CMA Final · Corporate Financial Reporting

NBFCs - Provisioning Norms, Accounting and Reporting: formula sheet

Full chapter guide

Key formulas

NPA test for credit facilities: Overdue interest or principal > 90 days ⇒ NPA; Below or at 90 days the asset stays standard and income keeps accruing.
Income on a standard asset: Accrual income = Principal outstanding × Rate × Period ÷ 12; Use months elapsed. Time-proportion basis for loans, finance charges and lease finance income.
Income on an NPA: Income recognised = Amount actually received; No accrual after the asset turns NPA. Recognise only on realisation.
Reversal on becoming NPA: Reversal = Income booked in earlier periods but not received; Debit interest income, credit interest receivable or accrued interest. Received amounts are not reversed.
Interest on bonds and debentures: Accrue only if rate is predetermined AND interest is serviced regularly AND not in arrears; If any condition fails, take interest on receipt. Securities guaranteed by the Central or a State Government for interest and principal can be accrued.
Dividend income: Cash basis; accrual allowed once declared and right to receive is established; Applies to shares of companies and units of mutual funds. Dividend = Shares × Face value × Rate.
NPA test: Overdue for more than 90 days → NPA; Overdue means principal or interest (or lease rental/HP instalment) not paid by its due date. Exactly 90 days is not yet an NPA; the test is more than 90 days.
Standard asset: Not an NPA → Standard asset; Includes all assets overdue for 90 days or less, provided there is no other sign of weakness stated in the question.
Sub-standard asset: NPA for ≤ 12 months → Sub-standard; The 12 months run from the date the asset became an NPA, not from the due date.
Doubtful asset: Sub-standard for > 12 months → Doubtful; Many problems split doubtful assets into up to 1 year, 1 to 3 years and over 3 years of doubtful status for provisioning.
Loss asset: Identified as loss by NBFC, auditor or RBI, not written off, or uncollectible → Loss; This is a judgement-based class. It does not depend only on time.
Timeline from due date: Date of NPA = due date + 90 days; Doubtful from = date of NPA + 12 months; Use this to place a year-end date on the correct side of each boundary.
Standard assets: Provision = 0.40% × outstanding standard assets; This is the general rate used in most study problems. Some categories of NBFCs or exposures carry a different rate. If the question gives a rate, use it.
Sub-standard assets: Provision = 10% × total outstanding; It is charged on the whole outstanding. Do not deduct security.
Doubtful assets: unsecured portion: Unsecured portion = Outstanding − Realisable value of security; Provision = 100% × unsecured portion; If the realisable value is more than the outstanding, the unsecured portion is nil. It is never negative.
Doubtful assets: secured portion: Secured portion × 20% (doubtful up to 1 year) | × 30% (1 to 3 years) | × 50% (more than 3 years); The rate depends on how long the asset has been classified as doubtful, not on how long the loan has existed.
Loss assets: Provision = 100% × outstanding (if not already written off); Provide only the balance not written off.
Total provision required: Total = Standard + Sub-standard + Doubtful (unsecured + secured) + Loss; Compute each class separately, then add.
Impairment reserve (Ind AS NBFCs): Impairment reserve = RBI-norm provision − Ind AS 109 ECL provision (only if positive); The reserve is created by appropriation from profit. Nothing is created if ECL is equal to or more than the RBI-norm figure.
Current investment: Readily realisable and intended to be held for ≤ 1 year from acquisition; Everything else is a long-term investment. Classify at the time of acquisition.
Valuation of current investments: Carrying amount = lower of cost and market value, category-wise; Categories: equity shares, preference shares, debentures and bonds, government securities, units of mutual funds, others. Provide for net depreciation in a category and ignore net appreciation.
Provision for current investments: Provision for a category = Σ cost − Σ market value (only if positive); Offset gains and losses within a category, never across categories.
Valuation of long-term investments: Cost, less provision for diminution other than temporary (scrip-wise); Follows the accounting standard on investments. A temporary fall needs no provision.
Unquoted equity shares: Value = lower of cost and break-up value; Break-up value = net worth available to equity ÷ number of equity shares, from the latest audited balance sheet. If it is not available, provide in full.
Unquoted preference shares: Value = lower of cost and face value; Applies to unquoted preference shares as per the RBI norms.
Mutual fund units: Value = repurchase price or NAV declared by the fund; Compare it with cost to find any depreciation.
Transfer between categories: Transfer at lower of cost, book value and market value on the date of transfer; Any depreciation on transfer is fully provided for.
Capital to risk assets ratio (CRAR): CRAR = (Tier I capital + Tier II capital) ÷ Risk-weighted assets × 100; Disclosed in the notes. The minimum percentage depends on the NBFC's category in the RBI directions, so use the figure given in the question.
Gross NPA ratio: Gross NPA ratio = Gross NPAs ÷ Gross advances × 100; A standard asset-quality disclosure. Use the same base for both items.
Net NPA ratio: Net NPA ratio = (Gross NPAs − Provisions held against NPAs) ÷ (Gross advances − Provisions held against NPAs) × 100; Use the definition in the question if one is given. Some questions simplify the denominator.
Provision movement: Closing provision = Opening provision + Provision made during the year − Write-backs − Write-offs and utilisation; Used in the reconciliation note of provisions.
Net owned fund (NOF) idea: NOF = Paid-up equity capital + Free reserves − Accumulated losses − Deferred revenue expenditure and other intangibles (as per RBI definition, with further adjustments); Only the broad structure is expected. Use the data given and do not recall the minimum amount unless stated.
Division III order: Financial assets → Non-financial assets → Financial liabilities → Non-financial liabilities → Equity; Memorise this order for balance sheet drafting.

