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CMA Final · Corporate Financial Reporting

NBFCs: Provisioning Norms, Accounting and Reporting

This chapter covers how Non-Banking Financial Companies are regulated by the RBI and how they account for loans and investments. You classify each asset as standard or non-performing, stop recognising income on non-performing assets, compute provision on the prescribed basis, and present statements in the format required. Learn the rules in that sequence and practise numerical workings.

What this chapter covers

This chapter explains how an NBFC is defined, how the RBI groups NBFCs into regulatory layers, and what prudential rules apply to them. The core of the chapter is a chain of linked rules: asset classification decides whether a loan is performing or not, income recognition decides whether interest can be booked, and provisioning decides how much loss you charge to profit.

The chapter also covers capital adequacy and exposure limits, valuation of investments, and the disclosures in an NBFC's financial statements. NBFCs that follow Ind AS use the expected credit loss approach of Ind AS 109 and present accounts in Division III of Schedule III to the Companies Act, 2013. Smaller NBFCs that are not required to follow Ind AS use the RBI's income recognition, asset classification and provisioning norms directly. Check which category a question refers to before you start.

This chapter connects to the rest of Paper 18 through Ind AS on financial instruments, presentation of financial statements and disclosures. It also links to banking-style reporting and to financial analysis. A numerical question here usually tests several steps together, so it rewards students who know the sequence.

NBFC questions are rule-based and numerical, so they reward preparation more than guesswork. A single case can test classification, income reversal, provision and disclosure in one answer, and each step carries marks if your working is shown. Section A can also test definitions, layers, capital ratios and the percentages used in provisioning. Once you know the sequence and the rates, the chapter is highly scoreable, and the same logic helps you in Ind AS questions on impairment.

NBFCs - Provisioning Norms, Accounting and Reporting: topics in the order to study them

  1. 1NBFC Meaning, Classification and Regulatory FrameworkStart here because every later rule depends on which type and layer of NBFC you are dealing with.
  2. 2Asset Classification NormsClassification into standard, sub-standard, doubtful and loss assets drives both income recognition and provisioning, so learn it before them.
  3. 3Income Recognition Norms for NBFCsOnce you can tell a performing asset from a non-performing one, you can learn when interest is booked and when it is reversed or kept out.
  4. 4Provisioning Norms and Computation of ProvisionProvision is computed on the classified asset and its security cover, so it comes after classification and income recognition.
  5. 5Prudential Norms: Capital Adequacy and Exposure LimitsAfter the loan-book rules, study how capital and concentration limits protect the NBFC; the ratios use owned funds and risk-weighted assets.
  6. 6Accounting for Investments and Valuation NormsThis is a separate set of valuation rules, easier to learn once the provisioning method is clear.
  7. 7Disclosure, Reporting and Financial Statements of NBFCsFinish with presentation and disclosures, which pull together everything you have learnt and are best revised last.

How to prepare NBFCs - Provisioning Norms, Accounting and Reporting

Treat this chapter as a sequence of rules and rates, then drill the numericals until the steps are automatic.

  1. Read the RBI framework in plain words first: what an NBFC is, the four layers of the scale-based regulation framework (the Top layer is ordinarily empty unless the RBI places an NBFC there), and which NBFCs follow Ind AS. Note the format as well: Ind AS NBFCs use Division III of Schedule III, while NBFCs not following Ind AS prepare their statements in Division I (or Division II, as applicable) of Schedule III, along with the RBI disclosure requirements. Write a one-page summary in your own words.
  2. Build a table of asset categories on one sheet: standard, sub-standard, doubtful and loss, with the time period for each and the provision rate applied. Learn it by writing it from memory.
  3. Practise a standard working in this order: classify the asset, reverse or stop income, find the secured and unsecured portion, compute provision, then state the net amount. Never skip a step even if the answer looks obvious.
  4. Separate the two worlds clearly: the RBI norms for NBFCs not following Ind AS, and the expected credit loss approach for Ind AS NBFCs. Note that 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 charged as an expense.
  5. Learn capital adequacy and exposure limits as a short list of ratios and bases. Check the latest RBI direction for the exact percentages before the exam.
  6. Solve past ICMAI questions and test-paper questions on the chapter, then redo the ones you got wrong after three days.
  7. In the last week, revise only your summary sheets and the table of rates, and attempt a few 2-mark questions on definitions and ratios.

Common mistakes in NBFCs - Provisioning Norms, Accounting and Reporting

  • Applying one provision rate to the whole asset without separating secured and unsecured portions.

    Fix: Always write the secured and unsecured portion first, then apply the rate to each, then add them.

  • Mixing the RBI norms with the Ind AS expected credit loss method in one answer.

    Fix: Read the question for whether the NBFC follows Ind AS. Use the RBI norms only for non-Ind AS NBFCs, and note the impairment reserve comparison for Ind AS NBFCs.

  • Continuing to recognise interest on a non-performing asset.

    Fix: Remember that income on an NPA is recognised only when received, and unrealised interest already booked is reversed.

  • Classifying an asset using the wrong overdue period or time in the category.

    Fix: Use the period stated in the question or the current RBI direction, and count from the date the asset became non-performing.

  • Quoting capital ratios or exposure limits from memory without checking the layer.

    Fix: Keep a revised sheet of the ratios from the latest direction and write the base (owned fund, Tier 1 or risk-weighted assets) with each percentage.

  • Leaving out disclosures and format in a reporting question.

    Fix: End every reporting answer with the required line items and notes, and name Division III of Schedule III where it applies.

Last-day revision: NBFCs - Provisioning Norms, Accounting and Reporting

  • 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.

NBFCs - Provisioning Norms, Accounting and Reporting practice questions

NBFCs - Provisioning Norms, Accounting and Reporting in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

NBFCs - Provisioning Norms, Accounting and Reporting: frequently asked questions

Is this chapter more theory or more numericals?

Both. Definitions, layers, ratios and disclosures suit multiple choice questions, while classification, income reversal and provision are tested as workings. Prepare both, but spend more time on workings, because they carry more marks.

Do I need to learn RBI norms if the NBFC follows Ind AS?

Yes. Ind AS NBFCs use the expected credit loss approach, but they still compare it with the provision required under the RBI norms. Where the Ind AS 109 allowance is lower, the difference is appropriated from net profit or retained earnings to an impairment reserve. You also still need asset classification and the regulatory framework.

Where do I find the latest percentages and limits?

Use the RBI's current directions for NBFCs and the latest ICMAI study material and updates. Rates and limits have changed over time, so check them close to your exam instead of relying on old notes.

Which Schedule III format applies to NBFCs?

NBFCs that are required to follow Ind AS present their statements in Division III of Schedule III to the Companies Act, 2013. NBFCs that do not follow Ind AS prepare theirs in Division I (or Division II, as applicable) of Schedule III, along with the RBI disclosure requirements. Learn the main line items and notes, as reporting questions can ask for the format.

How should I answer a provisioning question in the exam?

Classify the asset first, then state the secured and unsecured portions, apply the rates, and add them. Show the net figure and a one-line conclusion. Clear steps earn marks even if one number is wrong.