BANK FINANCE
& LENDING NORMS FOR LEASING & HIRE PURCHASE CONCERNS
What
is Lease ?
Lease can be defined as a right to use an equipment or capital goods on
payment of periodical amount. This may broadly be equated to an instalment credit
being extended to the person using the asset by the owner of capital goods with
small variation.
Parties to a Lease Agreement
There are two principal parties to any lease transaction as under,
Lessor :Who is actual owner of equipment permitting use
to the other party on payment of
periodical amount
Lessee :Who acquires the right to, use the equipment on payment of
periodical amount.
Lease Vis‑a‑Vis Hire Purchase
Hire‑purchase transaction is also almost similar to a lease
transaction with the basic difference that the person using the asset on hire‑purchase
basis is the owner of the asset and full title is transferred to him after he
has paid the agreed instalments. The asset will be shown in his balance sheet
and he can claim depreciation and other allowances on the asset for computation
of tax during the currency of hire‑purchase agreement and thereafter.
In a lease transaction, however, the ownership of the equipment always
vests with the lessor and lessee only gets the right to use the asset.
Depreciation and other allowances on the asset will be claimed by the lessor
and the asset will also be shown in the balance sheet of the lessor. The lease
money paid by the lessee can be charged to his Profit and Loss Account.
However, the asset as such will not appear in the balance sheet of the lessee.
Such asset for the lessee is, therefore called ‘off the balance sheet asset’.
Type of Leasing
A lease transaction has many variants relating to the type and nature of leased equipment amortisation period residual value of equipment, period of leasing, option for termination of lease etc. Various types of leasing transactions are, therefore, obtaining in the market on the basis of these variants. The different leasing options may however be grouped in two broad categories as under.
Operating
Lease
In this type of lease transaction, the primary lease period is short and
the lessor would not be able to realise the
full cost of the equipment and other incidental charges thereon during the
initial loan period. Besides the cost of machinery, the lessor also bears
insurance, maintenance and repair coats etc. The lessee acquires the right to
use the asset for a short duration. Agreements of operating lease generally
provide for an option to the lessee/lessor to terminate the lease after due
notice. These agreements may generally be preferred by the lessee in die
following circumstances:
·
When the long‑term suitability of asset
is uncertain.
·
When the asset is subject to rapid
obsolescence.
·
When the asset is required for immediate use to
tide over a temporary problem. Computers and other office equipment are the
very common assets which form subject matter of many operating lease
agreements.
Financial Lease
As against the temporary nature of an operating lease agreement,
financial lease agreement is a
long-term arrangement which is irrevocable during the primary lease period
which is generally the full economic life of the leased asset. Under this arrangement lessor is assured to realise the cost of
purchasing the leased asset, cost of financing it and other administrative
expenses as well as his profit by way of lease rent during the initial (primary) period of leasing itself.
Financial lease involves transferring almost all the risks incidental to
ownership and benefits arising therefrom except the legal title to the lessee
against his irrevocable undertaking to make unconditional payments to the
lessor as per agreed schedule. This is a closed end arrangement with no option
to lessee to terminate the lease agreement subsequently. In such lease, the lessee has to bear insurance maintenance and other related costs. The
choice of met and its supplier is generally left to the lessee in such
transactions. The variants under financial teem are as under :
·
Lease with purchase option where the lessee has
the right to purchase the leased assets after the expiry of initial lease
period at an agreed price.
·
Lease with lessee having residual benefits‑where
the lessee has the right to share the sale proceeds of the asset after expiry
of initial lease period and/or to renew die lease agreement at a lower rental.
In a few cases of financial lease, the lessor may not be a single individual but a group of equity participants and the group borrows a large amount from financial institutions to purchase the leased asset. Such transaction is called ‘Leveraged lease’.
Sales
and Lease Back Leasing
Under this arrangement an asset which already exists and in use by the
lessee is first sold to the lessor for consideration in cash. The same asset is
then acquired for use under financial lease agreement from the lessor. Ibis is
a method of raising funds immediately required by lessee for working capital or
other purposes. The lessee continues to make economic use of assets against
payment of lease rentals while ownership vests with the lessor.
Sales‑Aid‑Lease
When the leasing company (lessor) enters into an arrangement with the
seller, usually manufacturer of equipment, to market the latter’s product
through its own leasing gets a commission
on such sales from the manufactures and doubles its profit.
Apart from term loan and other facilities available from financial
institutions including banks to a
promoter to acquire equipment and other capital goods, the promoter now
has an alternative option to acquire economic use of capital assets through
leasing. The ultimate decision to either approach a financial institution or a
leasing company will, however, depend on the nature of each such transaction.
Advantages
·
The first and foremost advantage of a lease
agreement is its flexibility. The leasing company in most of the cases would be
prepared to modify the arrangement to suit the specific requirement of the
lessee. The ownership of the leased equipment gives them added confidence to
enable them to be more accommodative than the banks and other financial
institutions.
·
The leasing company may finance 100% cost of
the equipment without insisting for any initial disbursement by the lessee,
whereas 100% finance is generally never allowed by banks/financial
institutions.
·
Banks/financial institutions may involve
lengthy appraisal and impose stringent terms and conditions to the sanctioned
loan. The process is time consuming. In contrast leasing companies may arrange
for immediate purchase of equipment on mutually agreeable terms.
