On June 9, 2025, the RBI published a comprehensive set of FAQs on Know Your Customer (KYC) guidelines, aimed at clarifying confusion surrounding KYC measures for banks and financial institutions. While the majority of these FAQs successfully provide the much-needed clarity to the financial sector, the response to Question 13, however, has the possibility of inadvertently creating a regulatory arbitrage. This article examines the root of this discrepancy, its potential consequences, and why it warrants a re-examination by the regulator.
Face to Face vs. Non-face-to-face Modes of Onboarding
This classification is significant because the risk perception, control measures, and regulatory compliances differ for each mode, especially with remote onboarding posing higher risks of impersonation, identity fraud, and misuse. Para 40(f) of the directions provides that the customers onboarded in non face to face mode shall be classified as high risk customers and shall be subjected to enhanced due diligence until they have done the face to face identification.
As per the KYC Directions, a ‘Non face to face customer’ means customers who open accounts without visiting the branch/offices of the REs or meeting the officials of REs (refer para 3(b)(x)). In this regard, e-KYC authentication, undertaking offline verification of proof of possession of Aadhaar Number (submitted by way of aadhaar XML, mAadhar or electronic copy of the PVC card)); obtaining equivalent e-document of OVD can all be done by remote mode. These modes of submitting KYC information do not require the presence of the customer at the branch or an authorised official having to meet the customer in person.
However, these modes have been listed under face-to-face methods of onboarding in the response to Question 13 in the FAQs.
Role of V-CIP
In case these modes are considered as face to face modes of onboarding then the utility of performing V-CIP also comes into question. Let us examine why? V-CIP has been granted the same standing as face to face mode of onboarding and REs performing V-CIP are freed from additional compliance burden of performing EDD according to para 40 of the KYC Directions. The V-CIP process requires the REs to maintain costly infrastructure and also bear operating costs to run the process. Now, the V-CIP process has two parts – one, the KYC Directions mandate a rigorous process for capturing and storing the live video of the customer which is used for establishing the existence/ genuineness of the said person and two, obtaining requisite identification information from the Customer as per para 18 (b)(vi). The modes of obtaining customer identification information are –
OTP based Aadhaar e-KYC authentication
Offline Verification of Aadhaar for identification
KYC records downloaded from CKYCR, in accordance with paragraph 56, using the KYC identifier provided by the customer
Equivalent e-document of Officially Valid Documents (OVDs) including documents issued through DigiLocker
Hence, if merely performing Aadhar-based e-kyc or offline verification of aadhar or obtaining OVD e-document are considered as face-to-face modes of customer onboarding, REs will have no motivation of performing the full V-CIP. This cannot be the intention of the regulator.
Additionally, RBI in its notification dated June 12, 2025 on Updation/ Periodic Updation of KYC – Revised Instructions has touched upon the distinction between face-to-face, Non face-to-face, and V-CIP onboarding. It has considered only biometric-based e-kyc and digital KYC as face to face onboarding while considering V-CIP on the same footing as face to face onboarding.
Conclusion
The meaning of face-to-face mode of onboarding is implicit in the definition of Non-face-to-face Customer as per para 3(b)(x) of the KYC Directions. Face to face onboarding will mean that either customer physically visits the branch of the RE to open their account or or an authorised official of the RE physically meets such customer for such purpose. In either case the existence of the customer is physically verified when it comes to face to face onboarding. Given this reading of the regulations, in our view, the KYC Directions allow for only the following three modes of face to face onboarding –
where there is physical meeting of the Customer with the officials of the RE (e.g. branch visit),
Digital KYC as per annex I where an authorised official of the RE is required to meet the Customer physically, or
V-CIP, in compliance with all the infrastructure and operational requirements, has been explicitly recognised to have the same standing as face-to-face onboarding per para 3(b)(xvi).
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2025-06-12 17:34:512025-06-12 17:43:30RBI publishes FAQs on KYC - Question on Modes of Onboarding Raises more Questions
On June 06, 2025, the RBI notified the final Reserve Bank of India (Lending Against Gold and Silver Collateral) Directions, 2025 (‘Gold Lending Directions’), after incorporating substantial changes from the Draft Directions published on April 09, 2025 . In the final version, the RBI appears to have accepted some of the recommendations of the Ministry of Finance as also several of the recommendations from stakeholders and other commentators [VKC also sent some recommendations, partly accepted].
In this resource, we analyse the Gold Lending Directions, while also comparing the final version with the original draft.
II. Applicability
As stipulated under the Draft Directions, the Gold Lending Directions aim to create a harmonized and unified regulatory framework for Regulated Entities (REs) in gold-lending, and are applicable to:
Commercial Banks (including SFBs, Local Area Banks and Regional Rural Banks, but excluding Payments Banks).
Primary (Urban) Co-operative Banks (UCBs) & Rural Co-operative Banks (RCBs), i.e., State Co-operative Banks (StCBs) and Central Co-operative Banks (CCBs), and
All NBFCs, including HFCs
There has been no change from the Draft Directions with regard to applicability. In fact, remarkably, there was a discrimination in the Draft Directions seeming to put NBFCs to a disadvantage (the LTV cap was not applicable to banks in case of income generating loans, though applicable to NBFCs); the same has now been removed..
Applicability Date:
Above entities should apply the directions as expeditiously as possible, but no later than April 1, 2026. Further, the Directions refer to “adoption” by the RE – which implies that REs are expected to act soonest towards “adopting”. Loans extended before such adoption are covered by the erstwhile rules. This essentially implies that there is no disruption of business and the transitioning is smooth.
Does it have to be an all-at-a-time transitioning, or can lenders transition in tranches? There may be many changes required: besides LTV flexibility, there are rules on valuations, safe-keeping, auctioning, documentation, etc. Our view is that as regards changes in policy, SOPs, documentation, etc., the same may be initiated in tranches, but on key business aspects such as LTV, top-up lending, etc., the shift should be done only when the RE is fully ready to transition.
Given the surging gold prices and LTV and top-up flexibility, we also expect that many REs may be tempted to transition before the deadline.
III. Type of Loans
The Gold Lending Directions apply to “income generating loans” and “consumption loans” where eligible gold collateral or silver collateral is accepted as a collateral security. Some definitions are of relevance here, namely:
Collateral security: “Collateral Security” or “Collateral” means an existing asset of the borrower pledged to the lender for availing and securing a credit facility extended by the lender to the borrower”
Income generating loans: Loans extended for the purpose of productive economic activities. Here, of course, the lending – including the size of the loan, tenure, repayment pattern, etc are all defined by the cashflows of the income source for which the loan will be utilised.
Consumption loans: A loan that does not fit under the definition of an income generating loans.
Eligible gold-collateral: Collateral of jewellery, ornaments, or coins made of gold or silver.
Hence, all lending against gold collateral would be either categorised as an income generating loan, and if not, as a consumption loan, and consequently, be regulated under these Directions.
If there is an “eligible collateral”, then the question that arises is what is the “ineligible collateral”? Consistent with the Draft Directions, the Gold Lending Directions clarify that: Lenders shall not lend against,
Primary gold or silver; or
Financial assets, backed by such primary gold/silver (e.g. units of exchange traded funds, or mutual funds), or gold bonds.
