Subordinated debt

Subordinated debt

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Subordinated debt means an instrument, which is fully paid up, is unsecured and is subordinated to the claims of other creditors and is free from restrictive clauses, and is not redeemable at the instance of the holder or without the consent of the supervisory authority of the non-banking financial company. The book value of such instrument shall be subjected to discounting as provided hereunder:

Remaining Maturity of the instrumentsRate of discount
(a) Upto one year100 per cent
(b) More than one year but upto two years80 per cent
(c) More than two years but upto three years60 per cent
(d) More than three years but upto four years40 per cent
(e) More than four years but upto five years20 per cent

to the extent, such discounted value does not exceed fifty percent of Tier I capital.

Subordinated debt (also known as a subordinated debenture) is an unsecured loan or bond that ranks below other, more senior loans or securities with respect to claims on assets or earnings. Subordinated debentures are thus also known as junior securities. In the case of borrower default, creditors who own subordinated debt will not be paid out until after senior bondholders are paid in full.

Subordinated debt is any type of loan that’s paid after all other corporate debts and loans are repaid, in the case of borrower default. Borrowers of subordinated debt are usually larger corporations or other business entities. Subordinated debt is the exact opposite of unsubordinated debt in that senior debt is prioritized higher in bankruptcy or default situations.

Non-Banking Financial Companies (NBFCs) in India are always seeking sources of raising funds. Capital is costly and therefore NBFCs rely more on public funds. Public funds as defined under the Systemically Important Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015 (the “2015 Directions”) include funds raised directly or indirectly through public deposits, commercial papers, debentures, inter-corporate deposits, and bank finance but excludes funds raised by the issue of instruments compulsorily convertible into equity shares within a period not exceeding 5 years from the date of issue.

Debentures can be classified into various types based on several parameters viz. transferability, convertibility, tenure, public participation, security, seniority, coupon, and rate of return. On the basis of seniority, debentures can be classified as Senior debt and Subordinated debt. Subordinated debt is even included for meeting regulatory capital requirements.



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