·
Lengthy and time consuming documentation
procedure is involved for term loans by banks/institutions. The lease agreement
is very simple in comparison.
·
In short‑term lease (operating lease) the
lessee is safeguarded against the risk of obsolescence. It is also an ideal
method to acquire use of an asset required for a temporary period.
·
The use of leased assets does not affect die
borrowing capacity of the lessee as lease payment may not require normal lines
of credit and are payable from income during the operating period. This neither
affects the debt equity ratio or the current ratio of the lessee.
·
Leased equipment is an ‘off the balance sheet’
asset being economically used by the lessee and does not affect the debt
position of lessee.
·
By employing 'sale and lease back' arrangement,
the lessee may overcome a financial crisis by immediately arranging cash
resources for some emergent application or for working capital.
·
Piecemeal financing of small equipment is
conveniently possible through lease arrangement only as debt financing for such
items is impracticable.
·
Tax benefits may also sometimes accrue to the
lessee depending upon his tax status.
Disadvantages
·
The lease rentals become payable soon after the
acquisition of assets and no moratorium period is permissible as in case of
term loans from financial institutions. The lease arrangement may, therefore,
not be suitable for setting up of the new projects as it would entail cash out
flows even before the project comes into operation.
·
The leased assets are purchased by the lessor
who is the owner of equipment, The seller's warranties for satisfactory
operation of the leased assets may sometimes not be available to lessee.
·
Lessors generally obtain credit facilities from
banks etc. to purchase the leased equipment which are subject to hypothecation
charge in favour of the bank. Default in payment by the lessor may sometimes
result in seizure of assets by banks causing loss to the lessee.
·
Lease financing has a very high cost of
interest as compared to interest charged on term loans by financial
institutions/banks.
Despite all these disadvantages, the flexibility and simplicity offered
by lease finance is bound to make it popular. Lease operations will find
increasing use in the near future.
Regulations relating to Non‑Banking
Financial Companies (NBFCs)
With the enormous growth in number of NBFCs over the last few years and in
order to safeguard the interest of investing public the necessity of regulating
the functioning of these NBFCs by Reserve Bank of India was strongly felt. In
April May, 1993 NBFCs with Net Owned Funds (NOF) of Rs. 50 lakhs and above were
required to register themselves with RBI.
In June 1994, guidelines on prudential norms for income recognition,
accounting standards, provisioning for bad and doubtful debts, capital adequacy
and concentration of credit/investments were issued by RBI. Registered NBFCs
were required to get themselves rated by one of the credit rating agencies at
least once in a year. NBFCs were also required to attain capital adequacy of 8
per cent by March 31, 1996 after making adequate provision for sub‑standard,
doubtful and loss assets.
These guidelines further laid down exposure norms for maximum commitment
to a single party and a group of parties.
In order to have proper control and regulate the functioning of NBFCs,
Govt. of India enacted 'The Reserve Bank of India'(Amendment) Act, 1997
conferring wide ranging powers to RBI. As per the Act, no NBFC can commence or
carry on business:
(a) without obtaining from RBI, a certificate of registration, and
(b) having owned funds of Rs. 200 lacs.1
Finance from banks may now be restricted to NBFCs registered with Reserve Bank of India. For the purpose of granting bank advance Non‑Banking Financial Companies (NBFCs) am basically divided in four broad groups on the basis of their principal business as under :
(i) Equipment Leasing (EL),
(ii) Hire Purchase (HP),
(iii) Loan and investment activities,
(iv) Residuary Non‑Banking Companies (RNBC).
Further, the RBI issued NBFC Prudential Norms (Reserve Bank) Directions
1998 vide Notification No. DFC 119(SPT)‑98, dt. 31.1.1998. The text of
Notification dt. 31.1.1998 as amended from time to time is given in the Annexure
ANNEXURE
Non‑Banking
Financial Companies Prudential Norms (Reserve Bank) Directions, 19982
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 45 JA of the Reserve Bank of
India Act, 1934 (2 of 1934), and of all the powers enabling it in this behalf,
and in suppression 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.
Short
title, commencement and applicability of the directions
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
(a) a non‑banking
financial company (referred to in these directions asNBFC'), except a mutual
benefit financial company 1[and a mutual benefit
company] as defined in the Non‑Banking Financial Companies Acceptance to
Public Deposits (Reserve Bank) Directions, 1998, which is having a net owned
fund (referred to in these directions as "NOF') of rupees twenty‑five
lakhs and above and accepting/holding public deposit:
(b) a
residuary non‑banking company (referred to in these directions as
"RNBC"), as defined in the Residuary Non‑Banking Companies
(Reserve Bank) Directions, 1987.
(ii) The provisions of paragraphs 10 and 12 of these directions shall
not apply to
(a) a loan company;
(b) an investment company;
(c) a hire purchase finance company; and
(d) an equipment leasing company, which is having NOF of rupees twenty‑five
lakhs and above but not accepting/ holding public deposit.
(iii) These directions shall not apply to an NBFC being an investment
company :
Provided
that it is
(a) holding
investments in the securities of its group/holding/ subsidiary companies and
the 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
(b) not
accepting/holding public deposit.
2[(iv) These directions except the provisions of paragraph
13A shall not apply to an NBFC being a Government Company m defined under
section 617 of the Companies Act, 1956 (1 of 1956).]
3[(4) These Directions shall apply to infrastructure loan
as defined in paragraph 2 (1) (vital hereinafter, of these Directions, as
provided in Paragraph 13C of these directions.]
