21 April 2023
RBI/DNBR/2016-17/44 Master Direction DNBR.PD.007/03.10.119/2016-17 September 01, 2016 (Updated as on December 29, 2022*) Master Direction - Non-Banking Financial Company – Non-Systemically Important Non-Deposit taking Company (Reserve Bank) Directions, 2016 Chapter – I 2. Applicability (4) (iii) Applicable NBFCs having customer interface but not accessing public funds are exempt from the applicability of Chapter IV of the directions.” From the above, it can be deduced that “a private limited NBFC having NOF Rs. 2.3 Crore as on 31.03.2023 having no Public Fund” does not require to make provision for NPA as per above RBI Circular and clarified in “PresentationonNBFCsICSI_NIRC_18022017 at page 274” that “NBFC-ND with no PF - Provisioning norms - Not Applicable” . ok. No problem upto here. Now is there any rule or call it by any name in company law/ ACCOUTING STANDARDS/anywhere to make Provision for Debtors or just like NPA, if Yes, in which law etc. and How much percentage of Debtors in above example. Please guide, Thanks with regards in advance.
09 July 2024
In the context of provisions for Debtors (similar to NPA provisions), here's a clarification based on relevant regulations and practices in India:
1. **Provisions for Debtors in NBFCs:** - Unlike NPA provisions, which are specifically mandated by the Reserve Bank of India (RBI) for Non-Banking Financial Companies (NBFCs), there isn't a specific requirement under RBI regulations for NBFCs to make provisions for Debtors (trade receivables). - Generally, NBFCs follow prudent accounting practices where they assess the creditworthiness of Debtors and may voluntarily make provisions based on their assessment of the recoverability of debts.
2. **Accounting Standards:** - Under Indian Accounting Standards (Ind AS) or previous Accounting Standards (AS), provisions for Debtors are guided by principles of prudence and conservatism. - Ind AS 109, Financial Instruments, provides guidelines for impairment of financial assets, including trade receivables (Debtors). It requires entities to assess expected credit losses (ECL) on financial assets and make provisions accordingly. - However, Ind AS adoption is mandatory for certain classes of companies (like listed companies and certain NBFCs) and optional for others. Non-mandatory adopters may follow the earlier Accounting Standards (AS).
3. **Percentage of Provision:** - The percentage of provision for Debtors is typically based on an assessment of the risk of non-recovery. This assessment considers factors such as past experience, credit ratings of Debtors, economic conditions, and specific indicators of impairment. - There is no fixed percentage mandated by law; it varies based on the company's internal policies and risk management practices.
4. **Company Law:** - The Companies Act, 2013, and related rules primarily focus on financial reporting and disclosure requirements rather than specific provisions for trade receivables. - It mandates that financial statements should give a true and fair view of the company’s financial position, including provisions where necessary to reflect prudent accounting policies.
5. **NBFC-Specific Considerations:** - While NBFCs may not be required to make provisions for Debtors as strictly as for NPAs, they are expected to manage credit risk effectively and maintain adequate liquidity and solvency ratios. - Prudent NBFCs often establish internal guidelines or policies for provisions on Debtors to mitigate risks associated with credit losses.
**Conclusion:** In summary, while there is no specific legal requirement akin to NPA provisions for Debtors in NBFCs, prudent NBFCs often make provisions based on their assessment of credit risk and expected credit losses. This practice aligns with accounting standards (Ind AS or AS) and general principles of financial prudence. It's advisable for NBFCs to establish clear internal policies and methodologies for assessing and provisioning for Debtors to ensure sound financial management and compliance with accounting principles.
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