate agreements, and interest rate futures;
b. foreign exchange contracts, including contracts involving gold, - includes cross currency swaps (including cross currency interest rate swaps), forward foreign exchange contracts, currency futures, currency options;
c. Credit Default Swaps; and
d. any other market related contracts specifically allowed by the Reserve Bank which give rise to credit risk.
iv. Exemption from capital requirements is permitted for -
a. foreign exchange (except gold) contracts which have an original maturity of 14 calendar days or less; and
b. instruments traded on futures and options exchanges which are subject to daily mark-to-market and margin payments.
v. The exposures to Central Counter Parties (CCPs), on account of derivatives trading and securities financing transactions (e.g. Collateralised Borrowing and Lending Obligations - CBLOs, Repos) outstanding against them will be assigned zero exposure value for counterparty credit risk, as it is presumed that the CCPs' exposures to their counterparties are fully collateralised on a daily basis, thereby providing protection for the CCP's credit risk exposures.
vi. A CCF of 100 per cent will be applied to the corporate securities posted as collaterals with CCPs and the resultant off-balance sheet exposure will be assigned risk weights appropriate to the nature of the CCPs. In the case of Clearing Corporation of India Limited (CCIL), the risk weight will be 20 per cent and for other CCPs, risk weight will be 50 percent.
vii. The total credit exposure to a counterparty in respect of derivative transactions should be calculated according to the current exposure method as explained below:
D. Current Exposure Method
The credit equivalent amount of a market related off-balance sheet transaction calculated using the current exposure method is the sum of a) current credit exposure and b) potential future credit exposure of the contract.
a). Current credit exposure is defined as the sum of the gross positive mark-to-market value of all contracts with respect to a single counterparty (positive and negative marked-to-market values of various contracts with the same counterparty should not be netted). The Current Exposure Method requires periodical calculation of the current credit exposure by. marking these contracts to market.
b). Potential future credit exposure is determined by multiplying the notional principal amount of each of these contracts, irrespective of whether the contract has a zero, positive or negative mark-to-market value by the relevant add-on factor indicated below according to the nature and residual maturity of the instrument.
Credit Conversion Factors for interest rate related, exchange rate related
and gold related derivatives
Credit Conversion Factors (%)
Interest Rate Contracts
Exchange Rate Contracts & Gold
One year or less
0.50
2.00
Over one year to five years
1.00
10.00
Over five years
3.00
15.00
i. For contracts with multiple exchanges of principal, the add-on factors are to be multiplied by the number of remaining payments in the contract.
ii. For contracts that are structured to settle outstanding exposure following specified payment dates and where the terms are reset such that the market value of the contract is zero on these specified dates, the residual maturity would be set equal to the time until the next reset date. However, in the case of interest rate contracts which have residual maturities of more than one year and meet the above criteria, the CCF or add-on factor is subject to a floor of 1.0 per cent.
iii. No potential future credit exposure would be calculated for single currency floating / floating interest rate swaps; the credit exposure on these contracts would be evaluated solely on the basis of their mark-to-market value.
iv. Potential future exposures should be based on 'effective' rather than 'apparent notional amounts'. In the event that the 'stated notional amount' is leveraged or enhanced by the structure of the transaction, the 'effective notional amount' must be used for determining potential future exposure. For example, a stated notional amount of USD 1 million with payments based on an internal rate of two times the lending rate of the NBFC would have an effective notional amount of USD 2 million.
Deleted
“E. Credit conversion factors for Credit Default Swaps(CDS): 6
NBFCs are only permitted to buy credit protection to hedge their credit risk on corporate bonds they hold. The bonds may be held in current category or permanent category. The capital charge for these exposures will be as under:
(i) For corporate bonds held in current category and hedged by CDS where there is no mismatch between the CDS and the hedged bond, the credit protection will be permitted to be recognised to a maximum of 80% of the exposure hedged. Therefore, the NBFC will continue to maintain capital charge for the corporate bond to the extent of 20% of the applicable capital charge. This can be achieved by taking the exposure value at 20% of the market value of the bond and then multiplying that with the risk weight of the issuing entity. In addition to this, the bought CDS position will attract a capital charge for counterparty risk which will be calculated by applying a credit conversion factor of 100 percent and a risk weight as applicable to the protection seller i.e. 20 per cent for banks and 100 per cent for others.
