NBFC - UNDERSTANDING

Non-Banking Financial Company

Non – Banking Financial Company means only the non-banking financial institution which is a loan company or an investment company or an asset finance company or a mutual benefit financial company. NBFCs are incorporated under the Companies Act, 1956. The following are the categories of NBFCs:

§  Asset Finance Company (AFC),

§  Investment Company (IC),

§  Loan Company (LC),

§  Infrastructure Finance Company (IFC),

§  Core Investment Company (CIC),

§  Infrastructure Debt Fund – Non Banking Financial Company (IDF – NBFC),

§  Non – Banking Financial Company – Micro Finance Institution (NBFC – MFI)

NBFCs can be broadly classified into two categories, viz.,

§  NBFCs accepting public deposit (NBFCs-D) and

§  NBFCs not accepting/holding public deposit (NBFCs-ND).

Residuary Non-Banking Companies (RNBCs) are another category of NBFCs whose principal business is acceptance of deposits and investing in approved securities. The given below chart describes the categories of NBFCs which can accept public deposit and NBFCs which cannot accept pubic deposits:

In the interest of depositors, RBI has evolved a regulatory framework the salient features of which are outlined below for the guidance of depositors. However, the investors must carefully evaluate their investment decisions while investing in NBFCs, as the instructions below are illustrative and not exhaustive,

§  An NBFC must be registered with the Reserve Bank of India (RBI) and have specific authorization to accept deposits from the public,

§  NBFC must display the Certificate of Registration or a certified copy thereof at the Registered office and other offices/branches,

§  Registration of an NBFC with the RBI merely authorizes it to conduct the business of NBFC. RBI does not guarantee the repayment of deposits accepted by NBFCs. NBFCs cannot use the name of the RBI in any manner while conducting their business,

§  The NBFC whose application for grant of Certificate of Registration (CoR) has been rejected or cancelled by the RBI is neither authorized to accept fresh deposits nor renew existing deposit. Such rejection or cancellation is also published in newspapers from time to time. Besides, a list of NBFCs permitted to accept public deposits, NBFCs whose applications for CoR has been rejected or whose CoR has been cancelled by the RBI is available on the RBI's web site www.rbi.org.in,

§  NBFCs which accept deposits should have minimum investment grade credit rating granted by an approved credit rating agency for deposit collection, except certain Asset Finance (equipment leasing and hire purchase finance) companies and Residuary Non-Banking Companies (RNBCs),

§  NBFCs including RNBCs cannot

ü  Accept deposit for a period less than 12 months and more than 60 months (84 months in case of RNBC),

ü  Offer any gifts/incentives to solicit deposits from public.

§  If a deposit taking NBFC fails to repay the deposit or the interest accrued thereon in accordance with the terms and conditions of acceptance of such deposit, redressal of grievance can be through the Regional Bench of the Company Law Board at Chennai/Delhi/Kolkata/Mumbai,

§  Acceptance of deposits by companies engaged in activities including plantation activities, commodities trading, multilevel marketing, manufacturing activities, housing finance, nidhis (mutual benefit financial companies), and potential nidhis (mutual benefit company) and companies engaged in collective investment schemes do not come under the purview/regulations of the RBI,

Non – Banking Financial Company – Micro Finance Institution (NBFC – MFI)

Definition of NBFC – MFI (Introduced w.e.f. 02/12/2011)

An NBFC-MFI is defined as a non-deposit taking NBFC (other than a company licensed under Section 25 of the Indian Companies Act, 1956) that fulfils the following conditions:

§  Minimum Net Owned Funds of Rs.5 crore. (For NBFC-MFIs registered in the North Eastern Region of the country, the minimum NOF requirement shall stand at Rs. 2 crore),

§  Not less than 85% of its net assets are in the nature of “qualifying assets.”

§  Further the income an NBFC-MFI derives from the remaining 15 percent of assets shall be in accordance with the regulations specified in that behalf.

An NBFC which does not qualify as an NBFC-MFI shall not extend loans to micro finance sector[n1]  (Refer Appendix - 7), which in aggregate exceed 10% of its total assets.

Explanation:

1)      “Net assets” are defined as total assets other than cash and bank balances and money market instruments.