Quick revision

An NBFC is a company that carries on lending, investment or similar financial business but does not hold a banking licence.
The RBI's scale-based regulation has four layers: Base, Middle, Upper and Top. The Top layer is ordinarily empty unless the RBI identifies NBFCs for it.
Asset classification runs: standard, sub-standard, doubtful, loss. Use the overdue period given in the current RBI direction.
Do not recognise income on a non-performing asset until it is actually received; reverse interest already booked but not collected.
For non-Ind AS NBFCs the provision rates are: standard assets a small percentage of the outstanding, for example 0.40% for NBFC-ICC and 0.25% for Base layer NBFCs, with different rates for some sectors such as commercial real estate; sub-standard 10% of the total outstanding for secured exposures, and 25% where the exposure is unsecured ab initio; doubtful 100% of the unsecured portion plus 20% (doubtful for up to 1 year), 30% (doubtful for 1 to 3 years) or 50% (doubtful for over 3 years) of the secured portion; loss 100% of the outstanding. The 20%/30%/50% rates depend on the period for which the asset has remained in the doubtful category, not on the overdue period. Verify every rate, especially the standard asset rate and the sub-standard rate for unsecured exposures, against the current RBI Master Direction.
Ind AS NBFCs measure impairment by expected credit loss in stages 1, 2 and 3 under Ind AS 109.
Where the Ind AS 109 impairment allowance is lower than the provision required under the RBI norms, the difference is appropriated from net profit or retained earnings to an impairment reserve. It is not a charge to profit or loss, and the reserve is not distributed as dividend.
Capital adequacy is the ratio of capital funds to risk-weighted assets; Tier 2 capital is limited to 100% of Tier 1 capital for the applicable NBFC categories. Confirm with the current RBI direction.
Exposure limits to a single borrower and to a group are fixed as percentages of owned fund or Tier 1 capital; check the latest direction.
Ind AS NBFCs present financial statements in Division III of Schedule III to the Companies Act, 2013. NBFCs not following Ind AS use Division I (or Division II, as applicable) of Schedule III, along with the RBI disclosure requirements.
In a numerical, show each step separately: classification, income, provision, net balance.

Common mistakes

Continuing to accrue interest on an account that is more than 90 days overdue. Fix: Always test overdue days first. After NPA status, income is booked only on actual receipt.
Reversing the whole interest ever booked, including amounts already received. Fix: Reverse only income that was booked but is still unrealised.
Treating an account overdue for exactly 90 days as an NPA. Fix: The test is overdue for more than 90 days. At 90 days the account is still standard.
Counting the 12 months for sub-standard from the due date. Fix: Find the NPA date first (due date + 90 days). Count 12 months from that date to decide sub-standard or doubtful.
Applying 100% to the whole doubtful asset Fix: Always split the outstanding into unsecured and secured portions. Only the unsecured portion takes 100%.
Using the wrong rate for the secured portion Fix: Use the doubtful period. Up to one year is 20%, one to three years is 30%, and over three years is 50%.
Valuing each scrip separately and provisioning every loss in a current investment portfolio. Fix: For current investments, work category by category and offset gains and losses within a category. Do not offset across categories.
Offsetting a gain in equity shares against a loss in debentures. Fix: Categories are separate. Net appreciation in one category cannot reduce a provision needed in another.
Using the Division II format of Schedule III for an Ind AS NBFC. Fix: Whenever the entity is an NBFC under Ind AS, use Division III. Start with financial assets.
Showing loans at gross amount without deducting the impairment allowance. Fix: Show loans net of the allowance or give the gross and the allowance clearly, as the question demands.

Exam tips

Write the NPA test (overdue for more than 90 days) in the first line of any answer. It earns marks even if arithmetic slips.
In reversal questions, show the journal entry and say that only unrealised income is reversed.
For investment questions, list the conditions for accrual one by one against the facts given. Case MCQs often hide an arrear or a pending declaration.
Read whether the question wants RBI prudential treatment or Ind AS treatment, and state which one you apply.
Use time-proportion working in months. Show the monthly amount first so the examiner can see the method.
Write the due date, balance sheet date and days overdue for every account. Marks are given for the working, not just the label.
Treat the boundaries carefully: more than 90 days for NPA, and more than 12 months as NPA for doubtful.
In MCQs, look for a single fact that decides the class, such as the auditor identifying a loss or exactly 90 days overdue.