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FAQs on Non-Banking Financial Companies

Classification of NBFCs into sub-groups

24. The criterion for classification into equipment leasing/hire purchase finance has been modified and increased to 60 per cent of its assets and income. Will it not cause difficulties to the companies ? +

The NBFCs have been allowed sufficient time to achieve the ratio of 60 per cent of its net assets and derive its net income from these activities taken together. Therefore NBFCs are not expected to face much difficulty in achieving these norms.

Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999

Some Useful Definitions

Q24. What is “Other Capital” under Direct Investment? +

Ans: The other capital component (receivables and payables, except equity and participating preference shares investment) of direct investment covers the outstanding liabilities or claims arising due to borrowing and lending of funds, investment in debt securities, trade credits, financial leasing, share application money etc., between direct investors and DIEs and between two DIEs that share the same direct Investor. Non-participating preference shares owned by the direct investor are treated as debt securities & should be included in ‘other capital’.

External Commercial Borrowings (ECB) and Trade Credits

G. END-USES

24. Can ECB be availed of for making equity investment domestically or buying goodwill? +

No. Equity investment either directly or indirectly (through purchase of goodwill) is not permitted.

Government Securities Market in India – A Primer

24. How is the yield of a bond calculated? +

24.1 An investor who purchases a bond can expect to receive a return from one or more of the following sources:

The coupon interest payments made by the issuer;
Any capital gain (or capital loss) when the bond is sold/matured; and
Income from reinvestment of the interest payments that is interest-on-interest.

The three yield measures commonly used by investors to measure the potential return from investing in a bond are briefly described below:

i) Coupon Yield

24.2 The coupon yield is simply the coupon payment as a percentage of the face value. Coupon yield refers to nominal interest payable on a fixed income security like G-Sec. This is the fixed return the Government (i.e., the issuer) commits to pay to the investor. Coupon yield thus does not reflect the impact of interest rate movement and inflation on the nominal interest that the Government pays.

Coupon yield = Coupon Payment / Face Value

Illustration:

Coupon: 8.24
Face Value: ₹100
Market Value: ₹103.00
Coupon yield = 8.24/100 = 8.24%

ii) Current Yield

24.3 The current yield is simply the coupon payment as a percentage of the bond’s purchase price; in other words, it is the return a holder of the bond gets against its purchase price which may be more or less than the face value or the par value. The current yield does not take into account the reinvestment of the interest income received periodically.

Current yield = (Annual coupon rate / Purchase price) X100

Illustration:

The current yield for a 10 year 8.24% coupon bond selling for ₹103.00 per ₹100 par value is calculated below:

Annual coupon interest = 8.24% x ₹100 = ₹8.24

Current yield = (8.24/103) X 100 = 8.00%

The current yield considers only the coupon interest and ignores other sources of return that will affect an investor’s return.

iii) Yield to Maturity

24.4 Yield to Maturity (YTM) is the expected rate of return on a bond if it is held until its maturity. The price of a bond is simply the sum of the present values of all its remaining cash flows. Present value is calculated by discounting each cash flow at a rate; this rate is the YTM. Thus, YTM is the discount rate which equates the present value of the future cash flows from a bond to its current market price. In other words, it is the internal rate of return on the bond. The calculation of YTM involves a trial-and-error procedure. A calculator or software can be used to obtain a bond’s YTM easily (please see the Box III).

BOX III

YTM Calculation

YTM could be calculated manually as well as using functions in any standard spread sheet like MS Excel.

Manual (Trial and Error) Method

Manual or trial and error method is complicated because G-Secs have many cash flows running into future. This is explained by taking an example below.

Take a two year security bearing a coupon of 8% and a price of say ₹ 102 per face value of ₹ 100; the YTM could be calculated by solving for ‘r’ below. Typically, it involves trial and error by taking a value for ‘r’ and solving the equation and if the right hand side is more than 102, take a higher value of ‘r’ and solve again. Linear interpolation technique may also be used to find out exact ‘r’ once we have two ‘r’ values so that the price value is more than 102 for one and less than 102 for the other value.