2)      “Qualifying asset” shall mean a loan which satisfies the following criteria:-

ü  loan disbursed by an NBFC-MFI to a borrower with a rural household annual income not exceeding Rs. 60,000 or urban and semi-urban household income not exceeding Rs. 1,20,000;

ü  loan amount does not exceed Rs. 35,000 in the first cycle and Rs. 50,000 in subsequent cycles;

ü  total indebtedness of the borrower does not exceed Rs. 50,000;

ü  tenure of the loan not to be less than 24 months for loan amount in excess of Rs. 15,000 with prepayment without penalty;

ü  loan to be extended without collateral;

ü  aggregate amount of loans, given for income generation, is not less than 75 per cent of the total loans given by the MFIs;

ü  loan is repayable on weekly, fortnightly or monthly instalments at the choice of the borrower

3)      Definition & meaning of Net Owned Fund – Refer Appendix – 3.

Regulatory Framework - Prudential Norms

§  Capital requirement

ü  All new NBFC-MFIs shall maintain a capital adequacy ratio consisting of Tier I and Tier II Capital which shall not be less than 15 per cent of its aggregate risk weighted assets[n2] ,

ü  The total of Tier II Capital at any point of time, shall not exceed 100 per cent of Tier I Capital,

ü  The risk weights for on-balance sheet assets and the credit conversion factor for off-balance sheet items will be as provided in para 16 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve bank) Directions 2007,

ü  Among the existing NBFCs to be classified as NBFC-MFIs, those with asset size less than Rs. 100 crore will be required to comply with this norm w.e.f April 01, 2012. Those with asset size of Rs. 100 crore and above are already required to maintain minimum CRAR[n3]  of 15%. The CRAR for those NBF-MFIs which have more than 25% loan portfolio in the state of Andhra Pradesh will be at 12% for the year 2011-12 only. Thereafter they have to maintain CRAR at 15%.

§  Asset classification & provisioning norms

With effect from April 01, 2012 all NBFC-MFIs shall adopt the following norms(till then they shall follow the asset classification and provisioning norms as given in the Non-Banking Financial (Non-Deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007).

ü  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; ( Asset classification norm)

ü  Nonperforming asset means an asset for which, interest/principal payment has remained overdue for a period of 90 days or more; (Asset classification norm)

ü  The aggregate loan provision to be maintained by NBFC-MFIs at any point of time shall not be less than the higher of a) 1% of the outstanding loan portfolio or b) 50% of the aggregate loan instalments which are overdue for more than 90 days and less than 180 days and 100% of the aggregate loan instalments which are overdue for 180 days or more; (Provisioning norms)

ü  All other provisions of the Non-Banking Financial (Non-Deposit accepting or holding) Companies Prudential Norms (Reserve Bank) Directions, 2007) will be applicable to NBFC-MFIs except as indicated therein.

Pricing of credit

§  All NBFC-MFIs shall maintain an aggregate margin cap of not more than 12%. The interest cost will be calculated on average fortnightly balances of outstanding borrowings and interest income is to be calculated on average fortnightly balances of outstanding loan portfolio of qualifying assets,

§  Interest on individual loans will not exceed 26% per annum and calculated on a reducing balance basis,

§  Processing charges shall not be more than 1 % of gross loan amount. Processing charges need not be included in the margin cap or the interest cap,

§  NBFC-MFIs shall recover only the actual cost of insurance for group, or livestock, life, health for borrower and spouse. Administrative charges where recovered, shall be as per IRDA guidelines.

Infrastructure Debt Fund – Non Banking Financial Company (IDF – NBFC)

The Finance Minister had in his budget speech for the year 2011-2012 announced the setting up of Infrastructure Debt Funds (IDFs), to facilitate the flow of long-term debt into infrastructure projects. The IDF will be set up either as a trust or as a company. A trust based IDF would normally be a Mutual Fund (MF) while a company based IDF would normally be a NBFC. IDF- NBFC would raise resources through issue of either Rupee or Dollar denominated bonds of minimum 5 year maturity. The investors would be primarily domestic and off-shore institutional investors, especially insurance and pension funds which would have long term resources. IDF-MF would be regulated by SEBI while IDF-NBFC would be regulated by the Reserve Bank.

Definition of IDF – NBFC

“Infrastructure Debt Fund-Non-Banking Financial Company” or “IDF-NBFC” means a non-deposit taking NBFC that has Net Owned Fund of Rs 300 crores or more and which invests only in Public Private Partnerships (PPP) and post commencement operations date (COD) infrastructure projects which have completed at least one year of satisfactory commercial operation and becomes a party to a Tripartite Agreement.