2.
Definitions
(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 invested 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 he held for not more than one year from the date on which such investment is made;
1[(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
fits after tax as reduced by the preference dividend and adjusted for extraordinary
and non‑recurring items, for the immediately preceding three years and
further divided by the number of equity shams of the invested company and
capitalised at the following rate :
(a) in the case of predominantly manufacturing company, eight per cent;
(b) in the case of a predominantly trading company ten per cent; and
(c) in the case of any other company, including an NBFC, twelve percent.
Note : If an invested 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 m of debt;
2[(viia) ‘infrastructure loan’ means a credit facility extended
by NBFCs 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 mount 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 pa 'it domestic satellite
service (i.e. a satellite owned and operated by an Indian company for providing
telecommunication service), network of trucking, 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) any other infrastructure facility of
similar nature.]
(viii)
loss asset" means ‑
(a) 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
(b) as 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 pan of the borrower;
(ix) long term investment'
means an investment other than a current investment;
(x) "net
asset value" means the latest declared net asset value by the concerned
mutual fund in respect of that particular scheme;
1[(xi) "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 It balance charges and further reduced by the provisions made as
per paragraph 8(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;]
2[(xii) with effect from March 31, 2003,
"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 assets :
Provided that in the case of lease and hire purchase transactions, an
NBFC may classify each such account on the basis of its record of recovery.]
(xiii) ‘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;
(xiv) "past
due‑ means an amount of income or interest which remains unpaid for a
period of thirty days beyond the due date;
(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;
1[(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 yew of satisfactory performance under the
renegotiated or rescheduled terms:
Provided that the classification of infrastructure loan m a substandard
asset shall be in accordance with the provisions of paragraph 13 C of these
directions.]
(xvii) ‘subordinated
debt’ means of fully paid up capital instrument, which 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 the NBFC. The book value of such
instrument shall be subjected to discounting as provided hereunder
Remaining
Maturity Rate
of
of
the instruments discount
(a) Upto one year 100%
(b) More than one
year but upto two years 80%
(c) More than two
yews but upto three years 60%
(d) More than three
years but upto four years 40%
(c) More than four
years but upto five years
20%
to the extent such discounted value does not exceed fifty per cent of
Tier‑I capital;
(xviii) ‘substantial
interest’ means holding of a beneficial interest by an individual or his spouse
or minor child, whether singly or taken together in the shares of a company,
the amount paid up on which exceeds ten per cent of the paid up capital of the
company; or the capital subscribed by all the partners of a partnership firm;
(xix) ‘Tier‑I
Capital’ means owned fund as reduced by investment in shares of other NBFCs and
in shares, debentures, bonds, outstanding loans and advances including hire
purchase and lease finance made to and deposits with subsidiaries and companies
in the same group exceeding, in aggregate, ten per cent of the owned fund;
(xx) ‘Tier‑II capital’ includes the
following :
(a) preference
shares other than those which are compulsorily convertible into equity;
(b) revaluation reserves at
discounted rate of fifty‑five per cent;
(c) general
provisions and loss reserves to the extent these we not attributable to actual
diminution in value or identifiable potential loss in my specific asset and are
available to meet unexpected losses, to the extent of one and one‑fourth
per cent of risk weighted assets;
(d) hybrid debt capital
instruments; and
(e) 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 in 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. Income
recognition
(1) The income recognition
shall be based on recognised accounting principals.
1[(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 him purchase assets, whew instalments are overdue for more than 12
months, income shall be recognised only when him charges am 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 retrials 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).]
4. Income
from investments
(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 shams 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 NBFC'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 the
Central Government or a State Government may be taken into account on accrual
basis.
5.
Accounting Standards
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.
1 6. [Accounting for Investments
2[(1) (a) The Board of Directors of every NBFC 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 he no inter‑class
transfer on adhoc basis;
(ii) The
inter‑elms 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 he 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. it 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 inner‑class transfer, even in respect of the
scripts 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 shams,
(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 he 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 he 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, NBFcs may substitute fair
value for the break‑up value of the shares, if considered necessary.
Where the balance sheet of the invested company is not available for two years,
such shares shall be valued at one rupee only.
(4) Unquoted
preference shams 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.]
1[Need for Policy on
Demand/Call Loans
6A. (1)The Board of Directors of
every NBFC 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
(i) A cut off date within which the repayment of
demand or call loan shall be demanded or called up;
(ii)The sanctioning authority shall, record specific reasons in writing
at the time of sanctioning demand or calloan, 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;
(iii) The rate of interest which shall be payable on
such loans;
(iv) Interest on such loans, as stipulated shall he
payable either at monthly or quarterly rests;
(v) 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;
(vi)A cut off date, for review of performance of the loan, not exceeding
six months commencing from the date of sanction;
(vii)Such demand or call loans shall not be renewed unless the
periodical review has shown satisfactory compliance with the terms of
sanction.]
7. Asset Classification
1) Every NBFC
shall, after taking into account the degree of well defined credit weaknesses
and extent of dependence on collateral security formalisation, 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.
8. Provisioning Requirements
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 :
Loan, 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 NBFC 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 % of provision been considered as doubtful :
Upto 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.
