6190404 Non Performing Assets

8/4/2019 6190404 Non Performing Assets

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NON PERFORMING ASSETS (NPA)

1.0 WHAT IS A NPA (NON PERFORMING ASSET)

Action for enforcement of security interest can be initiated only

if the secured asset is classified as Nonperforming asset.

Non performing asset means an asset or account of

borrower ,which has been classified by bank or financial

institution as sub standard , doubtful or loss asset, in

accordance with the direction or guidelines relating to

assets classification issued by RBI .

An amount due under any credit facility is treated as past

due when it is not been paid within 30 days from the due date.

Due to the improvement in the payment and settlement

system, recovery climate, up gradation of technology in the

banking system etc, it was decided to dispense with past due

concept, with effect from March 31, 2001. Accordingly as from

that date, a Non performing asset shell be an advance where

i. Interest and/or instalment of principal remain overdue for

a period of more than 180 days in respect of a term loan,

ii. The account remains out of order for a period of more

than 180 days ,in respect of an overdraft/cash credit

(OD/CC)

iii. The bill remains overdue for a period of more than 180

days in case of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two harvestseason but for a period not exceeding two half years in

case of an advance granted for agricultural purpose ,and

v. Any amount to be received remains overdue for a period

of more than 180 days in respect of other accounts

With a view to moving towards international best practices

and to ensure greater transparency, it has been decided to


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adopt 90 days overdue norms for identification of NPAs

,from the year ending March 31,2004,a non performing asset

shell be a loan or an advance where;

i. Interest and/or instalment of principal remainoverdue for a period of more than 90 days in respect

of a term loan,

ii. The account remains out of order for a period of

more than 90 days ,in respect of an overdraft/cash

credit (OD/CC)

iii. The bill remains overdue for a period of more than 90

days in case of bill purchased or discounted.

iv. Interest and/or principal remains overdue for two

harvest season but for a period not exceeding two

half years in case of an advance granted for

agricultural purpose ,and

v. Any amount to be received remains overdue for a

period of more than 90 days in respect of other

accounts

Out of order

An account should be treated as out of order if the

outstanding balance remains continuously in excess of

sanctioned limit /drawing power. in case where the out

standing balance in the principal operating account is less thanthe sanctioned amount /drawing power, but there are no

credits continuously for six months as on the date of balance

sheet or credit are not enough to cover the interest debited

during the same period ,these account should be treated as

out of order.

Overdue


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Any amount due to the bank under any credit facility is overdue if it is

not paid on due date fixed by the bank.

FACTORS FOR RISE IN NPAs

The banking sector has been facing the serious problems

of the rising NPAs. But the problem of NPAs is more in public

sector banks when compared to private sector banks and

foreign banks. The NPAs in PSB are growing due to external as

well as internal factors.

EXTERNAL FACTORS

Ineffective recovery tribunal

The Govt. has set of numbers of recovery tribunals,

which works for recovery of loans and advances. Due to

their negligence and ineffectiveness in their work the bank

suffers the consequence of non-recover, their by reducing

their profitability and liquidity.

Wilful Defaults

There are borrowers who are able to payback loans

but are intentionally withdrawing it. These groups of

people should be identified and proper measures should

be taken in order to get back the money extended to them

as advances and loans.


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Natural calamities

This is the measure factor, which is creating alarming

rise in NPAs of the PSBs. every now and then India is hit

by major natural calamities thus making the borrowersunable to pay back there loans. Thus the bank has to

make large amount of provisions in order to compensate

those loans, hence end up the fiscal with a reduced profit.

Mainly ours framers depends on rain fall for

cropping. Due to irregularities of rain fall the framers are

not to achieve the production level thus they are notrepaying the loans.

Industrial sickness

Improper project handling , ineffective

management , lack of adequate resources , lack of

advance technology , day to day changing govt. Policiesgive birth to industrial sickness. Hence the banks that

finance those industries ultimately end up with a low

recovery of their loans reducing their profit and liquidity.

Lack of demand

Entrepreneurs in India could not foresee their productdemand and starts production which ultimately piles up

their product thus making them unable to pay back the

money they borrow to operate these activities. The banks

recover the amount by selling of their assets, which covers

a minimum label. Thus the banks record the nonrecovered

part as NPAs and has to make provision for it.

Change on Govt. policies


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With every new govt. banking sector gets new

policies for its operation. