The Reserve Bank had prescribed prudentialnorms for Non-Banking Financial Companies (NBFCs) in January 1998.In response to advice received from the Institute of Chartered Accountants of India(ICAI) and in consultation with them, it has been decided introduce certain modifications in the norms for accounting for investments and provisioning against Non-Performing Assets (NPAs). The modifications are designed to bring the prudential norms on the above two aspects in alignment with the accounting standard issued by the ICAI.The modifications are effective from January 31,1998.

As advised by the ICAI, the earlier bifurcation of longterm investments into quoted and unquoted investments has been done away with.Under the modified norms, the unquoted equity shares in the nature of current investments only are required to be valued at costor breakup value which ever is lower.The companies also have the option to value these shares at their fair value.However,all longterm investments including unquoted investments shall be valued as per the accounting standard issued by ICAI.

The earlier norms did not take into account the value of underlying as set for the purpose of provisions against hire purchase and lease assets.Accordingly, the entire amount of overdue instalments net of the finance charges/income not taken to the credit of profit and loss account was to be fully provided for.Due credit has now been given under the revised norms to the value of underlying as set while making provisions against NPAs in the category of above as sets.

Investments by NBFCs in the bonds of all PublicSectorBanks(PSBs) and fixed deposits/ certificates of deposit/bonds issued by Public Financial Institutions(PFIs) as also investment in the units of Unit Trust of India shall attract 20 percent risk weight as against 100 percent at present.

The NBFCs have been asked to reverse,with immediate effect, the income including interest/ discount or any other charges on NPAs recognised and taken to the profit and loss account but remaining unrealised before the asset became NPA.

With a view to further protecting the interests of the depositors, the NBFCs have been directed, with immediate effect, not to grant any loan or other credit facility or make investment or create any other as set as long as the default in repayment of public deposits in accordance with the provisions of Section 45QA(1) of the RBI Actexists