The Reserve Bank of India, having considered it necessary in the public interest, and being satisfied that, for the purpose of enabling the Bank to regulate the credit system to the advantage of the country, it is necessary to issue the directions relating to the prudential norms as set out below hereby, in exercise of the powers conferred by section 45JA of the Reserve Bank of India Act, 1934 (2 of 1934) and of all the powers enabling it in this behalf, and in supersession of the earlier directions contained in Notification No. DFC. 115/DG(SPT)/98 dated January 2, 1998 gives to every non-banking financial company the directions hereinafter specified.

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 as "NBFC"), 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 which is having net owned fund (referred to in these directions as "NOF") of rupees twenty-five lakh 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.

(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 lakh 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 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.

[(iv) These directions except the provisions of Paragraph 13A shall not apply to an NBFC being a Government company as defined under section 617 of the Companies Act, 1956 (1 of 1956).].

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;

1. a term loan, or
2. a lease asset, or
3. a hire purchase asset, or
4. any other asset, which remains a sub-standard asset for a period exceeding 18 months;]
5. "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 an NBFC, 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;

(hc) construction of educational institutions and hospitals] 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) 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;

(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;

(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 finance 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.

(xii) [with effect from March 31, 2003, ‘non-performing asset’ (referred to in these directions as "NPA") means:

1. an asset, in respect of which, interest has remained overdue for a period of six months or more;
2. 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;
3. 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;
4. a bill which remains overdue for a period of six months or more;
5. 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;
6. 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;
7. the lease rental and hire purchase instalment, which has become overdue for a period of twelve months or more;

1. 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, an NBFC may classify each such account on the basis of its record of recovery;]

["non-performing asset" (referred to in these directions as "NPA") means :-

(a) an asset, in respect of which, interest has remained past due for six months;

(b) a term loan inclusive of unpaid interest, when the instalment is overdue for more than six months or on which interest amount remained past due for six months;

[(ba) a demand or call loan, which remained overdue for six months from the date of demand or call or on which interest amount remained past due for a period of six months;]

(c) a bill which remains overdue for six months;

(d) the interest in respect of a debt or the income on receivables under the head `other current assets’ in the nature of short term loans/advances, which facility remained over due for a period of six months;

(e) 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;

(f) the lease rental and hire purchase instalment, which has become overdue for a period of more than twelve months;

(g) 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, 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;

(xvi) ["sub-standard asset" means –

(xvii) "subordinated debt" means a 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 of the instruments Rate of discount

(a) Upto one year 100%

(b) More than one year but upto two years 80%

(c) More than two years but upto three years 60%

(d) More than three years but upto four years 40%

(e) 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 percent;

(c) general provisions and loss reserves to the extent these are not attributable to actual diminution in value or identifiable potential loss in any specific asset and are available to meet unexpected losses, to the extent of one and one fourth percent of risk weighted assets;

(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 under that Act or those Directions. Any other words or expressions not defined in that Act or those Directions, shall have the same meaning assigned to them in the Companies Act, 1956 (1 of 1956).

3. (1) The income recognition shall be based on recognised accounting principles.

(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. (Effective from May 12, 1998)

(3) In respect of hire purchase assets, where instalments are overdue for more than 12 months, income shall be recognised only when hire charges are 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.

For the purpose of this paragraph, `net lease rentals’ mean gross lease rentals 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(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 shares 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 Central Government or a State Government may be taken into account on accrual basis.

5. 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.

6. [(1)(a) The Board of Directors of every NBFC shall frame investment policy for the company and implement the same;

(2) Quoted current investments shall, for the purposes of valuation, be grouped into the following categories, viz.,

(a) equity shares,
(b) preference shares,
(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 be 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 be 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 investee company is not available for two years, such shares shall be valued at one Rupee only.

(4) Unquoted preference shares 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.

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.

7(1) Every NBFC shall, after taking into account the degree of well defined credit weaknesses and extent of dependence on collateral security for realisation, classify its lease/hire purchase assets, loans and advances and any other forms of credit into the following classes namely, -

(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. Every NBFC shall, after taking into account the time lag between an account becoming non-performing, its recognition as such, the realisation of the security and the erosion over time in the value of security charged, make provision against sub-standard assets, doubtful assets and loss assets as provided hereunder :-

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

(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 outstandings 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 outstandings) shall be made on the following basis : -

Period for which the asset has been considered as doubtful % of provision

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 outstandings shall be made.

[ (2) The provisioning requirements in respect of hire purchase and leased assets shall be as under:-

(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.

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.

(ii) In respect of hire purchase and leased assets, additional provision shall be made as under :

1. 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 10 percent of the lease rentals are overdue for more than net book value 12 months but upto 24 months

Doubtful assets :

(c) where any amounts of hire charges or lease 40 percent of the rentals are overdue for more than 24 months net book value but upto 36 months

(d) where any amounts of hire charges or lease 70 percent of the rentals are overdue for more than 36 months net book value but upto 48 months

Loss assets :

(e) where any amounts of hire charges or lease 100 percent of the rentals are 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 hire 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 to the lease agreement together with the value of any other security available in pursuance to the lease agreement may be deducted only against the provisions stipulated under clause (ii) above.