1[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 any amounts of hire charges or lease
rentals are
overdue
upto 12 months Nil
SUB‑STANDARD ASSETS:
(b)
where any amounts of hire charges or lease
rentals are 10% of the
overdue
for more than 12 months but upto 24
months. Net book value
DOUBTFUL ASSETS:
(c)
where any amounts of hire charges or lease
rentals we 40% of the
overdue
for more than 24 months but upto 36 months. Net
book value
(d)
where any amounts of hire charges or lease
rentals are 70% of the
overdue
for more than 36 months but upto 48 months. Net
book value
LOSS ASSETS:
(c) where
any amounts of hire charges or lease rentals are 100% of the
overdue
for more than 48 months net
book value
(iii) On expiry of a
period of 12 months after the due date of the last instalment of him
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 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 of the lease agreement together with the value of any security
available in pursuance of 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 my, 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 a 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
renegotiations 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 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 8.1
1[(6) All financial leases
written on or after Apirl 1, 2001 attract the provisioning requirements as
applicable to hire purchase assets.]
9.
Disclosure in the Balance Sheet
(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 :
(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 NBFC.
(4) Such provisions for each year shall he 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.
2[Constitution of Audit
Committee by NBFCs
9A. An NBFC 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.
1 [Explanation 1. The Audit Committee constituted
by an NBFC as required under section 292A of the Companies Act, 1956 (1 of
1956) shall be the Audit Committee for the purpose 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
9B. Every NBK shall prepare its balance sheet and profit and loss account
as on March 31, every year with effect from its accounting year ending with
31st March, 2001 :
Provided that if the accounting year of any NBPC ends on any date other
than 31st March, 2001, such NBFC shall prepare its balance sheet and profit and
loss account for any fraction of the year ending on 31st March, 2001.]
3[Schedule to the balance sheet
9BB. Every NBFC shall append to its Balance Sheet prescribed under the
Companies Act, 1956, the particulars in the format as set out in the Schedule
annexed hereto.
SCHEDULE TO THE
BALANCE SHEETOF A NON‑BANKING FINANCIAL COMPANY
(As required in terms of Paragraph
9BB of Non‑Banking Financial Companies Prudential Norms (Reserve Bank)
Directions, 1998)
Rs. in lakhs
Particulars
Liabilities side :
(1) Loans
and advances availed by the NBFCs Amount Amount
inclusive of interest accrued
thereon Outstanding overdue
sbut not paid:
(a)
Debentures : Secured
Unsecured
(Other than falling within the
meaning of public deposits)
(b) Deferred Credits
(c) Term Loans
(d) Inter‑corporate loans and
borrowing
(e) Commercial Paper
(f) Public Deposits
(g) Other Loans (specify nature)
(2) Break‑up
of (I)(f) above (Outstanding
public
deposits inclusive of interest
accrued
thereon but not paid):
(a) In the form of unsecured
debentures
(b) In the form of partly secured debentures
i.e. debentures
where
there is a shortfall in the value of
security
(c)
Other public deposits
Assets side :
Amount Outstanding
(3) Break‑up
of Loans and Advances including
bills
receivables [other than those included
in (4)
below]:
(a) Secured
(b) Unsecured
(4) Break‑up
of Leased Assets and stock on
hire
and hypothecation loans counting
towards
EL/HP activities
(i) Lease assets including lease rentals
under sundry debtors:
(a) Financial lease
(b) Operating lease
(ii) Stock on hire including hire charges
under sundry debtors:
(a) Assets on hire
(b) Repossessed Assets
(iii)
Hypothecation loans counting towards EL/HP
activities
(a) Loans where assets have been repossessed
(b) Loans other than (a) above
(5) Break‑up
of Investments:
Current
Investments
1 , Quoted :
(i) Shares : (a) Equity
(b)Preference
(ii) Debentures and Bonds
(iii) Units of mutual funds
(iv) Government Securities
(v) Others (please specify)
2. Unquoted :
(i) Shares: (a) Equity
(b) Preference
(ii) Debentures and Bonds
(iii) Units of mutual funds
(iv) Government Securities
(v) Others
(Please specify)
Long-Term
investments
1 . Quoted :
(i) Share: (a) Equity
(b)Preference
(ii) Debentures and Bonds
(iii) Units of mutual funds
(iv) Government Securities
(v) Others (Please specify)
2. Unquoted:
(i) Shares: (a) Equity
(b) Preference
(ii)
Debentures and Bonds
(iii) Units of mutual
funds
(iv) Government Securities
(v) Others (Please
specify)
(6) Borrower
group‑wise classification of
all
leased assets, stock‑on‑hire and
loans
and advances :
Category Amount net of provisions
Secured Unsecured
Total
1 . Related Parties3
(a) Subsidiaries
(h) Companies in the same group
(c) Other related parties
2. Other than related parties
Total
(7) Investor
group‑wise classification
of
all investments (current and long
term)
in shares and securities (both
quoted
and unquoted):
Category Market
Value/ Book Value
Break-up or (Net of
Fair
value or NAV Provisions)
1 . Related Parties 3
(a) Subsidiaries As per Accounting Standard of ICAI (Please see Note 3)
(b) Companies in the same group
(c) other related parties
2. Other than related parties
Total
(8) Other
information
Particulars Amount
(i) Gross Non‑Performing Assets
(a) Related parties
(b) Other than related parties
(ii) Net Non‑Performing Assets
(a) Related parties
(b) Other than related‑parties
(iii) Assets acquired in satisfaction of debt
Notes:
1. As defined in Paragraph 2(I)(xii) of the Non‑Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.
2. Provisioning norms shall
be applicable as prescribed in the Non‑Banking Financial Companies
Prudential Norms (Reserve Bank) Directions, 1998.