(ii) For corporate bonds held in permanent category and hedged by CDS where there is no mismatch between the CDS and the hedged bond, NBFCs can recognise full credit protection for the underlying asset and no capital will be required to be maintained thereon. The exposure will stand fully substituted by the exposure to the protection seller and attract risk weight as applicable to the protection seller i.e. 20 per cent for banks and 100 per cent for others.”
Loans against non-banking financial company’s own shares prohibited
17. (1) No non-banking financial company shall lend against its own shares.
  (2)  Any outstanding loan granted by a non-banking financial company against its own shares on the date of commencement of these Directions shall be recovered by the non-banking financial company as per the repayment schedule.
17A “Loans against security of single product - gold jewellery”
a. All NBFCs shall
i. maintain a Loan-to-Value(LTV) ratio not exceeding 60 percent for loans granted against the collateral of gold jewellery and
ii. disclose in their balance sheet the percentage of such loans to their total assets.
b. NBFCs should not grant any advance against bullion / primary gold and gold coins. NBFCs should not grant any advance for purchase of gold in any form including primary gold, gold bullion, gold jewellery, gold coins, units of Exchange Traded Funds (ETF) and units of gold mutual fund.
Concentration of credit/investment 
18. (1) On and from April 1, 2007 no systemically important non-deposit taking non-banking financial company shall,
(i)  lend to
(a) any single borrower exceeding fifteen per cent of its owned fund; and
(b) any single group of borrowers exceeding twenty five per cent of its owned  fund;
(ii)  invest in
(a) the shares  of  another company exceeding fifteen per cent of its owned fund; and
(b) the shares of a single group of companies exceeding twenty five per cent of its owned fund;
(iii)  lend and invest  (loans/investments taken together) exceeding
(a) twenty five per cent of its owned fund  to a single party; and
(b) forty per cent of its owned fund to a single group of parties.
Provided that the ceiling on the investment in shares of another company shall not be applicable to a systemically important non-deposit taking non-banking financial company in respect of investment in the equity capital of an insurance company upto the extent specifically permitted, in writing, by the Reserve Bank of India.
Provided further that any systemically important non-deposit taking non-banking financial company, classified as Asset Finance Company by the Reserve Bank of India, may in exceptional circumstances, exceed the above ceilings on credit  / investment concentration to a single party or a single group of parties by 5 per cent of its owned fund, with the approval of its Board.
31"Provided further that any systemically important non-deposit taking non-banking financial company not accessing public funds, either directly or indirectly, or not issuing guarantees may make an application to the Bank for an appropriate dispensation consistent with the spirit of the exposure limits".
Explanation: "Public funds" for the purpose of the proviso shall include funds  raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits and bank finance.
(2) Every  systemically important non-deposit taking non-banking financial company shall formulate a policy in respect of exposures to a single party / a single group of parties.
Notes :
(1) For determining the limits, off-balance sheet exposures shall be converted into credit risk by applying the conversion factors as explained in paragraph 16.
(2) The investments in debentures for the purposes specified in this paragraph shall be treated as credit and not investment.
(3)  These ceilings shall be applicable to the credit/investment by such a non- banking financial company to companies/firms in  its own group as well as to the borrowers/ investee company’s group.
Information in regard to change of address, directors, auditors, etc. to be submitted
19. Every non-banking financial company not accepting/holding public deposit shall communicate, not later than one month from the occurrence of any change  in:
  1. the complete postal address, telephone number/s and fax number/s of the registered/corporate office;
  2. the names and residential addresses of the directors of the company;
  3. the names and the official designations of its  principal officers;
  4. the names and office address of the auditors of the company; and
  5. the specimen signatures of the officers authorised to sign on behalf of the company
to the Regional Office of the Department of Non-Banking Supervision of the Reserve Bank of India as indicated in the Second Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
[Requirements for Infrastructure Finance Company –
19A. An Infrastructure Finance Company shall, -
i.  not accept deposits from the public;
ii. have net owned funds of Rs. 300 crore or above;
  “(iii) have obtained a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA, Brickwork Ratings India Pvt. Ltd. (Brickwork) or equivalent rating by any other credit rating agency accredited by RBI "
iv.  have a CRAR of 15 percent  (with a minimum Tier I capital of 10 percent)].
