Executive summary

Rule 20 of the Nidhi Rules is the backbone of how you recognise income and provide for credit risk. It tells you: (i) when to stop counting interest as income; (ii) how to classify mortgage-backed loans and create provisions; (iii) what to disclose in the notes; and (iv) the special, time-bound treatment for gold/silver/jewellery loans including the 80% LTV ceiling. If you follow Rule 20 rigorously, your financials stay credible, audits go smoother, and regulator scrutiny is easier to handle.

1) Revenue recognition: you can count interest only when you actually receive it (for NPAs)

Rule 20 begins with a hard stop: once a loan becomes a non-performing asset (NPA), you do not recognise interest or other charges on an accrual basis anymore. You recognise them only on realisation (cash basis). Further, any interest that you had booked before the loan turned non-performing—and which remains unrealised at year-end—must be reversed in the immediately succeeding year’s profit and loss account.

Why this matters: It prevents overstated income and inflated net worth. Your profit reflects cash inflows from stressed accounts, not wishful accruals.

Practical tip: Your board-approved credit policy should define an objective NPA trigger (e.g., “interest/instalment overdue beyond X days from due date”). The Rule uses “remained unrealised” without specifying days, so set a clear, auditable threshold and stick to it consistently.

2) Mortgage loans: classify and provide (the prudence engine)

For mortgage loans, Rule 20 requires classification into categories with minimum provisioning:

• Standard Asset → No provision
• Sub-standard Asset → 10% of the aggregate outstanding
• Doubtful Asset → 25% of the aggregate outstanding
• Loss Asset → 100% of the aggregate outstanding

These are minimums. You may, and should, provide more if prudence or portfolio experience demands.

How classification works in practice

Rule 20 does not prescribe day-buckets for “sub-standard/doubtful/loss.” Build these into your internal policy (for example, based on days past due, security status, or legal progress). Consistency and documentation are key. Your auditor will test whether your classification policy is reasonable, approved, and consistently applied.

When can you reduce the provision base by collateral value?

You may deduct the estimated realisable value of the mortgaged property from the outstanding amount only if:

• you have a valid recourse to the collateral, and
• sale proceedings for that property have been initiated in a court of law within the previous two years from the date the interest/instalment remained unrealised.

Only then do you apply 10%/25%/100% on the net amount. Use a conservative, documented valuation (forced-sale or realisable value), and record the legal milestone (case number, filing date).

Illustration: Outstanding ₹10,00,000; you filed for sale 14 months ago; valuer’s realisable value ₹6,00,000. Provision base = ₹10,00,000 − ₹6,00,000 = ₹4,00,000. If classified as Doubtful, provision = 25% × ₹4,00,000 = ₹1,00,000.

3) Transitional catch-up for legacy Nidhis (pre-2001)

For companies incorporated on or before 26-07-2001, any un-provided provisioning/income reversal relating to loans outstanding as on 31-03-2002 had to be spread equally across FY 2014-15, 2015-16, 2016-17. In practice, the window is long closed, but if any entity still carries a residual gap, note disclosures must continue until the entire amount is provided.

4) Mandatory note disclosures (keep investors, members, and auditors aligned)

Your financial-statement notes each year must clearly state:

1. the total amount of provision required on account of income reversal and NPAs still unrealised;
2. the cumulative amount already provided till the previous year;
3. the amount provided in the current year; and
4. the balance still to be provided.
   Continue these disclosures every year until the shortfall is fully covered. This is non-negotiable transparency.

5) Jewellery loans (gold/silver): a different clock and a hard LTV cap

Rule 20 sets tighter rules for loans against gold/silver/jewellery because these are high-velocity, pledge-in-possession products.

The three-month clock: Once a jewellery loan becomes due, you must recover or renew within three months of the due date. If you neither recover/renew nor sell the pledged security within those three months, you must:

• provide for the entire unrealised amount (principal + interest) in the current year, and
• stop recognising income on that account after the three-month mark (or earlier, if you sell before then).

The 80% LTV ceiling: The loan-to-value (LTV) must not exceed 80% of the value of the gold/silver/jewellery at sanction. If jewellery is valued at ₹1,00,000, the maximum loan is ₹80,000. Keep valuation reports, photographs, purity/weight charts, pledge registers, and safe-custody logs impeccably.

Operational discipline: Put diary controls on every jewellery loan with due dates, 30/60/90-day ticklers, and an automatic alert at D+90 to either renew, recover, or initiate sale (as per your approved auction policy). Document borrower notices and auction outcomes; credit any surplus to the borrower.

6) How Rule 20 interacts with other Nidhi rules and audit

• With Rule 13 (deposit terms) and Rule 14 (10% unencumbered term deposits): prudential provisioning affects profits and, therefore, your ability to sustain liquidity buffers and growth. Be conservative in provisioning so you don’t over-state eligibility for expansion or payouts.
• With Rule 22 (Auditor’s certificate): your auditor must certify annual compliance with Nidhi Rules and call out any deviations. Any weakness in Rule 20 processes (wrong revenue recognition, thin provisions, missing disclosures) will be flagged in the audit report, attracting regulatory attention.

7) End-to-end month-close workflow (what great Nidhis do)

1. Age and flag all overdue accounts; lock the NPA list as of month-end.
2. Cease accrual of interest on NPAs; compute next-year reversals for any previously booked but unrealised income.
3. Classify mortgage NPAs as per policy; compute provisions at 0/10/25/100.
4. For cases with legal sale filed within two years, obtain updated realisable value; reduce the base appropriately before applying the rate.
5. Run the jewellery module: test the three-month window; if breached and security not sold, provide 100% and stop income. Check LTV ≤ 80% at sanction.
6. Compile note-disclosure numbers: total required, cumulative till last year, current-year provision, balance.
7. Committee oversight: place an MIS to the Board/ALCO/Recovery Committee with trends and high-risk names.