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 any, in the lease adjustment account. The fact that income on an NPA has not been recognised cannot be taken as reason for not making provision.
4. An asset which has been renegotiated or rescheduled as referred to in paragraph (2) (xvi) (b) of these directions shall be a sub-standard asset or continue to remain in the same category in which it was prior to its renegotiation or reschedulement as a doubtful asset or a loss asset as the case may be. Necessary provision is required to be made as applicable to such asset till it is upgraded.
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. ]
6. [All financial leases written on or after April 1, 2001 attract the provisioning requirements as applicable to hire purchase assets.]

9. (1) Every NBFC shall separately disclose in its balance sheet the provisions made as per paragraph 8 above without netting them from the income or against the value of assets.

(2) The provisions shall be distinctly indicated under separate heads of accounts as under :-

(3) Such provisions shall not be appropriated from the general provisions and loss reserves held, if any, by the NBFC.

(4) Such provisions for each year shall be debited to the profit and loss account. The excess of provisions, if any, held under the heads general provisions and loss reserves may be written back without making adjustment against them.

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.]¹³

10. (1) Every NBFC shall maintain a minimum capital ratio consisting of Tier I and Tier II capital which shall not be 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.

(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 hereunder :

(i) Cash and bank balances including fixed deposits and certificates of deposits with banks 0

(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) Shares 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 0 by the company itself
(d) Loans to staff 0
(e) Other secured loans and advances considered good 100
(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

(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’.

(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 : -

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 50

(To be specified)

Note: Cash margins/deposits shall be deducted before applying the conversion factor.

11. (1) No NBFC shall lend against its own shares.

(2) Any outstanding loan granted by an NBFC against its own shares on the date of commencement of these directions shall be recovered by the NBFC as per the repayment schedule.

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

(Effective from May 12, 1998)

Restrictions on investments in land and building and Unquoted shares

(Effective from December 18, 1998)⁷

12. (1) No NBFC shall,

(i) lend to

(ii) invest in

(iii) lend and invest (loans/investments taken together) exceeding

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

(2) Any loan granted and investment made by the NBFC in excess of the ceilings specified hereinabove and existing on the date of commencement of these directions, shall be brought down by the NBFC as per the repayment schedule in due course.

(1) For determining the abovementioned limits, off-balance sheet exposures be converted into credit risk by applying the conversion factors explained hereinabove.

(2) The investments in debentures for the above purpose be treated as credit and not investment.

(3) The above ceilings on credit/investments shall be applicable to the own group of the NBFC as well as to the other group of borrowers/investee companies.

13. NBFCs including RNBCs referred to in para 1(3)(i)(a) and (b) shall submit a half-yearly return within three months of the expiry of the relative half-year as on September and March every year, commencing from the half year ending March 31, 1998, in the format (NBS-2) annexed hereto to the Regional Office of the Department of Non-Banking Supervision of the Reserve Bank of India under whose jurisdiction the registered office of the company is located as per Second Schedule to the Non-Banking Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998 and Schedule B to Residuary Non-Banking Companies (Reserve Bank) Directions, 1987.

[Information in regard to change of address, directors, auditors, etc. to be submitted by NBFCs not accepting/holding public deposit

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 :

1. the complete postal address, telephone number/s and fax number/s of the registered/corporate office;
2. the names and residential addresses of the directors of the company;
3. the names and the official designations of its principal officers; and
4. 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 Financial Companies Acceptance of Public Deposits (Reserve Bank) Directions, 1998.

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

[13C. Norms relating to Infrastructure loan:

1. Applicability:

(i) These norms shall be applicable to restructuring and/or rescheduling and/or renegotiation 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 sub-standard asset and to the loan, which is subjected to restructuring and/or rescheduling and/or renegotiation 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 renegotiation of the loans, apart from the provision required on present value basis and as per prudential norms.

2. Restructuring, reschedulement or renegotiation

of 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 of 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 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 thereagainst.

(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 thereagainst.

(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 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 NBFCs 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. The Reserve Bank of India may, if it considers it necessary for avoiding any hardship or for any other just and sufficient reason, grant extension of time to comply with or exempt any NBFC or class of NBFCs, from all or any of the provisions of these directions either generally or for any specified period, subject to such conditions as the Reserve Bank of India may impose.

15. For the purpose of giving effect to the provisions of these directions, the Reserve Bank of India may if it considers necessary, issue necessary clarifications in respect of any matter covered herein and the interpretation of any provision of these directions given by the Reserve Bank of India shall be final and binding on all the parties concerned.

Sd/-

(S.P. Talwar)

Deputy Governor

(as required in terms of Paragraph 9BB of

(Rs. in lakhs)

** As per Accounting Standard of ICAI (Please see Note 3)