Changes against the Draft Directions: The following changes have been made against the Draft Directions in this regard:
Aspect
Change from Draft Directions
“Collateral Security”
Draft Directions: Defined the collateral security in relation to primary security (i.e. assets created out of the credit facility). Going by this definition – In situations where there were no assets created out of the credit facility, there would be no “collateral security” Further, the Draft Directions specified ambit for regulation as “where eligible gold is the only collateral available”. This created ambiguity/exclusion in case of mixed collateral (e.g. lending partly against gold, and partly against other assets). Final Directions: Both the issues are now resolved.
“Consumption Loans”
Draft Directions: Consumption loans were defined as: (a) Loans given for certain specific purposes – such as medical needs, consumer durables, emergency requirements, which do not directly help in generating income; and/or, (b) any loan that is not an IG loan. Final Directions: The definition has been simplified to mean any loan which is not an income generating loan.
IV. Differentiation between ‘Income Generating’ loans, and ‘Consumption’ loans:
Formerly, under the Draft Directions, there was a significant differentiation between the applicable compliance requirements for Income Generating loans (IG Loan) and Consumption loans. A tabulated snapshot of the compliance under the Draft Directions, may be accessed here.
However, under the present Gold Lending Directions, the differentiation has been reduced. Whilst the Draft Directions prescribed more stringent requirements with respect to monitoring end use, concurrent lending, purpose based internal classification and mandatory cash flow assessment for credit sanction, under the final Directions the lenders have been asked to adopt necessary policies and SOPs for ensuring PSL classification.
The essence of the differentiation is that in case of an income generating loan, as it is for a productive economic activity, the credit evaluation shall not be restricted to just the value of the gold but also the credit profile of the borrower and its activities. .
On the other hand, in the case of a consumption loan, such an assurance is not readily available except for the collateral value. Hence, greater safeguards are required. In the new regulations, all provisions are applicable to both types of loans i.e. income generating and consumption unless specified otherwise. Wherever separate provisions are given for any specific type of loan, such provision will be applicable only to such type of loan.
Differences between the two are tabulated below:
Basis
Income generating loan
Consumption loan
Definition
Loans extended for the purpose of productive economic activities. Such as: Farm credit Loans for businesses for commercial purposes; Loans for creation or acquisition of productive assets etc.
Any permissible loan that does not fit in the definition of income-generating loan.
Maximum Tenor
Maximum tenor not prescribed in the regulations. Usually for such loans, the tenor shall be based on the assessment of the borrower’s economic activity. This approach also becomes relevant in case of PSL classification. Refer RBI’s FAQs on PSL (No. 9), where for gold loans it is stated that, “bank should have extended the loan based on scale of finance and assessment of credit requirement for undertaking the agriculture activity and not solely based on available collateral in the form of gold.”
In case of bullet repayment loans, maximum tenor has been prescribed as 12 months None in case of non-bullet repaying loans.
Maximum LTV
Maximum LTV not prescribed. The same will have to be prescribed by the lenders under the respective lending policies.
Maximum LTV is based on the total consumption loan amount per borrower. Less than equal to 2.5 Lakh – 85% > ₹2.5 lakh & ≤ ₹5 lakh – 80% > ₹5 lakh – 75%
Disclosure in notes
No obligation to disclose what subset of income generating loans are in the nature of bullet repayment
Lender to disclose bifurcation between Consumption loans and what subset of the same are bullet repayment loans
V. Restrictions for Lenders
Restrictions for lenders
No advances against primary gold, silver, or financial assets backed by primary gold/silver: Lenders shall not grant advances against such collateral.
Doubtful ownership of collateral: Lenders shall not extend loans where the ownership of collateral is doubtful. Hence, suitable documentation shall be obtained from borrowers to confirm ownership of the collateral. Given the fact that a lot of gold articles for Indian households may either be inherited, or acquired by way of wedding gift etc., suitable documentation in many cases may be a declaration. However, where the value appears to be disproportional to the apparent sources of income, lenders may take extra precaution. .
Multiple loans to the same borrower/group of borrowers: Multiple loans extended to the same borrower/group of borrowers should be evaluated for anti-money laundering and fraud-risk.
Re-pledged collateral: Lenders shall not (i) avail loans through repledging of the borrower’s collateral; and (ii) Extend loans against the re-pledged collateral . However, it has been clarified that there is no bar on lenders obtaining finance against security of underlying receivables.
Tenor of bullet repayment consumption loans: The tenor of bullet repayment consumption loans shall not exceed 12 months. There is no such restriction on the tenor of bullet repayment income generating loans.
Top-up lending: Top-up loans may be extended only in case the existing loan is standard, based on the explicit request of the borrower, and subject to the LTV headroom. In the case of all bullet loans (income generating or consumption), the top-up shall be allowed only after the payment of accrued interest (if any). This acts as an evergreening check. Apparently, in case of bullet repaying loan, there is very little chance of the borrower turning an NPA except after maturity. Therefore, value of the gold so permitting, a top-up lending seems quite possible Will the renewal of a loan be considered a restructuring of the loan? The need for restructuring arises when a borrower is facing financial difficulties that hinder timely repayment of the loan. In such cases, the lender modifies the terms of the advances to provide concessions or relaxations to the borrower. In contrast, a gold loan renewal may not involve any concessions or changes due to any financial stress; it may merely be an extension or fresh sanction of the loan without being linked to the borrower’s financial hardship.
VI. Prudential Requirements in the loan journey
Aspect
Compliance
Credit underwriting
Lending upto ₹2.5 lakh: Under the Gold Lending Directions, lending upto ₹2.5 lakh, lenders have been provided the discretion to conduct credit assessment as per their own credit risk management framework. In such cases for instance, lenders may rely predominantly on the strength of the collateral, rather than conducting a deeper probe into the borrower’s repayment capacity, the cash-flows from the economic activity of the borrower. Lending above ₹2.5 lakh: For lending above ₹2.5 lakh, the lenders are mandatorily required to conduct a detailed credit assessment of the borrower. Our comments: Under the Draft Directions, the requirement for conducting credit assessment was applicable in case of all loans. However it is possible that this would have restricted credit access to poorer borrowers. Hence, in our view, this change may also be for the purpose of enabling access to credit through small ticket loans. This is also in line with the suggestions provided by the MOF.
Exposure Limits
Sectoral Limits: Given that gold is a “sensitive” sector, and the value is subject to regular fluctuations, lenders have been advised to set sectoral limits for lending against gold collateral, and include the same in their policy. Borrower Limits: The Policy shall also capture limits for lending against a single borrower. Weight Limits: Loans against gold and ornaments shall be subject to the following limits: (i) the aggregate weight of ornaments pledged for all loans to a borrower shall not exceed 1 kilogram for gold ornaments, and 10 kilograms for silver ornaments. (ii) the aggregate weight of coin(s) pledged for all loans to a borrower shall not exceed 50 grams in case of gold coins, and 500 grams in case of silver coins. LTV Limits: Specific LTV norms are prescribed for consumption loans. They are as follows: Under ₹2.5 Lakhs: 85% Between ₹2.5 Lakhs – 5 Lakhs: 80% Greater than 5 lakhs: 75% Our comments: Here, it must be noted that for income generating loans, although no specific LTV norms have been prescribed, it does not mean that such loans will not be subject to LTV requirements. It is merely a flexibility accorded to the lender, in recognition of its credit underwriting standards and the income generating nature of the facility. Such flexibility should be leveraged in good-faith and prudentially; As regards the LTV above, the maximum LTV has been prescribed, and hence lenders may also set their internal limits that are stricter.
