Subordinated Liabilities explained: this guide covers what it means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
A separate line on the face of the balance sheet for funding that ranks behind everyone else — because for a regulated lender, that ranking is what makes it count as capital.
The three classes of subordinated liabilities
Subordinated Liabilities shall be classified as:
- Perpetual Debt Instruments to the extent that do not qualify as equity;
- Preference Shares other than those that qualify as equity;
- Others (Specifying the nature and type of instrument issued).
The subordinated liabilities shall be disclosed both within and outside India.
Read the first two heads carefully — "to the extent that do not qualify as equity" and "other than those that qualify as equity".
That is Ind AS 32 doing the work. A perpetual debt instrument has no maturity and may look like equity; a preference share is called a share. But classification turns on whether the issuer has a contractual obligation to deliver cash, not on the instrument's name or its tenor. A perpetual instrument carrying a mandatory coupon is a liability; a preference share redeemable at the holder's option is a liability.
Note also "to the extent" in the first head. A compound instrument splits, with the liability component here and the equity component in other equity — the same treatment applied to the liability component of compound financial instruments under borrowings.
Why this matters for an NBFC specifically: subordinated debt counts toward regulatory capital precisely because it absorbs loss ahead of senior creditors. So the line represents funding that is legally a liability but prudentially close to capital — and a reader needs to see it separately from ordinary borrowings for either purpose.
The regulator's definition
"Others" will include those liabilities which are considered as subordinated by the respective regulator. The Guidance Note quotes the RBI's definition: "subordinated debt" is an instrument which
- is fully paid up;
- is unsecured;
- is subordinated to the claims of other creditors;
- 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.
Each condition removes a way the instrument could escape loss absorption — partly paid capital may never be called; security would put the holder ahead of unsecured creditors; restrictive clauses could force early repayment; and redemption at the holder's option would let the funding disappear exactly when it is needed.
Disclosures as required in respect of "debt securities" will have to be given, and also additional disclosures as required by the RBI will have to be provided.
Deposits
Deposits shall be classified as Public Deposits, from Banks, and from others. "Others" would also include Inter corporate deposits. They are further classified into (a) Amortised Cost, (b) Fair Value through Profit or Loss and (c) Designated at Fair Value through Profit or Loss.
Public deposits is a regulatory category of its own — deposit acceptance by NBFCs is separately licensed and supervised, and the presence or absence of public deposits on the balance sheet tells a reader which regulatory regime the entity is operating under.
Where the funding heads sit together
| Face head | What it carries |
|---|---|
| Debt Securities | Securities, secured or unsecured, other than those classified as subordinated debt — bonds, debentures, and the liability component of compound financial instruments |
| Borrowings (Other than Debt Securities) | Term loans, demand loans, related party loans, deferred payment liabilities and the rest |
| Deposits | Public deposits, from banks, from others including inter corporate deposits |
| Subordinated Liabilities | Perpetual debt and preference shares not qualifying as equity, and regulator-designated subordinated instruments |
The four heads run in broad order of seniority, which is the order in which they would be met in a wind-up.
Common mistakes
- Presenting subordinated liabilities within borrowings.
- Classifying preference shares as equity without applying Ind AS 32.
- Omitting the within and outside India split.
- Treating inter corporate deposits as borrowings rather than deposits.