Explanation: -

1)      “Tripartite Agreement” means an agreement between three parties, namely, the Concessionaire, the Project Authority and IDF-NBFC that also binds all the parties thereto to the terms and conditions of the other Agreements referred to therein.

2)      “Concessionaire” means a party which has entered into an agreement called ‘Concession Agreement’ with a Project Authority, for developing infrastructure.

3)      “Project Authority” means an authority constituted by a statute for the development of infrastructure in the country.

Credit rating

IDF-NBFC shall have at the minimum, a credit rating grade of 'A' of CRISIL or equivalent rating issued by other accredited rating agencies such as FITCH, CARE and ICRA.

Capital Adequacy

The IDF-NBFC shall have at the minimum CRAR of 15 percent and Tier II Capital (Refer Appendix – 2) of IDF–NBFC shall not exceed Tier I (Refer Appendix – 1).

For the purpose of computing capital adequacy of the IDF-NBFC

§  bonds covering PPP and post commercial operations date (COD) projects in existence over a year of commercial operation shall be assigned a risk weight of 50 percent,

§  All other assets shall be risk weighted as per the extant regulations as given in para 16 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007.

Credit concentration norms

§  The maximum exposure that an IDF-NBFC can take on individual projects will be at 50 percent of its total Capital Funds (Tier I plus Tier II as defined in Para 2 (xx) and (xxi) for the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007),

§  An additional exposure up to 10 per cent could be taken at the discretion of the Board of the IDF-NBFC,

§  RBI may, upon receipt of an application from an IDF-NBFC and on being satisfied that the financial position of the IDF-NBFC is satisfactory, permit additional exposure up to 15 percent (over 60 percent) subject to such conditions as it may deem fit to impose regarding additional prudential safeguards.

Investment

IDF-NBFCs shall invest only in PPP and post COD infrastructure projects which have completed at least one year of satisfactory commercial operation and are a party to a Tripartite Agreement with the Concessionaire and the Project Authority for ensuring a compulsory buyout with termination payment.

Other prudential norms

All other prudential norms as specified in Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 including income recognition, asset classification and provisioning norms will be applicable for IDF-NBFCs.

Infrastructure Finance Company (IFC)

Definition

“Infrastructure Finance Company” means a non-banking finance company which deploys at least 75% of its total assets in infrastructure loans.

Requirements for IFC

As per regulation 19A of “Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007”, an IFC shall, -

§  not accept deposits from the public,

§  have net owned funds of Rs. 300 crore or above,

§  have obtained a minimum credit rating 'A' or equivalent of CRISIL, FITCH, CARE, ICRA or equivalent rating by any other credit rating agency accredited by RBI,

§  have a CRAR of 15 percent (with a minimum Tier I capital of 10 percent).

Credit concentration norms

As per regulation 20(12A) of the above directions an IFCs may exceed the concentration of credit norms as provided in paragraph 18 of the aforesaid Directions as under

§  in lending to

ü  any single borrower by ten per cent of its owned fund; and

ü  any single group of borrowers by fifteen per cent of its owned fund;

§  in lending and investing (loans/investments taken together) by

ü  five percent of its owned fund to a single party; and

ü  ten percent of its owned fund to a single group of parties

Increase in exposure limits for infrastructure related loan and investments

The systematically important non-deposit taking non-banking financial companies may exceed the concentration of credit/investment norms, as provided in paragraph 18 of the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, by 5 per cent for any single party & by 10 per cent for a single group of parties, if the additional exposure is on account of infrastructure loan and/or investment.

Core Investment Company (CIC)

Directions – Core Investment Companies (Reserve Bank) Directions, 2011

The above directions shall apply to every Core Investment Company, that is to say, a non-banking financial company carrying on the business of acquisition of shares and securities and which satisfies the following conditions as on the date of the last audited balance sheet:-

§  it holds not less than 90% of its net assets in the form of investment in equity shares, preference shares, bonds, debentures, debt or loans in group companies;

§  its investments in the equity shares (including instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue) in group companies constitutes not less than 60% of its net assets as mentioned in clause (i) above;

§  it does not trade in its investments in shares, bonds, debentures, debt or loans in group companies except through block sale for the purpose of dilution or disinvestment;

§  it does not carry on any other financial activity referred to in Section 45I(c) and 45I(f) of the Reserve Bank of India Act, 1934 except

ü  investment in

(i)            bank deposits,

(ii)          money market instruments, including money market mutual funds

(iii)         government securities, and

(iv)        bonds or debentures issued by group companies

ü  granting of loans to group companies; and

ü  issuing guarantees on behalf of group companies.