PSL Classification
In case the loans have been originated to classify under priority sector lending, then the lender’s policy should also include appropriate documentation to be obtained and maintained for such loans. Loans originated by banks: In case of gold loans originated by banks, the RBI FAQs on PSL Lending clarify, that in order for such gold loans to be eligible for PSL classification, the banks should have extended the loan based on scale of finance and assessment of credit requirement for undertaking the activity. Further, as applicable to all loans under PSL, banks should put in place proper internal controls and systems to ensure that the loans extended under priority sector are for approved purposes and the end use is continuously monitored. Loans originated by NBFCs: PSL norms are not applicable upon NBFCs. However, NBFC originated exposures to priority sector categories, when securitised or transferred, are eligible for PSL classification by the investing/transferee Bank (see Para 18 and 19 of PSL Directions, 2025). However, gold loans are at present excluded under the aforesaid provisions (see Para 18(ii) and Para 19(iii) of the PSL Directions, 2025). Our comments: In our view, in case the originating NBFC, has ensured the safeguards captured for banks (i.e. credit underwriting and end-use monitoring norms), the gold loans originated should also be eligible for PSL benefit about TLE/securitisation. We hope to see enabling changes in the PSL Directions.
VII. Fair Lending Practices
Under the Gold Lending Directions (in line with the Draft Directions) lenders are required to ensure certain fair lending practices. These are:
Loan approval and sanctioning: The Borrower’s presence is to be ensured while assaying the collateral. There shall also be standardized documents (see Heading X)
Key Fact Statement: All the applicable charges shall be clearly included in the loan agreement, and a KFS shall flow to the borrower.
Communications with borrower: Communications shall be as per borrower’s regional language. For illiterate borrowers, the terms shall be explained in the presence of a witness (who is not the lender’s employee)
Misleading advertisements: In some cases, it has been observed that lenders advertise the interest rate to be a certain amount (say, 12%), however, the interest rate is a “jumping-interest-rate”, i.e. changes based on the borrower’s repayment behaviour. Repayments after a higher DPD may attract a higher interest rate. While this may be justifiable from the standpoint of compensating the lender for the increased riskiness of borrower, the facility should be advertised transparently, and the borrower should be made aware of the jumping interest rate nature of facility.
Use of recovery agents: The Gold Lending Directions clarify that the use of recovery agents for recovery/sourcing agents, are in compliance with the applicable guidelines on outsourcing and recovery practices. For NBFCs, the applicable regulations would be Annex XIII of the SBR Directions, the IT Outsourcing Directions, and the Digital Lending Guidelines.
Compensation: The Gold Lending Directions ensure that the borrower is able to receive compensation, and the cost of any damages to the collateral, whilst in possession of lender, is borne by lender. For each day of delay in release of collateral (beyond the stipulated timeline – i.e. 7 days of repayment/settlement), the borrower is to be compensated ₹5000. Further, it is noteworthy that the compensation above is without prejudice to the borrower’s rights under applicable law. This is a very significant consumer protection measure. Also consider that often the strata of borrowers may be such that they cannot afford lengthy court proceedings (consider that many of borrowers who take gold loans may be pledging their ancestral/inherited/bridal property in the absence of other property).
Fairness in auction procedure has been prescribed for lenders: Auction procedure is to be as per steps prescribed.
VIII. Policy Requirement
To a large extent, RBI has given flexibility to the lenders in respect of framing conditions for gold/silver lending. However, the Directions prescribe the below mentioned aspects to be mandatorily captured in the credit policy of the lender
appropriate single borrower limits
aggregate limits for the portfolio of loans against eligible collateral
maximum LTV ratio permissible for such loans
action to be taken in cases of breach of LTV ratio
valuation standards and norms
standards of gold and silver purity
appropriate documentation to be obtained and maintained for loans proposed to be categorised under PSL
Notably, ‘methods to ensure end-use’ which was one of the mandatory aspects to be covered in the credit policy under the draft directions were dropped from these present directions. However, in case lenders want to originate PSL loans, in our view, the same would still need to be captured.
Further, under the Draft Directions, LTV values for both Income generating and Consumption loans were provided. However, only the LTV values for the consumption loans could make it to the final directions. Therefore, the lenders should mention the LTV values for income generating loans in their Credit Policies.
IX. SOP Requirement
Since the credit policy will provide the skeleton of the process, the flesh i.e. the minute details will be the domain of the SOPs framed under the Policy. As per the present directions, the SOP shall cover the conduct-related aspects including but not limited to the following:
assaying procedure;
criteria/ qualifications for employing assayer/ valuer;
the auction procedure specifying, inter alia, the trigger event for the auction of eligible collateral;
timeline for serving an auction notice upon the borrower;
mode of auction;
notice period allowed to the borrower(s)/ legal heir(s) for settlement of loan before auction;
empanelment of auctioneers;
Procedure to be followed in case of loss, discrepancy in quantity or purity, or deterioration of eligible collateral during internal audit or otherwise, including at the time of return or auction, and fair compensation to be paid to the borrower(s)/legal heir(s) in such cases, along with timelines for effecting the same;
In addition to the above, in our view, the following key considerations should also find their way either in the Credit Policy or the SOPs framed thereunder:
Aspects
Compliance
Disbursements
Loans to generally be disbursed into customer accounts directly. An exception is made for flow of money between lenders for co-lending transactions.
Bank transfers: Funds directly in lender and borrower account; no routing through third party accounts (exceptions similar to DL Guidelines may be considered)
Cash transactions: Comply with provisions of IT Act, KYC Directions and PMLA
Disclosures
Disclosure in notes to account: Amount and percentage of loans extended against eligible collateral to total assets
Separately for IG and consumption purposes
Specific disclosures to be made for lending against silver collateral
Multiple loans
Multiple loans simultaneously to a single borrower/ group of related borrowers to be subject to stricter internal audit
Collateral management
Necessary infrastructure and security measures to be put in place for handling of gold collateral. Gold to be handled at own branches and by own employees Loans to not be extended by branches not having secured facility
X. Minimum Clauses to be added in the loan agreement
XI. Concluding notes – persisting ambiguities:
The flavour of the Gold Lending Directions is – a harmonised framework, consumer protection, and plugging the irregularities observed by the regulator in the past (see here our resource on the same).
However, it may be noted that the Gold Lending Directions have not repealed the provisions related to gold lending by NBFCs under the SBR Directions. It is important to note that the Draft Directions had proposed repealing para 37 (except 37.1.2 which deals with providing a loan for purchase of gold) and para 45.14 of the SBR Directions dealing with the provisions for gold lending. The miss out can lead to either of the following interpretations:
NBFCs will be required to adhere to the provisions of the SBR Directions in addition to the Gold Lending Directions – This does not seem likely since there are quite a few contradictions in the existing and new provisions.
Para 37 and 45.14 will be repealed/ amended to align with the Gold Lending Directions- this would require necessary action from the RBI.
Para 37 and 45.14 will not apply entirely and these Gold Lending Directions will prevail- however, this would require to be explicitly prescribed under the repeal provisions.
Our Resources in relation to the same:
Readers interested in a “bird’s-eye” view of the Draft Directions, for a better study of the regulation, may also view our resource here!
Our comprehensive book on NBFC Regulations, available here, contains a comprehensive section on the law as well as business of gold lending.