3. All Accounting Standards
and Guidance Notes issued by ICAI are applicable including for valuation of
investments and other assets as also assets acquired in satisfaction of debt.
However, market value in respect of quoted investments and break‑up/fair
value/NAV in respect of unquoted investments should be disclosed irrespective
of whether they are classified as long term or current in column (5) above.]
1[Transactions in Government Securities
9C. (1) Every NBFC :
(i) shall hold its investments in approved securities in a Constituent's
Subsidiary General Ledger (CGSL) account opened with a scheduled commercial
bank or the Stock Holding Corporation of India Ltd. or in a dematerialised
account opened with a depository through a depository participant registered
with the Securities and Exchange Board of India; and
(ii) shall transact in these securities only through the CSGL accounts
or its dematerialised account.
(2) No NBFC shall undertake
transactions in these securities in physical form with any broker.]
10.
Requirement as to capital adequacy
(1) Every
NBFC shall, maintain a minimum capital ratio consisting of Tier I and Tier II capital
which shall not he less than
(i)
ten per cent on or before March 31, 1998; and
(ii) twelve per cent on or before March 31, 1999, 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:
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 here under :
WEIGHTED RISK ASSETS‑ PERCENTAGE
ON BALANCE SHEET
ITEMS WEIGHT
(i)
Cash and bank balances including fixed deposits
s
and certificates of deposits with banks.
0
1[(ii) Investments
(a) Approved securities 0
(b) Bonds of public sector banks and fixed deposits/certificates of
deposits/bonds of public financial institutions 20
(c) Units of Unit Trust of India 20
(d) Shams of all companies and debentures/ bonds/commercial
papers of companies other than in (b) above/units of mutual
funds other than in (c) above. 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 100
(d) Loans to staff 0
(e) Other secured loans and advances considered good 0
(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'.
Off‑balances
sheet items
(2) In these directions, degrees of credit risk exposure attached to off‑balance
sheet items have been expressed as percentage of credit conversion factor.
Hence, the face value of each item requires to be first multiplied by the
relevant conversion factor to arrive at risk adjusted value of off‑balance
sheet item. The aggregate shall be taken into account for reckoning the minimum
capital ratio. This shall have to be again multiplied by the risk weight of
100. The risk adjusted value of the off‑balance sheet items shall be
calculated as per the credit conversion factors of non‑funded items as
detailed hereunder :
Nature of item Credit
conversion factor‑Percentage
(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) Other contingent
liabilities (To be specified) 50
Note : Cash margins/deposits shall be deducted before applying the
conversion factor.
11. Loans
against NBFCs own shares prohibited
(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.
1[NBFC failing to repay public deposit prohibited from making loans and
investments
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.]
1[Restrictions on Investments in Land and Building and unquoted shares
11 B.
(i) No
equipment leasing company or hire purchase finance company, which is accepting public deposit, shall,
invest in
(a) land
or building, except for its own use, an amount exceeding ten per cent of its
owned fund;
(b) 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 per cent of its owned fund.
(ii) No
loan company or investment company, which is accepting public deposit, shall,
invest in
(a) land
or building, except for its own use, an amount exceeding ten per cent of its
owned fund;
(b) 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 per cent 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 here in above 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.]
2[Explanation : While
calculating the ceiling on investment in unquoted shares, investments in such
shares of all companies shall be aggregated.]
3[Provided further that the
above ceiling on the investment in unquoted shares shall not be applicable to
an equipment leasing company or a hire purchase finance company or a loan
company or an investment 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.]
12.
Concentration of credit/investment
(1) No NBFC 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;
(b) the
shares of a single group of companies exceeding twenty‑five per cent of
its owned funds;
(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;
1[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 paragraphs 6(1)(a) and
6(1)(b) of the Residuary Non‑Banking Companies (Reserve Bank) Directions,
1987.]
2[Provided further that the
above ceiling on the investment in shares of another company shall not be
applicable to an NBFC 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.]
(2) Any loan granted and investment made by the NBFC in excess of the ceilings
specified here in above 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.
Notes: (1) For determining the above mentioned
limits, off‑balance sheet exposures be converted into credit risk by
applying the conversion factors explained herein above.
(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/invested companies.
13.
Submission of half‑yearly return
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 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 the 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.
1[Information in regard to change of address, directors, auditors, etc.
to be submitted by NBFCs not accepting/holding public deposits
13A. Every NBFC not accepting/holding public deposits shall, not later than
one month from the occurrence of any change in the following matters, intimate:
(a) the complete postal address, telephone number/s and fax number/s of
the registered/corporate office;
(b) the names and residential addresses of the directors of the company;
(c) the names and the official designations of its principal officers;
and
(d) the names and office address of the auditors of the company; and
furnish 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 Finance Companies Acceptance of Public Deposits (Reserve
Bank) Directions, 1998.
Exposure
to Capital Market
13B. Every NBFC holding public deposits of Rs. 50 crore and above and RNBC
having aggregate liabilities to the depositors of Rs. 50 crore and above as on
March 31, 2002 or thereafter, shall submit a quarterly return within one month
of the expiry of the relative quarter commencing from the quarter ending
December 31, 2002 in the format NBS‑6 annexed hereto the Regional Office
of the Department of Non‑Banking Supervision of the Reserve Banks of
India as indicated in the Second Schedule to the Non‑Banking Financial
Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and
Schedule B to the Residuary Non‑Banking Companies (Reserve Bank)
Directions, 1987]
2[Norms relating to Infrastructure loan:
13C.