Explanation:

1)      “net assets” means total assets excluding –

ü  cash and bank balances;

ü  investment in money market instruments and money market mutual funds;

ü  advance payments of taxes; and

ü  deferred tax payment.

Meaning of Systematically important Core Investment Company

It means a Core Investment Company fulfilling both the following conditions:

§  Having total assets of not less than Rs.100 crore, either individually or in aggregate along with other Core Investment Companies in the Group;

§  Raises or holds public funds

Explanation:

1)      “Companies in the Group”, shall mean an arrangement involving two or more entities related to each other through any of the following relationships : Subsidiary – parent (defined in terms of AS 21), Joint venture (defined in terms of AS 27), Associate ( defined in terms of AS 23), Promoter-promotee (as provided in the SEBI (Acquisition of Shares and Takeover) Regulations, 1997) for listed companies, a related party (defined in terms of AS 18), Common brand name, and investment in equity shares of 20% and above.

2)      “Public funds'; shall include funds raised either directly or indirectly through public deposits, Commercial Papers, debentures, inter-corporate deposits and bank finance but excludes funds raised by issue of instruments compulsorily convertible into equity shares within a period not exceeding 10 years from the date of issue.

3)      “Total asset” means the total of all assets appearing on the assets side of the balance sheet.

Registration

Every Core Investment Company shall apply to the Reserve Bank of India for grant of Certificate of Registration within a period of three months from the date of becoming a CIC-ND-SI.

Capital requirements

Adjusted Net Worth of a CIC-ND-SI shall at no point of time be less than 30% of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items as on the date of the last audited balance sheet as at the end of the financial year.

Submission of Annual Statutory Auditors Certificate

Every CIC-ND-SI shall submit an annual certificate from its statutory auditors regarding compliance with the requirements of these directions within a period of one month from the date of finalisation of the balance-sheet.

Leverage ratio

The outside liabilities (Refer Appendix – 10) of a CIC-ND-SI shall at no point of time exceed 2.5 times its Adjusted Net Worth as on the date of the last audited balance sheet as at the end of the financial year.

Asset Finance Company (AFC)/ Investment Company (IC)/ Loan Company (LC)

Definition

Asset Finance Company means any company which is a financial institution carrying on as its principal business the financing of physical assets supportive productive/economic activity, such as automobiles, tractors, lathe machines, generator sets, earth moving and material handling equipments , moving on own power and general purpose industrial machines.

Investment Company means any company which is a financial institution carrying on as its principal business the acquisition of securities.

Loan company means any company which is a financial institution carrying on as its principal business the providing of finance whether by  making loans or advances or otherwise for any activity other than its own but does not include an Asset Finance Company.

Minimum credit rating – Not applicable

No non-banking financial company having a Net Owned Fund of Rs. 25 lakh and above shall accept public deposits unless it has obtained minimum investment grade or other specified credit rating for fixed deposits from any one of the approved credit rating agencies at least once          a year with a copy of the rating is sent to the Reserve Bank of India along with return on prudential norms, provided that this clause shall not apply to an Asset Finance Company. The names of approved credit rating agencies and the minimum credit rating shall be as follows:

Name of the Agency	Minimum Investment Grade rating
The Credit Rating Information Services of India Ltd. (CRISIL)	FA – (FA Minus)
ICRA Ltd.	MA – (MA Minus)
Credit Analysis & Research Ltd. (CARE)	CARE BBB(FD)
FITCH Ratings India Private Ltd.	TA – (ind)(FD)

Change in credit rating

In the event of upgrading or downgrading of credit rating of any non-banking financial company to any level from the level previously held by the non-banking financial company, it shall within 15 days of its being so rated inform, in writing, of such upgrading/downgrading to the RBI.

Prohibition from accepting demand deposit

On and from 31^st January, 1998 no non-banking financial company shall accept or renew any public deposit whether accepted before or after 31^st January, 1998, which is repayable on demand.

Period of public deposit

On and from 31^st January, 1998, no non-banking financial company shall accept or renew any public deposit whether accepted before or after 31^st January, 1998, unless such deposit is repayable after a period of 12 months but not later than 60 months from the date of acceptance or renewal thereof.