Our Shatrartha (Video), on the Draft Directions, here.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-06-07 19:14:592025-06-09 10:44:07A pledge of prudence – New Gold Lending Directions keep it balanced, non-discriminatory and flexible
Loan write-offs in case of banks has been a consistent practice, and has been sharply criticized in several forums. Loan write-offs constitute a significant amount: Between FY 2015 and FY 2024, Scheduled commercial banks wrote off loans worth ₹12.3 lakh crore, with a ₹9.9 lakh crore written off in just the last five years (FY 2020 to FY 2024).
Year
Amount (in INR Crore)
2023-24
1,70,270
2022-23
2,08,037
2021-22
1,74,966
2020-21
2,02,781
2019-20
2,34,170
Total
9,90,224
Table 1: Loan write-offs by banks in the last 5 years (FY 20 – 24)
On the other hand, global supervisors and developmental bodies have always advocated a sound loan write-off policy for uncollectable loans. In its 2014 paper, IMF says:
“Banking supervisors should have a general policy requiring timely write-off of uncollectible loans and assist banks in formulating sound write-off criteria. The benefits of timely write-offs of uncollectible loans are numerous … A bank should write off a loan or portion of a loan when it is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted. This does not have to be preceded by exhausting all legal means and giving up contractual rights on cash flows. This also does not mean that the loan has absolutely no recovery or salvage value, but rather that it is not practical or desirable to defer writing off this essentially worthless asset even though partial recovery may be realized in the future.”
The IMF paper also discusses the potential downside of the write-off – that the reported NPLs would be lower, however, it argues that the write-off gives a better picture of the provision coverage.
European regulators have also extensively recommended loan-write off policy. In a 2017 paper1, European Central Bank says:
“An entity should write off a financial asset or part of a financial asset in the period in which the loan or part of the loan is considered unrecoverable. For the avoidance of doubt, a write-off can take place before legal actions against the borrower to recover the debt have been concluded in full. A write-off does not involve the bank forfeiting the legal right to recover the debt; a bank’s decision to forfeit the legal claim on the debt is called “debt forgiveness”.
The World Bank in a 2019 paper2 has, likewise, given several benefits of a write-off as compared with provisioning:
“An ambitious NPL write-off policy provides several benefits for banks and the financial system.
Firstly, by resolving NPLs banks can focus on core business (i.e., financial intermediation) in terms of time and resources. By efficiently dealing with NPLs, including writing off, the bank can allocate its productive resources to new lending, instead of becoming an asset management company of “bad assets”.
Secondly, while the main aim is the liquidation of assets with low recovery prospects, the consequence of an NPL write-off typically is a decrease of the NPL ratio in banks. Country experience shows that this is a particularly efficient way to decrease the NPL ratio quickly …
Thirdly, there are no negative effects on financial statements, provided that loans are already fully provisioned and losses already recorded in the P&L statements. Fourthly, a decrease in NPL ratio should improve a ratings agency assessment of credit risks in the bank or in the financial system.”
IFRS 9 (Indian version Ind AS 109) specifically permits write-off, though its precursor, IAS 39 did not have a specific provision.
Originally, write-off in India seems to have been inspired by tax considerations, as a mere provisioning qualifies for a conditional and limited tax deduction under sec. 43D of the Income-tax Act. On the contrary, write-off as a bad debt can be fully claimed. Therefore, as back as in 2009, the RBI advised:
“Therefore, the banks should either make full provision as per the guidelines or write-off such advances and claim such tax benefits as are applicable, by evolving appropriate methodology in consultation with their auditors/tax consultants. Recoveries made in such accounts should be offered for tax purposes as per the rules.”
Similar paras appear in the Prudential circular of 2007 and 2008 too.
What is the genesis of the word “technical write-off”? Is it coming from global jurisdictions? It does not seem so. As per our research, the 2009 circular of the RBI (cited above) permitted banks to write off advances at HO level, even though they are outstanding at the branch level [this, in present day parlance would mean, write-off in books of account, though still outstanding in the customer’s MIS LAN).
The RBI stated:
“Banks may write-off advances at Head Office level, even though the relative advances are still outstanding in the branch books. However, it is necessary that provision is made as per the classification accorded to the respective accounts. In other words, if an advance is a loss asset, 100 percent provision will have to be made therefor.”
This write-off, done at HO level but not at branch level, has been referred to as prudential or technical write off, that is written-off technically, but not written-off really. In the forms appended to Master Circulars of 2011 onwards, the word “technical write off” appears with the meaning referring to advances which are written off at HO level.
FAQs on Write off
Below are some of the pertinent questions on write-offs:
Para 4.1.3 of the IRACP Circular defines a loss asset as follows:
“A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection, but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.”
This loss asset has been placed as a category under NPAs.
The Technical Write-off Framework states:
“Technical write-off for this purpose shall refer to cases where the non-performing assets remain outstanding at borrowers’ loan account level, but are written-off (fully or partially) by the RE only for accounting purposes, without involving any waiver of claims against the borrower, and without prejudice to the recovery of the same.”
The Prudential Circular provides that loss assets are either to be written off, or to be fully provided for. On the other hand, the Compromise Framework clearly refers to full or partial write off.
The intent of the two is the same – to write down what is worthless. However, the Prudential Circular is referring to the degradation of an NPA – from substandard, to doubtful, to loss, where it comes to a stage where there is a trivial recovery value. The end result is the same – the first one is a mandatory prudential requirement; under the Technical Write-off Framework, accounting write-off is purely optional.
Can a lender do a partial write off? Or write off means the entire amount due from the borrower needs to be written off?
Response:
Very clearly, the technical Write-Off Framework provides the option for a partial write-off. Further, in terms of para 5.4.4 of Ind As 109
“An entity shall directly reduce the gross carrying amount of a financial asset when the entity has no reasonable expectations of recovering a financial asset in its entirety or a portion thereof. A write-off constitutes a derecognition event [see paragraph B3.2.16(r)].“
Further, para B3.2.16(r) provides that,
“The following examples illustrate the application of the derecognition principles of this Standard- (r) Write-off. An entity has no reasonable expectations of recovering the contractual cash flows on a financial asset in its entirety or a portion thereof.“
Therefore, accounting norms also allow for partial write offs and to the extent the loan has been written off, the lender can derecognise the loan asset from their books.
What is the approach towards write off? In case of secured loans, and in case of unsecured loans?
Response:
The key to determination of write-off is the extent of recovery in an impaired loan. That is, what is considered not recoverable is written off. So, the task is to recognise (a) an impaired loan; (b) make a fair estimate of recoverable amounts from the loan; (c) apply a suitable discounting factor; and thus, find the fair value of the loan. The difference between the POS and such fair value becomes the amount of the write-off.
In case of secured loans, the focus is on the value of the collateral, the haircut on its valuation due to sale of repossessed collateral, legal expenses and costs on recovery, the time taken, etc.
What is the stage of write off – only when the asset turns an NPA or can the write off be done before it is recognised as NPA?
Response:
The Technical Write-off Framework refers to technical write off in case of NPAs. The IRACP Circular (applicable upon Banks) also refers to a loss asset as a sub-category of NPAs. However, under the SBR Directions (relevant for NBFCs), loss asset is not a sub-category of NPA but is defined as a separate asset class:
(i) an asset which has been identified as loss asset by the NBFC or its internal or external
auditor or by the Reserve Bank during the inspection of the applicable NBFC, to the extent it is not written off by the applicable NBFC; and
(ii) an asset which is adversely affected by a potential threat of non-recoverability due to
either erosion in the value of security or non-availability of security or due to any fraudulent act or omission on the part of the borrower.