102 = 4/(1+r/2)¹+ 4/(1+r/2)² + 4/(1+r/2)³ + 104/(1+r/2)⁴

Spread Sheet Method using MS Excel

In the MS Excel programme, the following function could be used for calculating the yield of periodically coupon paying securities, given the price.

YIELD (settlement,maturity,rate,price,redemption,frequency,basis)

Wherein;

Settlement is the security's settlement date. The security settlement date is the date on which the security and funds are exchanged. Maturity is the security's maturity date. The maturity date is the date when the security expires.

Rate is the security's annual coupon rate.

Price is the security's price per ₹100 face value.

Redemption is the security's redemption value per ₹100 face value.

Frequency is the number of coupon payments per year. (2 for Government bonds in India)

Basis is the type of day count basis to use. (4 for Government bonds in India which uses 30/360 basis)

Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024

Aadhar enabled Payment System (AePS)

24. Can I make withdrawals from my Paytm Payments Bank account with biometric authentication under Aadhar enabled Payment System? +

Yes. You can continue to withdraw using the AePS authentication, upto the balance available in your account.

Retail Direct Scheme

Nomination related queries

24. Can a Government securities holder nominate an individual other than blood relation as a nominee? +

Yes. A Government securities holder may nominate any one as a nominee provided that the nominee should be eligible to invest in the particular loan as per the specific Government Loan Notification.

Domestic Deposits

II. Deposits of Non-Residents Indians (NRIs)

24. In the case of deceased depositor’s NRE/FCNR(B) deposit, in the event of legal heirs effecting premature withdrawal before completion of minimum prescribed period, whether any interest is payable? +

No. A deposit has to run for a minimum stipulated period, which is at present one year for both FCNR(B) and NRE deposits, to be eligible to earn interest.

All you wanted to know about NBFCs

B. Entities Regulated by RBI and applicable regulations

24. Whether PoA/ Non-Disposal undertaking structure by whatever name called is covered under the regulatory prescriptions on Lending against security of shares?

The regulations would be applicable and the type of encumbrance created is immaterial.

Core Investment Companies

D. Miscellaneous:

24. Would Current Liabilities also form part of Outside Liabilities? What will be the treatment of DTL, Advance Tax Due and Provision for Income Tax? Will they be Outside Liabilities?

Ans: Anything that has to be repaid to any other legal entity/ person will be an outside liability.

Indian Currency

C) Different Types of Bank Notes and Security Features of banknotes

4. What happens to the old design banknotes when a new design is introduced?

Both old and new design notes usually circulate together for a while. The old design notes are then gradually withdrawn from circulation when they become unfit to be re-issued.

Coordinated Portfolio Investment Survey – India

Contact Details for query related to CPIS

Q24. Whom to contact in case of any query related to the CPIS?

Ans: Queries/clarifications on CPIS may be sought from the RBI at the following address:

International Investment Position Division (IIPD)
Department of Statistics and Information Management (DSIM)
Reserve Bank of India
C-9/5 th Floor, Bandra - Kurla Complex, Bandra East
Mumbai, Maharashtra – 400 051
Email: cpis@rbi.org.in

Foreign Investment in India

Q.25: Within how many days from the date of receipt of the consideration should the capital instrument be issued ? +

Answer: The capital instrument has to be issued by the Indian company within sixty days from the date of receipt of the consideration.

