(a) Instant Finance Ltd. is a Non-Banking Financial Company (NBFC-BL) primarily engaged in providing loans to small businesses and individuals. As…

Compliance with Minimum Tier 1 Capital Requirements: As per RBI norms, Instant Finance Ltd. must maintain a minimum capital adequacy ratio of 15 % of aggregate risk-weighted assets. Since 60 % of its financial assets are loans against gold, it must maintain a Tier 1 Capital of at least 12% (120Crore) of its risk-weighted assets. (i) In the given situation, Instant Finance Ltd. has reported Tier 1 Capital of 130crore. However, NBFC-BL are not eligible to include perpetual debt instruments in their Tier 1 capital. Thus, the amount of Tier 1 Capital will be 115crores (130 crores - 15 crores = 115 crores). Since, Instant Finance Ltd.'s primary business involves lending against gold jewellery, with such loan comprising of 60% of its financial assets which is exceeding the criteria of 50% or more, thus, Instant Finance Ltd. is required to maintain a minimum Tier 1 capital of 12 percent of aggregate risk weighted assets of on-balance sheet and of risk adjusted value of off-balance sheet items. Considering the 120crore (Aggregate Risk Weighted assets *1000 crore*12% = 120 crore) as Tier 1 Capital, it can be concluded that Instant Finance Ltd. has not complied with the minimum Tier 1 Capital requirements as per the RBI Prudential Norms. Alternative Answer: (i) As per the facts, Instant Finance Ltd. has investment in shares and bonds of other NBFCs totalling of 10crore, which amount to 12% of its owned fund. "Tier 1 capital” for NBFCs (except NBFCs-BL) is the sum of (i) Owned fund as reduced by investment in shares of other NBFCs 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 percent of the owned fund; and (ii) Perpetual debt instruments issued by a non-deposit taking NBFCs in each year to the extent it does not exceed 15 percent of the aggregate Tier 1 capital of such company as on March 31 of the previous accounting year. However, NBFCs-BL are not eligible to include perpetual debt instruments in their Tier 1 capital. Since Owned Fund = 83.33 crore [i.e., = 10 crore /12%] - 1.667 [in excess of 10% of owned fund] = 81.667 crore In the given situation, Instant Finance Ltd. has reported Tier 1 Capital of 130crore. However, NBFC BL are not eligible to include perpetual debt instruments in their Tier 1 capital. Thus, amount of Tier 1 Capital will be - 113.333 crore = 130 crore - 15 crore - 1.667 crore (i.e., Tier 1 Capital-Perpetual Debt Instrument - excess of 10% of owned fund). Considering the 120crore = (Aggregate Risk Weighted assets 1000*12%) as Tier 1 Capital, it can be concluded that Instant Finance Ltd. has not complied with the minimum Tier 1 Capital requirements as per the RBI Prudential Norms. (ii) Perpetual debt instruments issued by a non-deposit taking NBFCs in each year to the extent it does not exceed 15 percent of the aggregate Tier 1 capital of such company as on March 31 of the previous accounting year are included while calculating Tier 1 capital. However, NBFCs-BL are not eligible to include perpetual debt instruments in their Tier 1 capital. In the instant case, Instant Finance Ltd. falls under the category of NBFC-BL, hence, perpetual debt instruments will not be included in Tier I Capital. (iii) While computing Tier I capital, Owned fund shall be reduced by investment in shares of other NBFCs 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 percent of the owned fund. In the given case, Tier I capital of Instant Finance Ltd should be reduced by investment in shares of other NBFCs, exceeding in aggregate ten percent of the owned fund. In the current scenario, the investment in shares and bonds of other NBFCs totaling to 10 crore is 12% of owned funds, hence, the excess of 2% of owned funds should be adjusted to arrive at Tier I Capital. Alternative Answer: (iii) While computing Tier I capital, Owned fund shall be reduced by investment in shares of other NBFCs 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 percent of the owned fund. In the given case, Tier I capital of Instant Finance Ltd should be reduced by investment in shares of other NBFCs, exceeding in aggregate ten percent of the owned fund. In the current scenario, the investment in shares and bonds of other NBFCs totaling to 10 crore is 11.33% of owned funds, hence, the excess of 1.33% of owned funds should be adjusted to arrive at Tier I Capital.