That, however, does not imply that a lender cannot have a policy of recognition of impairment before an asset turns NPA. This will depend on the nature of the asset. For example, in case of personal loans, if a lender recognises a loan as impaired after 60 DPD, the lender may do a write off. Of course, there is no justification to do a write off if the loan is not considered impaired, on the basis of the parameters that may be applicable to the said loan.
There are two facilities to a borrower – can one be written off while the other one continues? What will be the basis for the same?
Response:
Yes. It is possible that one loan is backed by a tangible collateral, say, home loan or gold loan, while the other loan is unsecured. While the borrower may default on the unsecured loan, he may be maintaining performance on the secured loan, in order not to lose the collateral. If the value of the collateral, on the basis of principles discussed above, is good, it is possible to conclude that no write-off is required in case of the secured loan, while write-off may be done in case of the unsecured one.
If one facility to a borrower is written off, can the other continuing facility, which is not in default, be treated as performing/standard?
Response:
Even though one loan (having a DPD status of 90+ days) is written off, the borrower’s liability to pay and the lender’s right to recover continue. The borrower is a defaulter. NPA classification is based on borrower, and not on facility. Hence, the other facility will remain NPA.
After write-off, can the lender give a fresh loan to the borrower?
Response:
We find it quite difficult to justify giving a fresh credit facility to a borrower who caused a write-off. However, para 12 of the Technical Write-off Framework allows giving of new loans to a borrower whose account has been written off after a minimum cooling period decided in accordance with the lender’s Board-approved policy.
In case a borrower has been written off by a particular lender, can another lender extend a fresh loan to such borrower? Would the cooling period provision be applicable in such a scenario?
Response:
The response to this seems affirmative, as the language of the Technical Write-off Framework suggests that bar on taking fresh exposure during the cooling off period is on the RE involved in the arrangement, however, it does not suggest any prohibition on other lenders to take fresh exposure during this period.
Of course, other lenders will have to take their own informed credit call and carry out the credit assessment in view of the impaired credit history of the borrower.
What is the difference between:
write off and waiver
Write off and restructuring
Response:
Waiver is the exhaustion of all rights to recoverability of the loan amount as compared to write offs where the lender writes off the amount only for accounting reasons but retains the legal right to recover money.
What should be the contours of the write-off policy? If there is an SOP for write off, what will the SOP contain?
Response:
The write off policy must contain the following aspects:
Condition precedent for write offs – this may include:
Efforts taken for a one-time settlement;
death of the borrower with absence of insurance;
achievement of a certain number of days past due before writing off);
Deterioration in the collateral value
a stipulation that if the monthly recovery drops below a certain % of the loan outstanding only then will the loan be written-off;
untraceability of borrower;
absence of guarantor support;
minimum time elapsed since last recovery;
exhaustion of all possible legal remedies etc.
Approval authority for the write-off – an approval matrix should be drawn for this purpose based on:
Size
Nature of loan
DPD status
Determining the write off amount – this will be based on the extent of security available, recovery efforts already taken, recovery costs associated etc.
Reporting Mechanism for write offs – to the board and CICs
The SOP on the other hand should provide for the following:
Recovery efforts taken and exhausted before arriving at the write off decision
Determination process of the write off amount
Recovery efforts to be taken after write off etc.
Who should approve the write off?
Response:
The delegation of powers for approving write-offs should be clearly articulated in the Policy (Para 5 of Annex to the technical Write off Framework). To ensure objectivity and avoid any potential conflict of interest or a ‘judge in its own case’ scenario, the write-off should, as a general principle, be approved by an authority which is at least one-level higher than the sanctioning authority of the original exposure. The approving authority should be determined based on factors such as the size of the exposure/write-off, the nature and duration of the borrower relationship. The policy should provide adequate flexibility while maintaining robust checks and balances.
What evidence of uncollectability is required to be put on record for write-off action?
Response:
The assessment will be borrower-specific. A detailed record of all the recovery actions taken, outcomes, and reasoned justification that all reasonable recovery measures have been exhausted, and further recovery is impractical, shall be maintained. This shall include reminders, follow-ups, legal notices, enforcement actions, and other efforts undertaken.
An aggressive lending policy, backed by an aggressive write off policy – what implications does it have for the lender, or for the system? In a situation where the lender is witnessing high levels of write off, is there a need to revisit the lending policy ?
Response:
Lending has to be responsible, that is, lenders have to assess the prospects of recovering the loan in view of the borrowers’ cashflows. Lenders determine their lending spreads based on expected losses of the portfolio. Therefore, the cost of defaults is charged on the borrowers. Aggressive lending, in a way, involves the cost of the defaults being passed on to those who mean to pay. The assessment of the borrowers’ ability to pay is not merely an ex ante assessment – it is also benefited by the feedback from performance of the existing pools. Therefore, if a pool is having significant and excessive write off, lenders need to reexamine their lending practices.
Reporting
When the lender writes off the loan, is the lender required to notify the same on the CIC portal?
Response:
Yes, as per the data formats laid down in Annex IV of Master Direction – Reserve Bank of India (Credit Information Reporting) Directions, 2025, a credit institution is required to report written-off amount (total and principal). When an account is reported as written-off and the borrower makes the complete payment, i.e., through settlement or otherwise, the ‘Credit Facility Status’ field in CIC reporting shall be reflected as ‘Post Write Off Closed’.
How long will a lender be required to report write offs to CICs ?
Response:
It may be operationally challenging for lenders to report write-off cases indefinitely. However, considering that the idea of CIC reporting is borrower behaviour, the borrower continues to be a defaulter. Therefore, merely because a loan is written off in accounting books should not mean it should be taken off CIC records.
Accounting
Is there accounting guidance on how the amount of write off/partial write off is to be computed?
Response:
As per Paragraph B5.4.9 of Ind AS 109,
“a financial asset, or a portion thereof, is required to be written off when there is no reasonable expectation of recovering the contractual cash flows. The standard allows for partial or full write-offs, depending on recoverability assessments. For example, if 30% is expected to be recovered via collateral and no further recovery is reasonably expected, then the remaining 70% is to be written off.”
However, Ind AS 109 does not prescribe a specific methodology for computing the amount to be written off, nor does it provide distinct guidance for unsecured lending. In such cases, since no collateral is involved, the amount can be determined based only on how much recovery is reasonably expected from the borrower. For this purpose, the lenders must have a SOP in place which will determine the write off amount based on the expectation of recovery, cost of recoveries, DPD status, borrower history etc.
When an asset is written off, what happens to the specific provision made against the asset, which is outstanding?
Response:
When a loan is written off, the entire amount that is being written off is charged to P/L
When a loan is written-off, the gross carrying amount of the loan is reduced to zero. The specific provision already created against it is utilised (i.e. reversed) against the carrying amount. In other words, as the loan is written off, so is the specific provision against such loan.
What is the impact of write off on the impairment for ECL?
Response:
A write off is a case of incurred loss, whereas ECL is made for expected loss. Expected loss should precede incurrence of the loss, since ECL is forward looking. Therefore, the extent of write off should force a lender to re-examine and calibrate the ECL estimation, such that a write off does not exceed the ECL against such assets..
Is it justifiable to say that there was no SICR and the asset was written off?