(1) Applicability:
(i) These
norms shall be applicable to restructuring and/or rescheduling and/or
renegotiations of the terms of agreement relating to infrastructure loan, as
defined in paragraph 2(1)(viia) of these directions which is fully or partly
secured standard and substandard asset and to the loan, which is subjected to
restructuring and/or rescheduling and/or renegotiations of terms with effect
from the financial year 2003‑2004.
(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 renegotiations of the loans, apart from the provision required on
present value basis and as per prudential norms.
(2) Restructuring,
reschedulement or renegotiations terms of infrastructure loan ‑ The NBFCs
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 to 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 or 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 there against.
(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 there against.
(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 NB17Cs against non‑performing
infrastructure loan, which may be classified as 'standard' after the coming
into effect of these norms, shall continue to be held and shall not be reversed
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
NBFCs may exceed the concentration of credit/ investment norms, as provided in
paragraph 12 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.
(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. Exemptions
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
tile provisions of these directions either generally or for any specified
period, subject to such conditions as the Reserve Bank of India may impose.
15. Interpretations
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.
Bank Finance to Equipment Leasing (EL) Companies
Leasing as a means of financing is gaining due popularity resulting in
mushroom growth of a large number of leasing companies. There had not been any
firm guidelines in respect of granting credit limits by the banks to such
companies. No norms had also been specified and banks were following their own
practice in this regard without any uniformity at the industry level. Reserve
Bank of India, therefore, issued comprehensive guidelines in April, 1988.
Further from time to time, RBI issued a number of guidelines, instructions,
directives to banks which have since been consolidated in Master Circular IECD.
No. 2/08.12.01/2002‑03 dated 1.7.2002. The requirements of banks finance
to leasing companies are discussed hereunder:
Maximum
Limit for Bank Lending
The ceiling on bank credit linked to Net Owned Fund of leasing companies
has since been withdrawn and accordingly banks now have greater operational
freedom in the matter of credit dispensation to such companies. However, banks
shall extend credit facilities to those equipment leasing companies only which
are registered with the Reserve Bank of India as NBFCs and are engaged in
principal business of equipment leasing.
The 'Cash Credit' form shall be used for extending bank finance.
Assessment
of working capital
(i) Banks may assess and provide need‑based finance to registered
equipment leasing companies, within the prudential guidelines and exposure
norms prescribed by the Reserve Bank subject to the condition that the
activities indicated under the heading 'Activities not eligible for bank
credit' are not financed by them. Banks are required to lay down transparent
policy and guidelines for credit dispensation in respect of such companies with
the approval of their Boards.
(ii) Banks should also ensure that lending to NBFCs (including bill
discounting/rediscounting) is part of the over‑all working capital credit
limit sanctioned to such companies after proper appraisal of their genuine
working capital needs.
(iii) In the light of the above, the instructions/guidelines issued in
the past by RBI regarding assessment of working capital credit needs of
equipment leasing and hire‑purchase finance companies, based on the
concept of Maximum Permissible Bank Finance (MPBF), have ceased to be
mandatory.
However, keeping in view the importance given to MPBF in the banking
sector and also because of some special features noted in leasing concerns,
computation of working capital and 'Maximum Permissible Bank Finance' is done
in a different way although basic methodology of granting advances remains the
same. The concept of MPBF has been explained later in the chapter.
Computation of
Maximum Permissible Bank Finance (MPBF)/Drawing Power (DP)
Receivables of leasing concerns mainly consist of lease rentals which
are incorporated in the lease agreement and are in the nature of outstanding
credit. These items are not reflected in the balance sheet as the leased assets
are generally shown as fixed assets. Though the basic methodology of arriving
at
MPBF remains the same as in case of other borrowers however, due to this
unique feature in leasing concerns, MPBF is arrived at on the basis of lease
rentals due during the period of next five years. This exercise involves
calculation of outstanding credit generally for a period of 5 years and then
calculating the drawing power against that particular transaction. The formula
for calculating outstanding credit against any lease transaction is as under:
Outstanding Credit
for a
Period of 5 years = Lease rental due
during next 5 years x Cost of
leased asset
for the lease
transaction Total rentals due
The banks will take
into consideration rentals due for the next five years* and if the lease is for
a longer period, that will be financed by the leasing concerns themselves,
Furthermore, lease rentals fallen due but not collected will also be excluded
while computing 'outstanding credit'. Illustration as given below will clarify
the position.
Let us presume that
Cost of Assets Rs.
10,00000
Period of lease 8
years
Lease rental per
annum Rs 2,40,000
Total rental due
under the transaction i.e. in 8 years Rs.
19200000
Lease rental due
during next 5 years Rs
12,00,000
Lease rental fallen
due but not collected Nil
(presuming it to be fresh lease)
The outstanding
credit for next 5 years = 12,00,000 x
1000000
19,20,000
= Rs. 6,25,000/
Thus Rs. 6,25,000/‑
represents outstanding credit for a period of 5 years for the above lease
transaction.