Ceiling on quantum of deposits

No Asset Finance Company or Loan Company or Investment Company shall, accept or renew public deposit except as provided hereunder –

Sl. No.	NBFC	Compliance	Particulars
1.	AFC	§  Having NOF = 25 lakhs or more; §  Complying with all the prudential norms with capital adequacy ratio of not less than 15% as per last audited balance sheet	AFC may accept or renew public deposit, together with the amounts outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one half times of its NOF or public deposit up to 10 Crore of rupees, whichever is lower.
2.	AFC	§  Having NOF = 25 lakhs or more; §  Complying with all the prudential norms; and §  Having minimum investment grade credit rating.	AFC may accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding 4 times of its NOF.
3.	LC/IC	§  Having NOF of = 25 lakhs or more; §  Having minimum investment grade credit rating; and §  Complying with all the prudential norms with capital adequacy ratio of not less than 15% as per last audited balance sheet.	LC/IC may accept or renew public deposit, together with the amounts remaining outstanding in the books of the company as on the date of acceptance or renewal of such deposit, not exceeding one and one-half times of its NOF.

Downgrading of credit rating

In the event of downgrading of credit rating below the minimum specified investment grade as provided for in paragraph 4(4), a non-banking financial company shall regularize the excess deposit as provided hereunder:

Asset Finance Company	Loan Company/Investment Company
An AFC shall -	A loan company or an investment company shall, -
a)      With immediate effect, stop accepting public deposit, if it is already holding public deposit to the extent permissible under the directions;	a)      With immediate effect, stop accepting public deposit;
b)      Report the position within 15 working days to the RBI; and	b)    Report the position within 15 working days to the RBI; and
c)  Reduce, within 3 years from the date of such downgrading of credit rating, the amount of excess public deposits to nil or the appropriate extent permissible under the directions, to which it is entitled to accept, by repayment as and when such deposit falls due or otherwise.	c)  Reduce, within 3 years from the date of such downgrading of credit rating, the amount of excess public deposits to nil by repayment as and when such deposit falls due or otherwise.

Appendix

1.       “Tier I Capital” means owned fund as reduced by investment in shares of other non-banking financial companies 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; and perpetual debt instruments issued by a systematically important non-deposit taking non-banking financial company in each year to the extent it does not exceed 15 per cent of the aggregate Tier I Capital of such company as on March 31 of the previous accounting year,

2.       “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 (including that for Standard Assets) 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[n4] ;

d)      hybrid debt capital instruments (Refer Appendix – 8);

e)       subordinated debt (Refer Appendix – 9); and

f)        perpetual debt instruments issued by a systematically important non-deposit taking non-banking financial company which is in excess of what qualifies for Tier I Capital

to the extent the aggregate does not exceed Tier I capital.

3.       `Net owned fund’ means net owned fund as defined under section 45-IA of the Reserve Bank of India Act, 1934 (2 of 1934), including the paid up preference shares which are compulsorily convertible into equity ;

Sl. No.	Particulars	Amount Rs.
1.	Capital Funds: (i)        Paid up equity capital	311
	(ii)      Paid-up preference shares which are compulsorily convertible to Equity	312
	(iii)     Free Reserves (please see instruction No.1 given below)	313
2.	Total (311+312+313) = A	310
3.	(i)        Accumulated balance of loss	321
	(ii)      Balance of deferred revenue expenditure	322
	(iii)     Other intangible assets (please specify)	323
4.	Total (321+322+323) = B	320
5.	Owned fund (A-B) i.e. (310-320) = C	330
6.	Book value of investments in shares of: (i)        Subsidiaries of the company	341
	(ii)      Companies in the same group	342
	(iii)     All other Non-Banking Financial companies	343
7.	Book value of investments in debentures & bonds of: (i)                  Subsidiaries of the company	344
	(ii)                Companies in the same group	345
8.	Outstanding loans and advances including bills purchased/ discounted, inter-corporate deposits, hire purchase and lease finance, CPs with: (i)                  Subsidiaries of the Company	346
	(ii)                Companies in the same group	347
9.	Total (341 to 347) = D	340
10.	D in excess of 10%[n5]  of C (340 in excess of 10% of 330) = E	351
11.	Net owned fund (330 – 351) = (C - E)	350
12.	Paid-up preference Share Capital not compulsorily convertible, as per latest balance sheet	361
13.	Paid-up preference Share Capital not compulsorily convertible, as on the date of this Return	362
14.	Total liabilities as per the latest balance sheet preceding the date of Return	363
15.	Total liability as on the date of this Return	364

Instructions:

§  “Free Reserves” mentioned under item 1(iii) above shall include the balance in the Share Premium Account, Capital and Debenture Redemption Reserves and any other Reserve shown or published in the Balance Sheet and created through an allocation of Profits (including credit balance of Profit & Loss Account) but not being :

(i)             a Reserve created for repayment of any future liability or for depreciation of assets or for provision against non-performing assets / bad debts; or

(ii)                 a Reserve created by Revaluation of the Assets of the Company.

