What changed
Paragraph 9(iii) of the Master Direction now permits inclusion of quarterly profits in free reserves, subject to a limited audit and a deduction equal to one‑quarter of the three‑year average dividend. The formula EP = NP – 0.25 × D is introduced. Any loss incurred in the current financial year must be subtracted from the Owned Fund.
What it means for you
NBFCs can boost their capital buffers by counting quarterly earnings, but only after satisfying audit requirements and adjusting for dividend payouts. The new deduction method standardises the profit inclusion across the sector. Immediate compliance is required, and current‑year losses will directly erode the capital base.
What you must do
- Ensure statutory auditors perform a limited review of quarterly financial statements.
- Calculate eligible quarterly profit using EP = Net profit – 0.25 × average dividend of the last three years.
- Deduct any loss incurred in the current year from the Owned Fund before reporting.
- Update internal capital adequacy reporting templates to reflect the new profit inclusion rules.
Who it affects
All NBFCs, NBFCs with factoring operations, Regulatory reporting teams
Can we include quarterly profits without an audit?
No. The quarterly statements must undergo a limited audit or review by the statutory auditor before the profit can be counted.
How is the dividend adjustment calculated?
Take the average dividend paid over the last three financial years and multiply it by 25%; subtract this amount from the net profit of the quarter.
What happens to a loss incurred in the current year?
The entire loss is deducted from the Owned Fund, reducing the capital available for regulatory purposes.