FAQs on Non-Banking Financial Companies

Classification of NBFCs into sub-groups

25. For arriving at the composition of assets and income in the equipment leasing and hire purchase finance activities, please clarify whether the ratio should be correlated to the gross assets/gross income or net assets/net income ? +

The NBFCs are entitled to depreciation benefits as a lessor on the assets leased out by them. The Guidance Note on Accounting for Leases issued by ICAI may entail creation of lease equalisation account/lease adjustment account. As per accounting practice, the entire amount of lease rentals is shown as gross lease income on the credit side of the profit and loss account. The income from equipment leasing, therefore, has to be computed on the basis of gross lease income net of depreciation on assets leased out and the lease equalisation account, if any. In the case of hire purchase finance, only the component of finance charges is taken to the Profit and Loss Account and therefore, such finance charges will be taken as hire purchase finance income. The composition of assets in the equipment leasing and hire purchase finance activities has to be worked out as a percentage of the total assets net of depreciation and net of lease adjustment account, if any, as disclosed in the audited Balance Sheet of the company. Hire purchase assets should be taken as stock on hire less unmatured finance charges. The sum total of debit balance in Profit and Loss Account, deferred revenue expenditure and intangible assets like Goodwill will also be excluded from the total assets.

Annual Return on Foreign Liabilities and Assets (FLA) under FEMA 1999

Some Useful Definitions

Q25. What is meant by “Residence of Enterprises”? +

Ans: An enterprise is said to have a centre of economic interest and to be a resident unit of a country (economic territory) when the enterprise is engaged in a significant amount of production of goods and/or services in that centre or when it owns land or buildings located in that centre. The enterprise must maintain at least one production establishment in the country and must plan to operate the establishment indefinitely or over a long period of time.

External Commercial Borrowings (ECB) and Trade Credits

G. END-USES

25. Can ECB be availed of for making contribution in an LLP? +

No, it is not permitted.

Business restrictions imposed on Paytm Payments Bank Limited vide Press Releases dated January 31 and February 16, 2024

Money Transfer through UPI/ IMPS

25. Can I transfer my money into my Paytm Payments Bank account through UPI/ IMPS after March 15, 2024? +

No. You cannot transfer the money into your Paytm Payments Bank account after March 15, 2024

Government Securities Market in India – A Primer

25. What are the day count conventions used in calculating bond yields? +

Day count convention refers to the method used for arriving at the holding period (number of days) of a bond to calculate the accrued interest. As the use of different day count conventions can result in different accrued interest amounts, it is appropriate that all the participants in the market follow a uniform day count convention.

For example, the conventions followed in Indian market are given below.

Bond market: The day count convention followed is 30/360, which means that irrespective of the actual number of days in a month, the number of days in a month is taken as 30 and the number of days in a year is taken as 360.

Money market: The day count convention followed is actual/365, which means that the actual number of days in a month is taken for number of days (numerator) whereas the number of days in a year is taken as 365 days. Hence, in the case of T-Bills, which are essentially money market instruments, money market convention is followed.

In some countries, participants use actual/actual, some countries use actual/360 while some use 30/actual. Hence the convention changes in different countries and in different markets within the same country (eg. Money market convention is different than the bond market convention in India).

Retail Direct Scheme

Nomination related queries

25. What happens if one of the joint nominees to a Government security dies? +

In such cases where a nomination in respect of a Government security has been made in favour of two and either or any of the nominees is dead, the surviving nominee will be entitled to the Government security and payment thereon.

Domestic Deposits

II. Deposits of Non-Residents Indians (NRIs)

25. Whether banks can pay interest on NRE and FCNR(B) deposits for the intervening Saturday, Sunday and holidays between the date of maturity and payment? +

Yes. Whenever the due dates fall on Saturday/Sunday/non-business working day/holidays, banks are permitted to pay interest on NRE and FCNR(B) deposits at the originally contracted rate for the intervening period between the due date and date of payment so that no interest loss is suffered by the depositors.

All you wanted to know about NBFCs

B. Entities Regulated by RBI and applicable regulations

25. Does the definition of “companies in a group” as given in the Master Direction – Reserve Bank of India (Non-Banking Financial Company – Scale Based Regulation) 2023apply in respect of concentration of credit/ investment norms.

No, the definition of “companies in the group” is only for the purpose of determining the applicability of prudential norms on multiple NBFCs in a group.