RESERVE BANK OF INDIA
DEPARTMENT OF FINANCIAL COMPANIES
CENTRAL OFFICE
15, NETAJI SUBHAS ROAD
POST BOX No. 571
CALCUTTA

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 -

(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;

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/holding public deposit.

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

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;

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;

1. 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
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;

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.

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 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;
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. 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 :

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;

1. preference shares other than those which are compulsorily convertible into equity;
2. revaluation reserves at discounted rate of fifty five 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 capital instruments; 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 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.

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:

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

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, -

(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 :-

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

Hire purchase assets

1. The amount of caution money/margin money or security deposits kept by the borrower with the NBFC 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 NBFC 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.

1. 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.
2. 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.
3. The balance sheet for the year 1999-2000 to be prepared by the NBFC may be in accordance with the provisions contained in sub-paragraph (2) of paragraph 8. ]
4. [All financial leases written on or after April 1, 2001 attract the provisioning requirements as applicable to hire purchase assets.]

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 :-

(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 -

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.

Explanations :

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’.

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 shares on the date of commencement of these directions shall be recovered by the NBFC as per the repayment schedule.

11A. An NBFC which has failed to repay any public deposit or part thereof in accordance with the terms and conditions of such deposit, as provided in section 45QA(1) of the Reserve Bank of India Act, 1934 (2 of 1934) shall not grant any loan or other credit facility by whatever name called or make any investment or create any other asset as long as the default exists.

11B (i) No equipment leasing company or hire purchase finance company, which is accepting public deposit, shall, invest in -

1. land or building, except for its own use, an amount exceeding ten percent of its owned fund;
2. unquoted shares of another company, which is not a subsidiary company or a company in the same group of the NBFC, an amount exceeding ten percent of its owned fund.

(ii) No loan company or investment company, which is accepting public deposit, shall, invest in -

1. (a) land or building, except for its own use, an amount exceeding ten percent of its owned fund ;
2. unquoted shares of another company, which is not a subsidiary company or a company in the same group of the NBFC, an amount exceeding twenty percent of its owned fund :

Provided that the land or building or unquoted shares acquired in satisfaction of its debts shall be disposed off by the NBFC within a period of three years or within such period as extended by the Bank, from the date of such acquisition if the investment in these assets together with such assets already held by the NBFC exceeds the above ceiling;

Provided further that the land or building or unquoted shares held by the company in excess of the ceiling specified hereinabove on the date of commencement of these directions, shall be disposed off so as to bring down such holding within the said ceiling by the NBFC within three years or within such period as extended by the Bank, from the date of coming into force of these Directions.

(Effective from December 18, 1998)⁷

Concentration of credit/investment

12. (1) No NBFC shall,

(i) 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;

(ii) 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;

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.

Provided that the above ceilings on credit/investment concentration shall not be applicable to a RNBC in respect of investments in approved securities, bonds, debentures and other securities issued by a Government company or a public financial institution or a scheduled commercial bank under the provisions of paragraph 6(1)(a) and 6(1)(b) of the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987.

(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.

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.

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 (NBS-2) 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 Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and Schedule B to Residuary Non-Banking Companies (Reserve Bank) Directions, 1987.

14. 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 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 of India may impose.

15. 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.

Sd/-

(S.P. Talwar)
Deputy Governor