Norms relating to Infrastructure loan
20. (1)  Applicability
(i) These norms shall be applicable to restructuring and/or rescheduling and/or renegotiation of the terms of  agreement relating to infrastructure loan, as defined in paragraph 2(1)(viii) of these Directions which is fully or partly secured standard and sub-standard asset and to the loan, which is subjected to restructuring and/or rescheduling and/or renegotiation of terms. 
(ii) Where the asset is partly secured, a provision to the extent of shortfall in the security available, shall be made while restructuring and/or rescheduling and/or renegotiation of the loans, apart from the provision required on present value basis and as per prudential norms.
(2)  Restructuring, reschedulement or renegotiation of terms of infrastructure loan 
The non-banking financial companies may, not more than once, restructure or reschedule or renegotiate the terms of infrastructure loan agreement as per the policy framework laid down by the Board of Directors of the company under the following stages:
(a)  before commencement of commercial production;
(b)  after commencement of commercial production but before the asset has been classified as sub-standard;
(c)  after commencement of commercial production and the asset has been classified as sub-standard:
Provided that in each of the above three stages, the restructuring and/or rescheduling and/or renegotiation of principal and / or of interest may take place, with or without sacrifice, as part of the restructuring or rescheduling or renegotiating package evolved.
(3) Treatment of restructured standard loan
The rescheduling or restructuring or renegotiation of the instalments of principal alone, at any of the aforesaid first two stages shall not cause a standard asset to be re-classified in the sub-standard category, if the project is re-examined and found to be viable by the Board of Directors of the company or by a functionary at least one step senior to the functionary who sanctioned the initial loan for the project, within the policy framework laid down by the Board:
Provided that rescheduling or renegotiation or restructuring of interest element at any of the foregoing first two stages shall not cause an asset to be downgraded to sub-standard category subject to the condition that the amount of interest foregone, if any, on account of adjustment in the element of interest as specified later, is either written off or 100 per cent provision is made thereagainst.
(4) Treatment of restructured sub-standard asset 
A sub-standard asset shall continue to remain in the same category in case of restructuring or rescheduling or renegotiation of the instalments of principal until the expiry of one year and the amount of interest foregone, if any, on account of adjustment, including adjustment by way of write off of the past interest dues, in the element of interest as specified later, shall be written off or 100 per cent provision made thereagainst.
(5) Adjustment of interest
Where rescheduling or renegotiation or restructuring involves a reduction in the rate of interest, the interest adjustment shall be computed by taking the difference between the rate of interest as currently applicable to infrastructure loan (as adjusted for the risk rating applicable to the borrower) and the reduced rate and aggregating the present value (discounted at the rate currently applicable to infrastructure loan, adjusted for risk enhancement) of the future interest payable so stipulated in the restructuring or rescheduling or renegotiation proposal.
(6) Funded Interest
In the case of funding of interest in respect of NPAs, where the interest funded is recognized as income, the interest funded shall be fully provided for.
(7) Income Recognition norms
The income recognition in respect of infrastructure loan shall be governed by the provisions of paragraph 3 of these Directions;
(8) Treatment of Provisions held
The provisions held by the non-banking financial companies against non-performing infrastructure loan, which may be classified as 'standard' in terms of sub-paragraph (3) hereinabove, shall continue to be held until full recovery of the loan is made. 
(9) Eligibility for upgradation of restructured sub-standard infrastructure loan 
The sub-standard asset subjected to rescheduling and/or renegotiation and/or restructuring, whether in respect of instalments of principal amount, or interest amount, by whatever modality, shall  not be upgraded to the standard category until expiry of one year of satisfactory performance under the restructuring and/or rescheduling and/or renegotiation terms.