Response:
Sans any Significant Increase in Credit Risk (SICR), a financial asset remains in Stage 1 under Ind AS 109. It is generally not prudent to write off a Stage 1 asset, as a write-off requires the lender to have no reasonable expectation of recovering the asset, in whole or in part, a condition that ordinarily implies the asset is credit-impaired and therefore classified under Stage 3. That said, as discussed in above, a write-off before an asset turns to NPA may still be possible, provided there is objective evidence of impairment based on the lender’s internal credit risk assessment, particularly in cases such as short-tenure personal loans or unsecured retail loans, where credit deterioration may manifest earlier than 90 DPD.
What will be the accounting treatment for the recoveries received after an account has been written off?
Response:
Any amount received (principal or interest) after a loan account has been written off will be shown as other income in the P/L.
Tax treatment
What will be the tax treatment for write off in the books of the lender?
Response:
For Banks and NBFCs, the tax treatment of loan write-offs is primarily governed by Sections 36(1)(vii) of the Income Tax Act, 1961 (‘IT Act, 1961’). As per Section 36(1)(vii), these entities can claim a tax deduction for bad debts or parts thereof that are actually written off as irrecoverable during the financial year. There are conditions as evidence of the amount having been taken in computation of income, as also reference to accounting standards – ICDS – under sec. 145 (2).
In addition, deduction is allowed for provision, upto limits, under Section 36(1)(viia).
Hence, if there is a write off, the same is deductible against income. However, if the write off was preceded by a provision, and the entity has claimed the benefit of the provision u/s 36 (1) (viia), then the write off should be first adjusted against such provision.
Further, in terms of Section 43D of the Income tax Act, an amount which has already been written off and subsequently recovered will be chargeable to tax in the previous year in which it is credited by the lender to its P/L account or in the year it is actually received, whichever is earlier.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Staffhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngStaff2025-06-06 17:15:452025-06-06 17:32:23Gone but Not Forgotten: FAQs on Loan Write-offs
The Reserve Bank of India (RBI) has continually worked to strengthen the Know Your Customer (KYC) framework to ensure inclusion. Recognizing challenges in periodic KYC updation, especially in remote areas where bank branches and ATMs are scarce, the RBI has proposed pragmatic measures involving Business Correspondents (BCs). These initiatives aim to ease the KYC process for beneficiaries of government schemes and rural banking customers.
Via these regulations the RBI has also proposed additional measures for REs to increase the effectiveness of periodic KYC updation, while reducing hardship on customers; these are also discussed in this article.
BC allowed to perform KYC Periodic Updation
RBI identified a significant backlog in periodic KYC updation, particularly in accounts opened for the credit of Direct Benefit Transfer (DBT), Electronic Benefit Transfer (EBT), scholarship payments, and those under the Pradhan Mantri Jan Dhan Yojana (PMJDY).
To address this, RBI’s proposed framework allows authorized BCs to assist customers with certain types of KYC updation, improving service access for those in underserved locations. However, the ultimate responsibility for KYC updation still remains with the bank. Once the bank receives the updated information from the BC, it must update its records and intimate the customer upon completion. This is mandated under paragraph 38(c) of the RBI’s Master Direction on KYC.
Updated KYC Periodic Updation Process
Self-declaration for No Change / Address Change
Customers can submit a self-declaration through a BCs if:
There’s no change in their KYC details, or
Only the address has changed.
Collection and Recording of Self-declarations
Electronic Mode:
Banks are expected to enable their BC systems to record and store self-declarations and supporting documents electronically.
Physical Mode (in case electronic facilities are not available):
BC will authenticate the customer’s physical self-declaration and documents.
These will be forwarded promptly to the concerned bank branch.
Acknowledgment receipt shall be issued to the customer.
Transaction Flexibility for Low-Risk Accounts
In line with the KYC directions and Anti-Money Laundering (AML) standards, customers are categorized into low, medium, and high-risk categories. The risk categorization helps to determine the extent of ongoing monitoring, transaction limits, and enhanced due diligence required for each customer category.
The frequency of the periodic updation depends on the risk categorisation of the customer –
High Risk Customers
Every 2 years
Medium Risk Customers
Every 8 years
Low Risk Customers
Every 10 years
RBI vide this guideline proposes that, low risk customers will be allowed time till June 2026 or one year from when their periodic KYC is due, whichever is later to complete the periodic KYC.
For example, if a customer’s KYC was due in September 2025 and it remains pending, the bank can allow the customer to continue the transactions in their accounts upto September 2026. If the due date of the periodic updation was earlier, say May 2025 then the customer could continue to transact until June 2026.
Timely Intimations and Reminders to Customers
Periodic KYC updation is a regulatory requirement under Para 12 of KYC Directions where REs are required to periodically update the customer’s KYC records after on-boarding the customer. REs face several practical challenges in completing periodic KYC updation, such as the customer being unaware about these requirements or reluctance and misconceptions towards sharing personal documents or information.
With respect to this, RBI has proposed that, REs must issue at least three advance KYC due notices (including one by letter) at appropriate intervals, using available communication channels. If the customer still does not complete periodic KYC, three additional reminders must be sent.
All communications should contain easy to understand instructions for updating KYC, escalation mechanism for seeking help, if required, and the consequences, if any, of failure to update their KYC in time. REs are also required to maintain detailed records of these notifications and reminders.
Conclusion
By enabling simplified and decentralized KYC updation, these measures address both operational challenges and the broader goals of financial inclusion.
As the financial ecosystem evolves, such regulatory measures remain crucial for building a secure, inclusive, and customer-friendly financial environment.
Consider this: you’re out shopping on a Saturday afternoon for a perfect pair of jeans. You stop by a store that retails multiple brands and boasts the best variety. With a salesperson to guide you, you make your pick after careful diligence and comparison, and finally check out. Hours later, however, you discover that certain brands were selling better trousers at a lower price point, in the very same store, but these were deliberately obscured from your vision. Now, you feel duped, hurt and confused.
It’s still the same product. However, what has changed is your ability to make an informed choice. What’s worse, indeed, is that you were made to believe that you had an informed choice.
A sincere consumer, shopping for trousers from a multi-brand store.
Multi-lender LSPs (MLLs)
Drawing parallels from the above, in the lending space, a similar tale unfolds. There is an emerging class of platforms that operate as Multi-lender LSPs (MLLs). These MLLs undertake the sourcing function for multiple lenders against a given product. For instance, Partner ‘A’ may act as a sourcing agent via its platform for unsecured personal loans offered by Lenders X, Y, and Z.
In this case, the consumer may be onboarded onto the platform and be under the impression that they are making an informed choice, and receiving an impartial display of all options for the given loan product. If this is indeed the case, then there is no issue. However, it is possible that due to factors including (a) certain Lender-LSP Arrangements, and (b) differences in the commission received from various lenders, the loan product of a particular lender may be pushed to the borrower. The borrower may also be influenced towards making a particular selection through the use of deceptive design practices designed to subvert their decision-making process (Dark Patterns – for more, see our resource here).
Here, the lack of choice and transparency, and insufficient disclosure in the sourcing process would be an unfair lending practice. And unlike a simple pair of trousers, here the consumer’s hard-earned money and personal finances are at stake.
A similar tale unfolds on a multi-lender platform.
Requirements for REs under the Digital Lending Directions, 2025
Para 6 of the DL Directions
In order to protect the borrower and their right to choose, the RBI vide the Digital Lending Directions, 2025 (‘DL Directions’) has prescribed additional requirements upon REs contracting with such MLLs (refer to our article on the DL Directions here).
These requirements under Para 6 of the DL Directions are applicable upon “RE-LSP arrangements involving multiple lenders”, and pertain to:
The borrower being provided a digital view of all the loan offers which meet the borrower’s requirements.