The drawing power is
to he ascertained by applying the margin of 25% stipulated for leasing
concerns. Thus drawing power in the above illustration will come to 75% of the
outstanding credit i.e. Rs 4,68,750.
The overall drawing
power can also be straight away worked out on the basis of the following
formula :
D.P. = Lease
rentals receivable for the next 5 years
x 75 % of cost of Assets
Total
rental receivables for the entire period
= 12,00,000 x 7,50,000
19,20,000
= Rs. 4,68,750/
As already stated if the lease is for period longer than 5 years, the
margin on bank finance will be more as the banks would take into consideration
only those lease rentals which are due for next 5 years. In the illustration if
we presume that the lease is only for a period of 5 years, the drawing power
will be computed as under:
D.P. = 19,20,000 x 7,50,000
19,20,000
= Rs. 7.50 lacs
In such cases 75% of the cost of leased asset becomes the drawing power.
The illustration is on the basis of an individual lease transaction
whereas in actual practice the MPBF/DP will be calculated on the basis of
aggregates of all transactions keeping in view the formula stated above.
Activities
Not Eligible for Bank Credit
The following activities undertaken by equipment leasing/hire purchase
companies are not eligible for bank credit :
(i) Bill
discounted/rediscounted by NBFCs, except for rediscounting of bills discounted
by NBFCs arising from sale of
(a) commercial vehicles
(including light commercial vehicles), and
(b) two wheeler and three
wheeler vehicles, subject to the following
conditions
:
·
the bills should have been drawn by the
manufacturer on dealers only;
·
the bills should represent genuine sale
transactions as may be ascertained from the chassis/engine number; and
·
before rediscounting the bills, banks should
satisfy themselves about the bona fides and track record of NBFCs which have
discounted the bills.
(ii) Investments made by
NBFCs in shares, debentures, etc. of a current nature, i.e., stock‑in‑trade.
However, Stock Broking Companies may be provided need‑based credit
against shares and debentures held by them as stock‑in‑trade.
(iii) Investments of NBFCs in
and advances to subsidiaries, group companies or other entities.
(iv) Investments of NBFCs in
other companies and inter‑corporate loans/ deposits to/in other
companies.
1 [The position has been
reviewed and banks are advised that SM which comply with the following conditions
would not be treated as investment companies and therefore would not be
considered as NBFCs:
(a) They
function as holding companies, special purpose vehicles, etc. with not less
than 90 per cent of their total assets as investment in securities held for the
purpose of holding ownership stake;
(b) They do not trade in
these securities except for block sale; and
(c) They do not undertake
any other financial activities.
SPVs which satisfy the above conditions would be eligible for bank
finance for PSU disinvestments of Government of India.]
(v) Finance
to NBFCs for further lending to individuals for subscribing to Initial Public
Offerings (IPOs).
1[(vi) Banks are precluded from granting term loans for acquisition of existing
assets (except imported second hand machinery). Bank finance to leasing
concerns should cover purchases of only new equipment. Banks should not extend
finance against existing assets whether by way of term loans for purchase of
such assets or by way of finance to leasing companies for purchase and release
of such assets.]
Leased and
Sub‑leased Assets
(i) Banks
should not enter into lease agreements departmentally with equipment’s leasing
companies as well as other Non‑Banking Financial Companies engaged in
equipment leasing.
(ii) As
banks can only support lease rental receivables arising out of lease of
equipment/machinery owned by the borrowers, lease rentals receivables arising
out of sub‑lease of an asset by a Non‑Banking Financial Company
(undertaking nominal leasing activity) or by a Non‑Banking Financial
Company should be excluded for the purpose of computation of bank finance for
such company.
No Bridge Loan/Interim Finance to Equipment Leasing & Hire Purchase Companies
Banks have been precluded from granting of bridge loans of any nature,
or interim finance against capital/debenture issues and/or in the form of loans
of a bridging nature pending raising of long‑term funds from the market
by way of capital, deposits, etc. to equipment leasing and hire‑purchase
finance companies.
Equipment leasing and hire purchase companies will, therefore, not be
able to raise bridge loan/interim advance against public issue and/or market
borrowings.
Sanction of Credit Under Different Nomenclature
Banks have been‑ strictly advised by RBI not to sanction credit
under a different nomenclature like unsecured negotiable notes, floating rate
interest bonds, etc., as also short‑term loans, the repayment of which is
proposed/ expected to be made out of funds to be or likely to be mobilised from
external/ other sources and not out of the surplus generated by the use of the
asset(s).
CMA Data Base Forms
Different forms have been prescribed for leasing and hire purchase
concerns for assessment of working capital by the banks due to the special
features of these concerns. Other important points which are generally adhered
to by banks are as under :
(1) All
leasing concerns should conform to 1Ind method of lending ensuring maintenance
of a minimum current ratio of 1.33:1. Furthermore, current ratio of 1.33 is to
be maintained not only on the basis of estimates/projections but also on the
basis of actuals as per the latest audited balance sheet. The provision of
current ratio is thus stricter than applicable to other borrowers.
(2) The
statement as prescribed under 'Quarterly Information System' are not relevant
and leasing concerns are to, submit the following statements in lieu thereof :
(a) Monthly statement of
leased assets and rentals receivable with following details.
1.
S. No.
2.
Lessee.
3. Description of equipment.
4. Date of lease agreement.
5. Value of equipment (original)
6. Depreciated value.
7.Lease rentals due to be bifurcated as
(i) Overdue
(ii)
Due within next 60 months.
