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RBI clarifies DTA/DTL treatment for NBFC capital adequacy

Current · Source: Reserve Bank of India · RBI/2008-09/107 · issued 31 Jul 2008 · ~1 min read
Quick answerRBI directs NBFCs to deduct deferred tax assets (DTA) from Tier I capital and exclude deferred tax liabilities (DTL) from capital adequacy calculations, effective from FY ending March 2009.
The rule, in the simplest words
How it plays out — a real example

An NBFC compliance officer in Indore, Priya, is checking her NBFC's capital adequacy for the March 2009 year-end. She sees a large deferred tax asset on the books from past losses. Following the new RBI rule, she deducts that DTA from Tier I capital, which drops the CRAR [capital-to-risk ratio] below the required 12%. Priya immediately drafts a letter to the RBI Regional Office, asking for a transition period to fix the shortfall, as the circular allows.

What changed

RBI clarified that DTL cannot be counted as Tier I or Tier II capital for CRAR purposes. DTA must be treated as an intangible asset and deducted from Tier I capital. These norms apply from the accounting year ending March 31, 2009.

What it means for you

NBFCs will see a reduction in their regulatory capital base due to DTA deduction and DTL exclusion, potentially lowering CRAR. Lenders must adjust capital planning and may need to seek transition relief from RBI if they fall short of minimum requirements.

What you must do

Who it affects

All Non-Banking Financial Companies (NBFCs), Residuary Non-Banking Companies (RNBCs)

❓ Common questions

Why is DTA deducted from Tier I capital?

RBI treats DTA as an intangible asset because it represents future tax benefits, not current cash or tangible capital, so it is deducted from Tier I capital to ensure capital quality.

What if my NBFC's CRAR falls below the minimum after this change?

RBI allows a transition period for NBFCs unable to comply. You must approach your Regional Office within 30 days of the circular's issue for suitable dispensation.

📜 Read the original circular — full text as issued by RBI
RBI/2008-09/107 DNBS (PD) C.C. No. 124/ 03.05.002/ 2008-09 July 31, 2008 All Non-Banking Financial Companies (NBFCs), including Residuary Non-Banking Companies (RNBCs) Dear Sirs, Accounting for taxes on income- Accounting Standard 22- Treatment of deferred tax assets (DTA) and deferred tax liabilities (DTL) for computation of capital In terms of Accounting Standard 22 issued by the Institute of Chartered Accountant of India (ICAI), on ‘Accounting for Taxes on Income’, taxable income is calculated in accordance with tax laws and the requirements of these laws to compute taxable income differ from the accounting policies applied to determine accounting income. The tax effects of timing differences are included in the tax expense in the statement of profit and loss and as deferred tax assets (DTA) (subject to the consideration of prudence) or as deferred tax liabilities (DTL) in the balance sheet. 2. As creation of DTA or DTL would give rise to certain issues impacting the balance sheet of the company, it is clarified that the regulatory treatment to be given to these issues are as under :-  - The balance in DTL account will not be eligible for inclusion in Tier I or Tier II capital for capital adequacy purpose as it is not an eligible item of capital. - DTA will be treated as an intangible asset and should be deducted from Tier I Capital. -  NBFCs may keep the above clarifications in mind for all regulatory requirements including computation of CRAR and ensure compliance with effect from the accounting year ending March 31, 2009. NBFCs which are unable to comply with the regulatory CRAR requirement due to giving effect to the norms as above will be given an appropriate transition period to comply with the same. Such companies may approach the Regional Office of the Bank in the jurisdiction of which their Registered Office is located for suitable dispensation in accordance with the spirit of these norms within a period of thirty days of the issue of the instructions in this regard. Yours faithfully, ((P Krishnamurthy) Chief General Manager In-Charge
Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2008-09/107 · issued 31 Jul 2008. The plain-English explanation above is BankPulse’s own independent summary.
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Key termsPlain-English definitions of terms in this circular — see the full Indian banking glossary. NBFC · CRAR (Capital adequacy) · Gross NPA (GNPA) · Wilful defaulter
Related circulars · NBFC Regulation
NBFCs: PMLA Compliance & Transaction Monitoring UpdateAnnual NBS-7 Return Mandate for NBFC-ND-SIMaster Circular: Exemptions from RBI Act, 1934 for NBFCsMaster Circular: NBFC/RNBC Liquid Asset Returns & MaintenanceNBFC Auditor Report Directions 1998: Master Circular
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Who does what — compliance checklist
💻 IT / Systems
  • Deduct DTA from Tier I capital in CRAR computation from FY ending March 2009.
  • Exclude DTL from both Tier I and Tier II capital for capital adequacy purposes.
  • Update internal accounting and reporting systems to reflect these regulatory treatments.
📜 Compliance
  • Review CRAR compliance; if norms cause shortfall, approach RBI Regional Office within 30 days for transition period.
Grouped from the action items above — a single circular may involve more than one team.
Worked example & action-note template

Example: if you are an IT/Systems lead at a bank this circular applies to (All Non-Banking Financial Companies (NBFCs), Residuary Non-Banking Companies (RNBCs)), your first concrete step on “RBI clarifies DTA/DTL treatment for NBFC capital adequacy” is: “Deduct DTA from Tier I capital in CRAR computation from FY ending March 2009.” (RBI issued this 31 Jul 2008).

  1. Circular: RBI/2008-09/107 -- RBI clarifies DTA/DTL treatment for NBFC capital adequacy
  2. Issued: 31 Jul 2008
  3. Action required: Deduct DTA from Tier I capital in CRAR computation from FY ending March 2009.
  4. Action required: Exclude DTL from both Tier I and Tier II capital for capital adequacy purposes.
  5. Action required: Review CRAR compliance; if norms cause shortfall, approach RBI Regional Office within 30 days for transition period.
  6. Action required: Update internal accounting and reporting systems to reflect these regulatory treatments.
  7. Owner: ____________ Target date: ____________
  8. Board/committee approval needed? Y / N
  9. Evidence filed in compliance register on: ____________
Built only from this circular’s own published fields — not legal advice; always confirm against the official RBI source.

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Official RBI source: https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=4385&Mode=0 — Plain-English summary by BankPulse (bankpulse.ai), reviewed by our expert reviewer, CA Amit Jain. Independent platform, not affiliated with the Reserve Bank of India; is our own plain-English paraphrase, not RBI’s original wording.
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