A view of the unmatched lenders as well.
The digital view would have to include the KFS, APR, and penal charges if any of all the lenders, to display terms in a comparable manner.
The content displayed should be unbiased and objective, free from the influence of any dark patterns or deceptive design practices designed to favour a given product.
The RBI’s annual report for FY 2024-2025 also reveals that the rationale behind these additions was to mitigate risks arising out of LSPs that display the loan offers in a discretionary way, and “which seldom display all available loan offers to the borrower for making an informed choice”. These requirements were, of course, first published via the Draft Guidelines on ‘Digital Lending – Transparency in Aggregation of Loan Products for Multiple Lenders’ (our team’s views on the same may be found here).
Multi-lender LSP v. LSP working for multiple lenders – Is there a difference?
Although this may not be immediately apparent from the language, the “RE-LSP arrangements involving multiple lenders” being contemplated here (in our view) are not RE-LSP arrangements where a single LSP is contracting with multiple REs, each for a separate product, but rather the MLLs described above.
For example, consider a scenario where the LSP works with Lender ‘A’ for vehicle loans, Lender ‘B’ for personal loans, Lender ‘C’ for gold loans and so on. Would this then be considered a Multi-lender LSP requiring compliance under Para 6 of the DL Directions? In our view, no.
Here, because each borrower has only a single lender for a particular product, there is no question of their ability to choose being prejudiced, or there being a need to draw a comparison between the terms offered by multiple lenders. Hence, the requirements under Para 6 of the DL Directions would not be applicable upon REs contracting with such LSPs.
Such requirements would only become relevant in the case where the LSP is undertaking sourcing for multiple lenders against a particular product. In such a case, because the borrower is under the impression that they have a choice, it becomes crucial to protect the borrower’s ability to make that choice (in an informed, transparent, and non-discriminatory manner).
Consumer Protection Act, 2019
Additionally, with reference to the above scenario, under Section 2(9) of the Consumer Protection Act, the following (amongst others) have been recognised as consumer rights (upon violation of which the consumer can seek redressal):
Right to be informed: “the right to be informed about the quality, quantity, potency, purity, standard and price of goods, products or services, as the case may be, so as to protect the consumer against unfair trade practices”
Access to competitive prices: “the right to be assured, wherever possible, access to a variety of goods, products or services at competitive prices”.
In our view, with respect to MLLs, this may be interpreted to mean that the borrower has a right to be informed of the comparable options and to receive an impartial, unbiased, and competitive display of the terms to enable their decision-making.
Finally, it is to be noted that such MLLs, would also qualify as “E-Commerce Entities” under the Consumer Protection (E-Commerce) Rules, and the said rules inter alia cast a duty upon such entities to ensure that they do not adopt any unfair trade practice, whether in course of business on its platform, or otherwise [Rule (4)(2)]. Under the E-commerce Rules, a “marketplace e-commerce entity” is an e-commerce entity providing an information technology platform to facilitate transactions between buyers and sellers. Marketplace e-commerce entities are required to ensure that:
All the details about the sellers necessary to help the buyer make an informed decision at the pre-purchase stage are “displayed prominently in an appropriate place on its platform”
To the extent MLLs would meet this definition, they would also need to ensure the same.
With the continuous growth and the emergence of large non-banking financial companies (NBFCs) in India, the Reserve Bank of India (RBI) has extended certain bank-level regulations to these institutions with the intention to make them manage their various risks. Among these various risks, liquidity risk is a critical one, which could lead to the breakdown of a financial institution, and if a contagion builds, it may affect the entire financial system too. No financial institution is entirely immune to it, even a well-performing NBFC with minimal NPAs could face a run on it if it experiences a liquidity crunch. The larger an institution, the greater impact its failure could have on the broader economy.
To address the above concerns, the RBI under the Para 89 read with Annex XXI of the Scale-Based Regulation (SBR) Directions[1] mandates certain large NBFCs (as discussed below) to maintain a Liquidity Coverage Ratio (LCR).
This article provides a practical guide to the LCR requirements under the SBR Directions, including the regulatory requirements to be followed, and tries to provide insights into its proper implementation by the NBFCs, subject to these norms.
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2025-06-03 19:13:052025-06-04 12:17:13Surviving the Squeeze: Liquidity Coverage Ratio for NBFC liquidity management
The economic device of purchasing an asset, and generating revenue by leasing it out is surely nothing new. However, through innovative leverage of accounting and tax norms, market participants devise offerings that continue to add novelty to this age-old practice. Today, there is an emerging business-opportunity with respect to leasing of electronic devices, which is gaining popularity due to associated tax benefits, short-tenures, and mass-market potential. In this article, we walk the reader through the quintessential features of this model, and the tax rules that make it possible.
Many are likely familiar with the CTC car-leasing model, which is considered a unique by-product of the Indian taxation system, and has been in vogue for several decades now. It entails a reduction in the employee’s taxable income due to the rules pertaining to valuation of perquisites [see Rule 3(2)(A) of the Income Tax Rules].
However, this arrangement is typically only made available to employees meeting a certain salary threshold, as it entails a significant financial contribution, and time commitment, on part of the employee (the time commitment is also of note here because it would require the employee to hold their position long enough to make pay-outs continuously for the tenure of lease).
As a result, the incentives and benefits associated with this CTC car leasing model do not percolate to employees who are not able to make said commitments/do not meet said thresholds.
Likely as a response to this market gap, there is now an emerging model of CTC leasing where the employer obtains a lease for electronics such as smartphones, laptops and tablets, and makes it available to the employees, while treating such lease payments as a part of the employee’s CTC. That is to say, the employer pays the lease rentals, but the same constitutes a part of the CTC – therefore, on a CTC basis, it is the employee who is actually paying the lease rentals. At the end of the lease tenure, the lessor may make the assets available to the employee for purchase at the residual value / other agreed value as specified in the contract. The leasing of such assets to the employer, and the making available of such assets by the employers, to the employees, will be referred to as CTC Device Leasing.
Much of the value associated with CTC Device Leasing is linked once again to the reduction in taxable income for the employee, for, in the absence of the same, the employee may simply obtain those assets through any prevailing EMI schemes (consider also the fact that these EMI schemes may offer more competitive interest rates due to the absence of GST component). However, in that case, the employee earns the gross CTC, and pays tax on the same. To illustrate:
Assume an employee’s agreed CTC is Rs 100,000 a month, and the employer arranges for him a top-class laptop costing Rs 1 lakh, paying lease rentals of Rs 12000 a month for a year. Since this payment of Rs 12000 is a part of the CTC, the employer will now have to pay a salary of Rs 88,000 a month, which is taxed as his salary. However, for the employer, the CTC is Rs 1 lakh. At the end of the 12-month rental period, the employee gets to own the laptop from the lessor.