(iii) Due beyond next 60 months,
(iv) Total.
(b) Quarterly
statement of summarised position of current assets and liabilities indicating
the estimates at the beginning of each quarter and actuals of the quarter that
ended on the pattern of CMA Data Base Form IV.
(c) Half
yearly operating and funds flow statements containing data relevant to leasing
business on the lines of CMA Data Base Form II &V.
The statement at (a) is to be submitted by all leasing concerns availing
bank finance whereas statements at (b) & (c) are‑to‑be
submitted only by those leasing concerns with limits of Rs. 50.00 lacs and
above.
(3) A
certificate from statutory auditors/chartered accountant will be required to be
submitted in respect of figures of 'outstanding credit under lease agreement'
for calculation of MPBF.
(4) Secondary
and tertiary lease agreements in respect of same equipment will not be financed
by the banks. Bank finance is available only to 'fully pay out' leases of new
equipments.
(5) The
receipts of lease rentals are required to be routed through the bank accounts.
No diversion of funds to other lines of activities such as manufacturing,
investment etc. will be permitted.
(6) Multiple
banking/consortium arrangements are permitted if the borrowing leasing concerns
deal with more than one bank as per general guidelines in this regard.
Guidelines as relating to Hire Purchase Concerns are almost similar as
applicable for leasing concerns including registration with RBI as NBFC. However,
there is a slight difference in the manner of computing, 'Maximum Permissible
Bank Finance (MPBF)1 and consequent drawing
power.
MPBF in case of Hire Purchase Companies is to be assessed on the basis
of projections of current assets and current liabilities as done in the case of
other categories of borrowers. It is the general practice of hire purchase
concerns to show the stock‑on‑hire under hire purchase agreements
(at agreement values less amounts received) at full value in the balance sheet
under current assets and 'unmatured finance charges' under current liabilities.
However, for the purpose of calculation of MPBF net figure of stock‑on‑hire
i.e. stock‑on‑hire at full value less unmatured finance charges,
should be included under assets to arrive at a realistic picture. The margin
applicable is 25% on the total current assets to conform to 2nd method of
lending.
The facility is to he allowed as cash credit limit and drawing power is
to be regulated on the basis of outstanding future instalments less the
relative unmatured finance charges. The borrowing hire purchase concern will be
required to submit a statement of 'stock‑on‑hire, (net of unmatured
finance charges) hypothecated to the bank as at the end of every month on which
drawing power will be made available by the bank for the following month.
The hire purchase
concerns will also be required to submit quarterly statement showing the
progress in collection of instalments with the following particulars
1. Overdues at the end of previous quarter.
2. Demand for the current quarter.
3. Total
4. Collection against arrears and current demand during the quarter.
5. Overdue at the end of quarter.
6. Period‑wise classification of overdues as under:
(a) Within 30 days
(b) 31 to 60 days
(c) 61 to 90 days
(d) 91 days & over.
All other terms and conditions as applicable to leasing concerns will be
applicable for hire purchase concerns as well with suitable modifications
wherever necessary.
It may also be noted that most of the leasing concerns are also doing
hire purchase business. Separate limits are required to be set up by the banks
for such units for each activity as the method of computation of MPBF is
different for both the activities. Same forms have, however, been prescribed
for type of activities.
CMA Data Base Forms I and V as applicable for leasing and hire purchase
companies are given as Appendices 18.I to 18.V
Exposure Norms of Banks to Leasing and Hire Purchase Activities
Banks should maintain a balanced portfolio of equipment leasing and hire
purchase vis‑a‑vis the aggregate credit. Their exposure to each of
these activities should not exceed 10 per cent of total advances.
Form‑1 Particulars of the Existing Limits from the Banking System/Financial Institutions
Limits from all Banks
and Financial Institutions as on a date near to the date of the Application
(Amounts
‑ Rs. in lakhs with two decimals)
Name of Bank Nature of Existing Extent
to which limits were Balancing
Financial
Institutions facility limits utilised during the last 12 Outstanding
Months as
on
Maximum Minimum
(Date:……….)
(1) (2) (3) (4) (5) (6)
A. Working Capital limits
(Division‑wise)
1.
2.
3.
4.
5.
B. Medium term and
long term buns (excluding working capital term loans) and deferred payments
credits (Division‑wise)
1
2
3.
NOTES:
(i) Information
to be given separately in respect of each of the credit limits under short‑term
loan/s (for working capital), cash credits/overdrafts, working capital term
loan/s (i.e. the quantum of the excess finance over the stipulated level
identified and segregated for recovery at stipulated instalments), bills
purchased and discounted, medium‑term and long‑term loans, deferred
payment credits etc.
(ii) If
different credit limits are sanctioned for the different units/divisions of the
borrower, the aforesaid data should be given unit/division‑wise,
furnishing also the unit/division‑wise sub‑totals.
(iii) In
this form, details of credit limits available to the borrower from die entire
banking system, including ad hoc limits/casual borrowings and also those from
the term lending institutions should he given.
(vi) Maximum
and minimum utilisation of the limits during the past 12 months and the
outstanding balance as on a recent date should only he given (month‑wise
figures need not he given).
(v) In die
case of term loans, only the original amount of each low and the present
balance outstanding should be indicated in columns 3 and 6 respectively.
(vi) If there are large‑unutilised
limits, the reasons therefor should he given.