8) Numerical case study (year-end provisioning & revenue recognition)

Portfolio at 31 March

• Mortgage Loan A: Outstanding ₹12,00,000; 150 days past due. Court sale filed 10 months ago; realisable collateral value ₹8,00,000.
• Mortgage Loan B: Outstanding ₹5,00,000; 380 days past due; no legal action.
• Jewellery Loan C: Due on 1 Jan; outstanding ₹1,20,000 at 31 Mar; not renewed/recovered; no sale by 1 Apr.
• All other loans standard.

Step 1: Stop accrual & reverse prior income
Loans A, B, C are NPAs; you stop accruing interest from their NPA trigger dates. If ₹70,000 interest was accrued earlier on A and remains unrealised at 31 Mar, you will reverse ₹70,000 next year.

Step 2: Provisions

• Loan A (Mortgage, Doubtful): Base = ₹12,00,000 − ₹8,00,000 = ₹4,00,000; Provision = 25% = ₹1,00,000.
• Loan B (Mortgage, Loss): No legal action; cannot reduce by collateral; Provision = 100% of ₹5,00,000 = ₹5,00,000.
• Loan C (Jewellery): Three-month window (till 1 Apr) lapsed without recovery/renewal/sale → Provision = ₹1,20,000; income recognition stops post 1 Apr.

Notes disclosure will show the totals required, cumulative to prior year, current-year charge, and balance.

9) Governance, controls and documentation that auditors love

• A clear NPA policy (definition, buckets, approval levels).
• Legal-proceedings tracker to evidence the “filed within two years” condition for collateral deduction.
• Valuation policy with accredited valuers and “realisable value” methodology.
• Jewellery SOP covering valuation, storage, insurance, three-month actions, borrower notices, and auction steps.
• Month-end certification by finance + recovery, and a quarterly review by the Board/Committee.
• Robust notes to accounts, matching Rule 20(5) line-items exactly.

10) Frequent mistakes that draw penalties (and how to avoid them)

• Continuing to accrue interest on NPAs → lock NPA flag in your CBS; disable accrual automatically.
• Deducting collateral value without eligible legal action → no deduction unless court sale proceedings were initiated within two years of default.
• Missing the three-month jewellery trigger → set automated D+90 actions; if not sold/renewed/recovered, provide 100% and stop income.
• Thin or delayed provisioning → provision in the same reporting period; don’t wait for audit.
• Incomplete note disclosures → prepare a standard workpaper mapping to Rule 20(5)(a)(i–iv).

11) What to include in your Board-approved “Prudential Norms & Provisioning Policy”

• The NPA trigger and classification buckets (with reasons).
• The provisioning matrix exactly as per Rule 20, plus any higher, internally prudent overlays.
• The collateral deduction test (legal filing proof, valuation standards, haircut).
• The jewellery loan timelines, LTV, renewal rules, and auction framework.
• The month-end close steps, maker-checker controls, and reporting to the Board.
• The disclosure template for notes to accounts.

Keep versions dated, minuted, and implemented in your core system.

12) Key takeaways (kept brief)

• Recognise income on NPAs only on cash realisation; reverse prior unrealised accruals next year.
• Provide 0/10/25/100 on mortgage loans; deduct collateral value only when court sale was initiated within two years.
• For gold/silver/jewellery: recover/renew within three months or provide 100% and stop income; keep LTV ≤ 80%.
• Disclose totals, cumulative, current-year and balance provisions in notes every year until fully provided.

FAQs on Prudential Norms for Nidhi Companies (Rule 20)

Q1. What are prudential norms for Nidhi Companies?
Prudential norms are financial rules that Nidhis must follow to ensure fair income recognition and adequate provisioning for bad loans. They mainly deal with how interest income is recorded and how provisions are made for non-performing assets (NPAs).

Q2. When can a Nidhi recognise interest income on loans?
If a loan becomes non-performing, the Nidhi can recognise interest income only when it is actually received in cash. Accrued but unpaid interest must be reversed in the next year’s accounts.

Q3. How are mortgage loans classified for provisioning?
Mortgage loans are divided into four categories:

• Standard Assets – No provision.
• Sub-standard Assets – 10% provision.
• Doubtful Assets – 25% provision.
• Loss Assets – 100% provision.

Q4. Can a Nidhi reduce the provision amount by considering collateral value?
Yes, but only if:

1. The Nidhi has valid legal recourse to the collateral, and
2. Court proceedings for sale of the property have been started within two years of default.

Only then can the estimated realisable value of the property be deducted from the outstanding loan before calculating provisions.

Q5. What special rules apply to gold and jewellery loans?

• Loans must be recovered or renewed within 3 months of the due date.
• If not recovered or sold within 3 months, the Nidhi must make a 100% provision.
• No further income can be recognised after the 3-month period.
• The Loan-to-Value (LTV) ratio must not exceed 80%.

Q6. What does “Loan-to-Value (LTV) ratio” mean in Nidhi Rules?
It is the ratio between the loan amount given and the value of the gold/silver/jewellery pledged. Example: if jewellery is valued at ₹1,00,000, the maximum loan allowed is ₹80,000 (80% LTV).

Q7. What must be disclosed in financial statements regarding provisions?
Nidhis must disclose every year:

1. The total provision required,
2. The cumulative provision made so far,
3. The provision made in the current year, and
4. The balance provision yet to be made.

Q8. Why are these prudential norms important?
They prevent overstatement of income, ensure realistic financial statements, and protect members’ deposits by forcing Nidhis to set aside funds for potential losses.