II. Unpacking the CTC Device Leasing Model
a. Tax and GST Aspects
The reduction in the taxable income may be due to any one or more of the criteria mentioned under Rule 3(7) of the Income Tax Rules, and the legality of the same (i.e. whether that specific facility qualifies for the exemptions) would need to be evaluated on a case-to-case basis. However, generally speaking, reference in the case of mobile phone leasing (which is a common asset class being made available under this modell) is made to Rule 3(7)(ix) of the rules, read with Section 17 of the Income Tax Act, which would provide that
“Taxable value of perquisite shall be computed on the basis of cost to the employer (under an arm’s length transaction) less amount recovered from the employee. However, expenses on telephones including a mobile phone incurred by the employer on behalf of employee shall not be treated as taxable perquisite”[1]
Here, it becomes necessary to examine the burden on the employer under the device leasing model. In the CTC car-leasing model for instance, the employer remains “cost-agnostic”. Because under that model regardless of whether the benefit is given to the employee by deducting ‘x’ amount from their CTC component beforehand, or by paying said ‘x’ component to the employee, the financial obligation viz. expense for the employer remains unchanged. However, because in CTC car-leasing the employer is not able to claim ITC on the GST paid to the Lessor with the Lease rentals (due to it being blocked credit under Section 17(5) of the CGST Act), the cost is passed on to the employee, from whose salary along with lease rentals are also deducted the GST amount.
Under CTC Device Leasing, the employer is similarly cost-agnostic with the key difference being that employers are able to claim the ITC on the inputs (as it is not blocked credit). Hence, the employer would deduct only the actual lease rentals net-off from GST from the employee’s salary.
b. Residual Value considerations
As has been mentioned above, at the end of the lease tenure, the lessor typically would make the asset available to the employee for purchase basis its residual value. An important consideration here is that unless the lessor is a financial sector entity, they would usually not wish to keep a very low residual value (10% or below) lest the lease be considered a “financial lease” as per accounting norms, and thus eventually require the lessor to obtain an NBFC registration (as the transaction would be considered substantively a financing transaction, with the assets being financial assets, and income from the assets posing concerns with respect to the PBC criteria).
However, a higher residual value could also correspond to a decrease in the tax benefit for the employee, because the option to purchase the asset would be exercised post the lease tenure by the employee themselves, and such payout being made by the employee directly against the residual value, may not qualify for the exemptions under the Income Tax Rules. Hence, there is a delicate balance the lessors would have to maintain, to ensure viability of the business-model, while also ensuring that the structure remains compliant with tax law.
c. Trend-Cycling & Data Protection
One practical consideration here is that the tenure of the lease in CTC leasing models gives the employer an added employee-retention benefit. However, in the case of device leasing, the lease tenures may need to account for the “trend-cycles”, whereby younger workforce (in particular) may have a preference towards upgrading the device as and when newer models are released (for e.g. new iPhone models are typically released within a year of the previous launch). If the lease tenure exceeds this time-span, the facility may lose some of its charm.
Another consideration here, would pertain to the deletion of the employee’s data from the device, having regards to applicable data protection law, in case the employee does not exercise the purchase
option / the possession of device is transferred to another employee (for e.g. due to employee’s exit from the company).
III. Concluding Notes – Impact on Leasing Volumes and Industry in India
Because this model is in its nascent stage, it may be too soon to predict what its impact would be on leasing volumes in India. However, as the data captured in our report, available here, may reveal – the growth of leasing volumes in India has been very low. The use of leasing appears to be kept afloat by models such as CTC car leasing, and now maybe through device leasing.
However, one can surely expect this model to be popular with the lessors who would be able to enter the leasing space without making significant capital expenditures / taking on large borrowings, and to some extent may even be able to lease by obtaining the assets through their own funds rather than borrowings, and use the churn (due to the short tenure) to keep the leasing going.
[1]See CBDT Resource on Income Tax Rules, available at: https://incometaxindia.gov.in/_layouts/15/dit/pages/viewer.aspx?grp=rule&cname=cmsid&cval=103120000000007059&searchfilter= .
https://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.png00Team Finservhttps://vinodkothari.com/wp-content/uploads/2023/06/vinod-kothari-logo.pngTeam Finserv2025-05-30 17:26:332025-06-04 17:48:56A brief on the law and mechanics of CTC based Device Leasing
RBI has recently been directing NBFCs to compute ECL without factoring in the impact of DLGs obtained1. This stance appears to stem from the regulator’s perception that fintech-issued guarantees carry inherent risk and may expose NBFCs to potential losses.
As per Ind AS 109, Expected Credit Loss (ECL) model is used for the recognition and measurement of impairment on financial assets. ECL is a forward-looking approach that requires entities to recognize credit losses based on expectations of future defaults.
The Default Loss guarantee Guidelines (‘DLG Guidelines’) allow LSPs, (both regulated and unregulated) to provide DLG to the extent of 5% of the portfolio amount to the lender. The DLG Guidelines specify the forms in which such DLG can be obtained.
In terms of para 22 of the DL Guidelines,
“RE can accept DLG only in one or more of the following forms:
Cash deposited with the RE;
Fixed Deposit maintained with a Scheduled Commercial Bank with a lien marked in favour of the RE;
Bank Guarantee in favour of the RE”
Accordingly, DLGs can only be obtained in fully funded forms thus eliminating any question of incurring credit loss on such guarantee.
RBI Directive to NBFCs
RBI has directed NBFCs to maintain ECL without giving effect to the DLGs obtained in accordance with the DLG Guidelines. In this respect, the following should be taken into consideration:
A regulatory prescription, without a regulatory backing, and in fact, going against the regulation:
There is a well-laid process for the RBI coming with a regulation, and in fact, now, the RBI has decided to come up with a consultation process, impact assessment etc before coming with a regulation.
Dictating a certain treatment with respect to ECL is nothing short of a regulation – if this sort of generic requirements keep coming from the supervisors, then the very dividing line between supervision and regulation is lost.
Let accounting standards prevail; auditors and accountants know what ECL to provide:
Annex II of the SBR Directions provides that NBFCs shall follow applicable accounting standards. The ECL provisioning, known as impairment loss, comes from para 5.5.13 of Ind AS 109. The detailed requirements of how ECL is to be estimated has been laid in that standard.
Admittedly, whether and how much ECL write down is required, and whether such ECL estimation does or does not give effect to a fully-funded guarantee, is a matter for the accountants and auditors to deal with. We find little reason for the regulator to step into what is clearly an accounting standard domain.
If there is a funded guarantee, how can losses met by such guarantee be disregarded?
As per DLG guidelines, the guarantee has to be either fully funded, or fully backed by bank guarantee. It is true that even if a credit loss is backed by a guarantee, it is merely shifting of the exposure – from the borrower to the guarantor. But in this case, the guarantee is equivalent to cash. If the lender has a cash collateral to back up the guarantee, there is no reason to not give the benefit of the same in ECL estimation.
For example, if for a certain loan pool, the ECL estimation is 3.8%, and the lender has a guarantee of 5% backed by fixed deposits lien-marked to the lender, will the lender have any expected loss? The answer is negative. If the ECL estimation was, say, 6.8% and the guarantee is 5%, clearly the lender’s ECL will be 1.8%. Thus, there is no reason to disregard the funded guarantee while estimating ECL.
If a company cannot incur loss to the extent of the guarantee, and it still creates an impairment loss, it is actually creating a reserve and not a provision, and therefore, compromising its true and fair view:
The RBI expects lenders to disregard the guarantee and create ECL as if the guarantee did not exist. This will be like creating a loss where the losses actually cannot hit the lender. Therefore, the ECL becomes a reserve, and given that the entity is hitting the P/L with a loss that will not hit the lender, the entity is compromising its true and fair view.
The RBI has reasons to have no trust on the fintechs for the guarantee they give, but it is fully funded.
In light of this, the RBI’s emails sent to various lenders are objectionable, and such emails create a precedent of creating a regulation without going through the regulatory process.
Accordingly, in our view, NBFCs should be allowed to follow their applicable accounting standards while computing the ECL provisions.
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