ADVANCED ACCOUNTING SHORT NOTES PROBLEMS

NBFC

NBFC [Non-banking financial company] Meaning:

A company registered under Companies Act, 2013 engaged in the business of

 Providing loans and advances
 Acquisition of shares, debentures & other securities
 Leasing
 Hire purchase
 Insurance business &
 Chit business

Example:
a. India Bulls
b. DHFL
c. TATA capital etc.

NBFC – doesn’t include

Whose principal business is

 Agricultural activity
 Industrial activity
 Sale/purchase/construction of immovable property

Net Owned Fund – NBFC

In terms of Sec. 45-IA of RBI Act, 1934.

 NBFC’s are required to obtain a Certificate of Registration from RBI to
commence/carry on business of Non-Banking Financial Institution

 Once registered, they shall maintain minimum NOF, creation of reserve fund,
compulsory transfer of certain % of net profit etc.

 NOF for new companies is stipulated @ 200 lakhs [Note: all NBFC’s to attain a
minimum NOF of Rs.200 lakh by the end of 31.3.17]

OWNED FUND  COMPUTATION

Add:
 Paid up Capital
 Free reserves
 Share premium
 Capital reserves [excluding revaluation reserves]

Less:
 Accumulated Loss
 Deferred revenue expenditure
 Intangible assets

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NET OWNED FUND  COMPUTATION

Add:
 Owned Fund

Less:
 Investment in Shares of subsidiaries / companies in same group / other NBFC
 Book value of debentures, bonds, outstanding loans and advances made to and
deposits with subsidiaries and companies in the same group [to the extent such sum
exceeds 10% of owned fund]

NBFC Vs. Bank

Basis of Distinction NBFC Bank

Accepting demand deposits Not possible Possible

Part of payment & settlement system No Yes
Cheques drawn on itself Not possible Possible
DICGC (Deposit Insurance and Credit Not available Available
Guarantee Corporation) guarantee

NPA CLASSIFICATION– NBFC

Asset What is overdue? Overdue period

NBFC-D, NBFD –
NBFC-ND ND
SI
1 Asset Interest >3M >6M

2 Term Loan 1. Installment >3M >6M

(including unpaid
interest)
Or
2. Interest

3 Demand or Call loan Interest from the date >3M >6M

of demand/call

4 Bill Amount >3M >6M

5 Debt/income on receivables [in the Interest >3M >6M

nature of short term loans/advances]

6 Sale of assets Dues >3M >6M

Services rendered
Reimbursement of expenses incurred

7 Hire purchase Installment >3M > 12 M

8 Lease Rental >3M > 12 M

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ASSET CLASSFICATION – NBFC

Asset Meaning
1 Standard No default in respect of principal / interest
2 Sub- 1. Asset which has been classified as NPA for a period not exceeding 12
Standard months [For NBFC-ND it is 18 months]

3 Doubtful Asset which remains sub-standard for a period exceeding 12 months [For
NBFC-ND it is 18 months]
4 Loss 1. Asset identified as loss during inspection by
A. NBFC or
B. Internal or external auditor or
C. RBI

2. Asset adversely affected by a potential threat of non-recoverability due

to
A. Erosion in value of security
B. Non availability of security
C. Fraudulent act or omission on the part of borrower

#NPA: INTEREST/INSTALLMENT OVERDUE FOR A PERIOD OF 3 MONHTS/MORE

NBFC – PRUDENTIAL NORMS  PROVISIONING OF ASSETS

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NBFC’S – PROVISIONING OF ADVANCES for “NBFC –ND – SI & NBFC –D”

Assets Provision required
Standard Assets 0.40 % Note: For those “NBFC – ND”, STANDARD ASSETS
FOR WHICH 0.25% CONTINUES.
Sub-standard Assets 10 %
Secured Portion of
doubtful debts
- upto 1 year 20 %
- one year to 3 years 30 %
- more than 3 years 50 %
Unsecured portions of 100 %
doubtful debts
Loss assets 100 %

Additional Provision for hire purchase and leased assets

In respect of hire purchase and leased assets, additional provision shall be made as under:

Where hire charges or lease rentals Provision as a

are overdue % on Net Book Value
Upto 12 months
> 12 months upto 24 months 10%
> 24 months upto 36 months 40%
> 36 months upto 48 months 70%
> 48 months 100%

Valuation of Investments:

Investment in Valuation scale

A) Quoted Current Investments
Quoted current investments Cost or Market value whichever is lower
B) Unquoted Current Investments
Equity shares Cost or Break-up value whichever is lower
Preference shares Cost or Face value whichever is lower
Govt securities/Bonds Carrying cost
Mutual funds Net Asset Value
Commercial papers Carrying cost
C) Long term investments As per Accounting Standards issued by ICAI

Note: Quoted current investments for each category shall be valued at cost or market value
whichever is lower. For this purpose, the investments in each category shall be considered
scrip-wise and the cost and market value aggregated for all investments in each category
i. If the aggregate market value for the category is less than the aggregate cost for that
category, the net depreciation shall be provided for or charged to P & L a/c.
ii. If the aggregate market value for the category exceeds the aggregate cost for the
category, the net appreciation is ignored.
iii. Note: Depreciation in one category of investments shall not be set off against
appreciation in another category

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PRACTICAL QUESTIONS

Q. 1 Templeton Finance Ltd. is a non-banking finance company. The extracts of its balance
sheet are given below:

Liabilities Amount Assets Amount

` in 000’s ` in 000’s
Paid up equity capital 100 Leased out assets 800
Free reserves 500 Investments:
Loans 400 In shares of subsidiaries & group companies 100
Deposits 400 In debentures of subsidiaries & group companies 100
Cash and bank balance 200
Deferred expenditure 200
1,400 1,400

You are required to compute “Net owned Fund” of Templeton Finance Ltd. as per Non-
Banking Financial Company – Systematically Important Non-Deposit taking Company and
Deposit taking Company (Reserve Bank) Directions, 2016.

Q. 2 Bright Finance Ltd. is a non-banking financial company. It provides you with the
following information regarding its outstanding amount, ` 200 lakhs of which installments
are overdue
 on 200 accounts for last one month (amounts overdue ` 40 lakhs)
 on 24 accounts for two months (amount overdue ` 24 lakhs)
 on 10 accounts for more than thirty months (amount overdue ` 20 lakhs)
 on 4 accounts for more than two years (amount overdue ` 20 lakhs & already
identified as sub-standard assets) &
 one account of ` 10 lakhs which has been identified as non-recoverable by
management

Other information:
 Out of 10 accounts overdue for more than 30 months, 6 accounts are already
identified as sub-standard (amount ` 6 lakhs) for more than twelve months and other
are identified as sub-standard asset for a period of less than twelve months.
Classify the assets of the company in line with Non-Banking Financial Company –
Systematically Important Non-Deposit taking Company and Deposit taking Company
(Reserve Bank) Directions, 2016.

Q. 3 While closing its books of account on 31st March, a Non-Banking Finance Company has
its advances classified as follows:
` in lakhs
Standard assets 16,800
Sub-standard assets 1,340
Secured portions of doubtful debts:
− up to one year 320
− one year to three years 90
− more than three years 30

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Unsecured portions of doubtful debts 97

Loss assets 48

Calculate the amount of provision, which must be made against the Advances as per
a. The Non-Banking Financial Company – Non-Systematically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016 and
b. The Non-Banking Financial Company – Systematically Important Non-Deposit
taking Company and Deposit taking Company (Reserve Bank) Directions, 2016

Q. 4 Anischit Finance Ltd. is a non-banking finance company. It makes available to you the
costs and market price of various investments held by it as on 31.3.2017:
Scripts: (Figures in ` lakhs)
Cost Market price
A. Equity Shares-
A 60.00 61.20
B 31.50 24.00
C 60.00 36.00
D 60.00 120.00
E 90.00 105.00
F 75.00 90.00
G 30.00 6.00

B. Mutual funds-
MF-1 39.00 24.00
MF-2 30.00 21.00
MF-3 6.00 9.00

C. Government securities-
GV-1 60.00 66.00
GV-2 75.00 72.00

1. Can the company adjust depreciation of a particular item of investment within a

category?
2. What should be the value of investments as on 31.3.2017?
3. Is it possible to off-set depreciation in investment in mutual funds against appreciation
of the value of investment in equity shares and government securities?

Q. 5 Samvedan Ltd. is a non-banking finance company. It accepts public deposit and also
deals in hire purchase business. It provides you with the following information regarding
major hire purchase deals as on 31.3.14. Few machines were sold on hire purchase basis. The
hire purchase price was set as Rs.100 lakhs as against the cash price of Rs.80 lacs. The
amount was payable as Rs.20 lacs down payment and balance in 5 equal instalments. The
hire vendor collected first instalment as on 31.3.15, but could not collect the second
instalment which was due on 31.3.16. The company was finalising accounts for the year
ending 31.3.16. Till 15.5.16, the date on which the Board of Directors signed the accounts, the
second instalment was not collected. Presume IRR to be 10.42%.

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Required:
a. What should be the principal outstanding on 1.4.15? Should the company recognise
finance charge for the year 2015-16 as income?
b. What should be the net book value of assets as on 31.3.16 so far Samvedan Ltd. is
concerned as per NBFC prudential norms requirement for provisioning?
c. What should be the amount of provision to be made as per prudential norms for
NBFC laid down by RBI?

Q. 6 Peoples Financiers Ltd. is an NBFC providing the Hire Purchase Solutions for acquiring
consumer durables. The following information is extracted from its books for the year ended
31.3.17:
Asset Funded Interest Overdue but recognised in Net Book Value of
P&L Assets outstanding
Period Interest Amount (` In crore)
Overdue (` In crore)
LCD TV Upto 12 months 480.00 20,123.00
Washing machines For 24 months 102.00 2,410.00
Refrigerators For 30 months 50.50 1,280.00
Air Conditioners For 45 months 26.75 647.00

You are required to calculate the amount of provision to be made.

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