(10) Conversion of debt into equity 
Where the amount due as interest, is converted into equity or any other instrument, and income is recognized in consequence, full provision shall be made for the amount of income so recognized to offset the effect of such income recognition:
Provided that no provision is required to be made, if the conversion of interest is into equity which is quoted; 
Provided further that in such cases, interest income may be recognized at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity.
(11)  Conversion of debt into debentures 
Where principal amount and/or interest amount in respect of NPAs is converted into debentures, such debentures shall be treated as NPA, ab initio, in the same asset classification as was applicable to the loan just before conversion and provision shall be made as per norms.
(12) Increase in exposure limits for Infrastructure related loan and investment 
The systemically important non-deposit taking non-banking financial companies may exceed the concentration of credit/investment norms, as provided in paragraph 18 of these Directions, by 5 per cent for any single party and by 10 per cent for a single group of parties, if the additional exposure is on account of infrastructure loan and/ or investment. 
["(12A) Infrastructure Finance Companies may exceed the concentration of credit norms as provided in paragraph 18 of the aforesaid Directions,
(i)  in lending to
(a) any single borrower, by ten per cent of its owned fund; and
(b) any single group of borrowers, by fifteen per cent of its owned fund;
(ii)  in lending to and investing in, (loans/investments taken together)
(a)  a single party, by five percent of its owned fund; and
(b) a single group of parties, by ten percent  of its owned fund.”] 
(13)  Risk weight for investment in AAA rated securitized paper
The investment in “AAA” rated securitized paper pertaining to the infrastructure facility shall attract risk weight of 50 per cent for capital adequacy purposes subject to the fulfilment of the following conditions:
(i) The infrastructure facility generates income / cash flows, which ensures servicing / repayment of the securitized paper.
(ii)  The rating by one of the approved credit rating agencies is current and valid.
Explanation:
The rating relied upon shall be deemed to be current and valid, if the rating is not more than one month old on the date of opening of the issue, and the rating rationale from the rating agency is not more than one year old on the date of opening of the issue, and the rating letter and the rating rationale form part of the offer document.
(iii) In the case of secondary market acquisition, the ‘AAA’ rating of the issue is in force and confirmed from the monthly bulletin published by the respective rating agency.
(iv) The securitized paper is a performing asset.
“(14) For Infrastructure Finance Companies, the risk weight for assets covering PPP and post commercial operations date (COD) projects which have completed at least one year of satisfactory commercial operations shall be at 50 percent”.
"NBFCs not to be partners in partnership firms"
20A. (1) No non-banking financial company shall contribute to the capital of a partnership firm or become a partner of such firm.
(2) A non-banking financial company, which had already contributed to the capital of a partnership firm or was a partner of a partnership firm shall seek early retirement from the partnership firm.
(3)  In this connection it is further clarified that;
a)  Partnership firms mentioned above will also include Limited Liability Partnerships (LLPs).
b)  Further, the aforesaid prohibition will also be applicable with respect to Association of persons; these being similar in nature to partnership firms
NBFCs which had already contributed to the capital of a LLP / Association of persons or was a partner of a LLP / Association of persons are advised to seek early retirement from the LLP / Association of persons.
Exemptions
21.  The Reserve Bank of India 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 non-banking financial company or class of non-banking financial companies, 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 of India may impose.
Interpretations
22.  For the purpose of giving effect to the provisions of these Directions, the Reserve Bank of India 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 of India shall be final and binding on all the parties concerned.
Repeal and Saving
23. (1) The Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 shall stand repealed by these Directions.
(2) Notwithstanding such repeal, any circular, instruction, order issued under the Directions in sub–section (1) shall continue to apply to non-banking financial companies in the same manner as they applied to such companies before such repeal. 
(V. Leeladhar)
Deputy Governor

Ozg NBFC Consultant

Ozg Center | Delhi | Mumbai | Chennai | Bangalore | Kolkata

Back Office Phone # 09811415831-37-61-72-84-92-94

W: nbfc.in | Email: ask@nbfc.in