RBI Updates NBFC Prudential Norms Master Circular (2007 Directions Updated to June 30, 2009)

RBI/2009-10/2 DNBS (PD) CC No. 144/ 03.02.001/ 2009-10 July 1, 2009 To The Chairman / CEOs of all Non-Banking Financial (Deposit Accepting or Holding) Companies and Residuary Non-Banking Companies Dear Sir, Master Circular – “Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”   As you are aware, in order to have all current instructions on the subject at one place, the Reserve Bank of India had issued a Master Circular No. 116 on the captioned subject, which is now updated up to 30th June 2009. The Master Circular has also been placed on the RBI web-site ( http://www.rbi.org.in ). A copy of the revised Master Circular is enclosed. Yours sincerely, (P. Krishnamurthy) Chief General Manager -in-Charge RESERVE BANK OF INDIA DEPARTMENT OF NON-BANKING SUPERVISION CENTRAL OFFICE CENTRE I, WORLD TRADE CENTRE CUFFE PARADE, COLABA MUMBAI 400 005 NOTIFICATION No. DNBS. 192/DG (VL)-2007 dated February 22, 2007 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, 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 Non-Banking Financial Companies Prudential Norms (Reserve Bank) Directions, 1998 contained in Notification No. DFC. 119/DG(SPT)/98 dated January 31, 1998, gives to every non-banking financial company (other than Residuary Non-Banking Company) accepting/ holding public deposits and to every Residuary Non-Banking Company the Directions hereinafter specified. Short title, commencement  and applicability of the Directions: 1. (1) These Directions shall be known as the "Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007". (2) These Directions shall come into force with immediate effect. (3) (i)  The  provisions  of  these  Directions, shall apply to: (a) a non-banking financial company, except a mutual benefit financial company [ and a mutual benefit company] as defined in the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and accepting/holding public deposit; (b) a residuary non-banking company as defined in the Residuary Non-Banking Companies (Reserve Bank) Directions, 1987. (ii) These Directions shall not apply to a non-banking financial company being a Government company as defined under Section 617 of the Companies Act, 1956 (1 of 1956) and accepting / holding public deposit. Definitions 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: (a) a term loan, or (b) a lease asset, or (c) a hire purchase asset, or (d) any other asset, which remains a sub-standard asset for a period exceeding 18 months; (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: (a) in case of predominantly manufacturing company, eight per cent; (b) in case of predominantly trading company, ten per cent; and (c) in case of any other company, including non-banking financial company, twelve per cent; NOTE : 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) ‘infrastructure loan’ means a credit facility extended by non-banking financial companies to a borrower, by way of term loan, project loan subscription to bonds/debentures/ preference shares / equity shares in a project company acquired as a part of the project finance package such that such subscription amount to be “in the nature of advance” or any other form of long term funded facility provided to a borrower company engaged in: Developing or Operating and maintaining, or Developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors: (a) a road, including toll road, a bridge or a rail system; (b) a highway project including other activities being an integral part of the highway project; (c) a port, airport, inland waterway or inland port; (d) a water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system; (e) telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e., a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services; (f) an industrial park or special economic zone; (g) generation or generation and distribution of power; (h) transmission or distribution of power by laying a network of new transmission or distribution lines; (i) construction relating to projects involving agro-processing and supply of inputs to agriculture; (j) construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality; and (k) construction of educational institutions and hospitals; and (l) any other infrastructure facility of similar nature. (ix)  “loss asset” means: (a)   an asset which has been identified as loss asset by the non-banking financial company or its internal or external auditor or by the Reserve Bank  of India during the inspection of the non-banking financial company, to the extent it is not written off by the non-banking financial company; 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; (x) “long term investment” means an investment other than a current investment; (xi) “net asset value” means the latest declared net asset value by the mutual fund concerned in respect of that particular scheme; (xii) “net book value” means: (a) 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 9(2)(i) of these Directions; (b) 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. (xiii) ‘non-performing asset’ (referred to in these Directions as “NPA”) means: (a) an asset, in respect of which, interest has remained  overdue for a period of six months or more; (b) a term loan inclusive of unpaid interest, when the instalment is overdue for a period of six months or more or on which interest amount remained overdue for a period of six months or more; (c) a demand or call loan, which remained overdue for a period of six months or more from the date of demand or call or on which interest amount remained overdue for a period of six months or more; (d) a bill which remains overdue for a period of six months or more; (e) 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 overdue for a period of six months or more; (f) 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 or more; (g) the lease rental and hire purchase instalment, which has become overdue for a period of twelve months or more; (h) 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, a non-banking financial company may classify each such account on the basis of its record of recovery; (xiv) “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; (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 asset” means: (a) an asset which has been classified as non-performing asset for a period not exceeding 18 months; (b) an asset where the terms of the agreement regarding interest and / or principal have been renegotiated  or rescheduled or restructured after commencement of operations, until the expiry of one year of satisfactory performance under the renegotiated or rescheduled or restructured terms: Provided that the classification of infrastructure loan as a sub-standard asset shall be in accordance with the provisions of paragraph 23 of these Directions; (xvii) "subordinated debt" means an instrument, which is fully paid up, 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 non-banking financial company. The book value of such instrument shall be subjected to discounting as provided hereunder:

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2009-10/2 · issued 01 Jul 2009. The plain-English explanation above is BankPulse’s own independent summary.

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Topics: NBFC Regulations

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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