§  Hire Purchase and Lease Finance mean :

(i)                  in the case of hire purchase asset, the amount of future instalments receivable reduced by the balance of the unmatured finance charges[n6] ; and

(ii)            in the case of lease assets, the depreciated book value of the lease asset plus/minus the balance in the lease adjustment account;

Amount due but not received should be added in both the cases.

Source: http://rbidocs.rbi.org.in/rdocs/notification/PDFs/71239.pdf

4.       “Infrastructure Loan” means a credit facility extended by non-banking financial companies 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 amount 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 paging, domestic satellite service (i.e. a satellite owned and operated by an Indian company for providing tele communication service), Telecom towers, network of trunking, 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;

(ha) laying down and/or maintenance of gas, crude oil and petroleum pipelines;

(i)      Construction relating to projects involving agro-processing and supply of inputs to agriculture;

(j)     Construction for preservation and storage of processed agro-products, perishable goods such as fruits, vegetables and flowers including testing facilities for quality;

(k)    Omitted

(l)      Any other infrastructure facility of similar nature.

5.       On balance sheet items

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:

Weighted risk assets - On-Balance Sheet items	Percentage weight
I.            Cash and bank balances including fixed deposits and certificates of deposits with banks	0
II.            Investments
a)      Approved securities  [Except at (c) below]	0
b)      Bonds of public sector banks	20
c)      Fixed deposits/certificates of deposits/ bonds of public financial institutions	100
d)      Shares of all companies and debentures / bonds/commercial papers of all companies and units of all mutual funds	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
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

Notes:

(a)    Netting may be done only in respect of assets where provisions for depreciation or for bad and doubtful debts have been made.

(b)   Assets which have been deducted from owned fund to arrive at net owned fund shall have a weightage of `zero’.

(c)    While calculating the aggregate of funded exposure of a borrower for the purpose of assignment of risk weight, such non-banking financial companies may net off the amount of cash margin/caution money/security deposits (against which right to set-off is available) held as collateral against the advances out of the total outstanding exposure of the borrower.

(d)   The counterparty credit risk, arising out of exposure of CICs-ND-SI to CCIL on account of securities financing transactions (CBLOs) will carry a risk weight of zero, as it is presumed that the CCP’s exposures to their counterparties are fully collateralised on a daily basis, thereby providing protection for the CCP’s credit risk exposures. The deposits / collaterals kept by CICs-ND-SI with CCIL will attract a risk weight of 20%.

6.       Off – balance sheet items

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

7.       “Micro finance sector” is engaged in providing credit and other financial services to the poor households and their micro enterprises as an extended arm of the banking system; micro finance sector lacks a formal statutory framework for its financial activities.

8.       “Hybrid debt” means capital instrument which possess certain characteristics of equity as well as of debt.

9.       “Subordinated debt” means an instrument, which is fully paid up, 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 non-banking financial company. The book value of such instrument shall be subjected to discounting as provided hereunder:

Remaining maturity of the instruments                                 Rate of discount

a)         Up to 1 year                                                                  100 per cent

b)        More than 1 year but up to 2 years                                 80 per cent

c)         More than 2 years but up to 3 years                               60 per cent

d)        More than 3 years but up to 4 years                               40 per cent

e)        More than 4 years but up to 5 years                               20 per cent

To the extent such discounted value does not exceed 50% of Tier I capital.

10.   “Outside liabilities” means total liabilities as appearing on the liabilities side of the balance sheet excluding ‘paid-up capital’ and ‘reserves and surplus’, instruments compulsorily convertible in to equity shares within a period not exceeding 10 years from the date of issue but including all forms of debt and obligations having the characteristics of debt, whether created by issue of hybrid instruments or otherwise, and value of guarantees issued, whether appearing on the balance sheet or not.