Treatment of Right-of-Use (ROU)

Date: Mar 21, 2025.

Please refer to:

a) Paragraphs 5.1.25 and 107.2 of the Master Direction - Reserve Bank of India (Non-Banking Financial Company (NBFC) – Scale Based Regulation) Directions, 2023 - (definition of Owned Fund and Common Equity Tier 1 (CET 1) capital)

b) Paragraph 4.1.28 of the Master Direction - Non-Banking Financial Company - Housing Finance Company (HFC) (Reserve Bank) Directions, 2021 – (definition of Owned Fund)

c) Paragraph 3.(1)(xxii) of the Core Investment Companies (Reserve Bank) Directions, 2016 – (definition of Owned Fund)

d) Paragraph 3(a)(xxv) of the Mortgage Guarantee Companies (Reserve Bank) Directions, 2016 – (definition of Owned Fund)

e) Paragraph 3.1(xi) of the Master Direction – Reserve Bank of India (Asset Reconstruction Companies) Directions, 2024 – (definition of Owned Fund)

f) Paragraph 3(iv) of the Master Direction - Standalone Primary Dealers (Reserve Bank) Directions, 2016 – (definition of Tier 1 capital) The instructions cited above require deducting the book value of intangible assets while calculating Owned Fund/ CET 1 capital/ Tier 1 capital.

The instructions cited above require deducting the book value of intangible assets while calculating Owned Fund/ CET 1 capital/ Tier 1 capital.

2. In terms of Indian Accounting Standard (Ind AS) 116 - Leases, most leases will be reflected on a lessee's balance sheet as an obligation to make lease payments (a liability) and a related ROU asset (an asset). We have received references from various NBFCs (in their capacity as lessees) on the treatment of ROU assets for calculation of regulatory capital/ Owned Fund.

3. In this regard, it is clarified that regulated entities shall not be required to deduct an ROU asset (created in terms of Ind AS 116-Leases) from Owned Fund/ CET 1 capital/ Tier 1 capital (as the case may be), provided the underlying asset being taken on lease is a tangible asset. The ROU asset shall be risk-weighted at 100 per cent, consistent with the risk weight applied historically to the owned tangible assets.

4. The above revisions/changes have been incorporated in the respective Master Directions, as detailed in Annexure 1 to Annexure to 6 below.

Applicability

5. This circular is applicable, with immediate effect, to all NBFCs (including HFCs) and Asset Reconstruction Companies implementing Companies (Indian Accounting Standards) Rules, 2015.