Reserve Bank of India (RBI) has issued a circular clarifying the treatment of Right-of-Use (ROU) assets for regulatory capital calculations by Non-Banking Financial Companies (NBFCs), Housing Finance Companies (HFCs), and other regulated entities. As per Indian Accounting Standard (Ind AS) 116, lease agreements result in both a liability (lease obligation) and an asset (ROU asset) on the lessee’s balance sheet. Previously, RBI regulations required the deduction of intangible assets when calculating Owned Fund, Common Equity Tier 1 (CET 1) capital, and Tier 1 capital. However, after receiving industry feedback, the RBI has clarified that ROU assets derived from tangible leased assets will not be deducted from regulatory capital. Instead, these assets will be risk-weighted at 100%, in line with historically applied risk weights for owned tangible assets. The revised guidelines have been incorporated into the relevant Master Directions, ensuring consistency across NBFCs, HFCs, Core Investment Companies, Mortgage Guarantee Companies, Asset Reconstruction Companies, and Standalone Primary Dealers. The circular, effective immediately, applies to all NBFCs and Asset Reconstruction Companies following Ind AS-based financial reporting.
Reserve Bank of India
India’s Central Bank
Notifications
Treatment of Right-of-Use (ROU) Asset for Regulatory Capital Purposes
RBI/2024-25/128
DOR.CAP.REC.No.68/21.01.002/2024-25
March 21, 2025
Dear Sir/Madam,
Treatment of Right-of-Use (ROU) Asset for Regulatory Capital Purposes
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.
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.
Yours faithfully,
(Usha Janakiraman)
Chief General Manager-in-Charge
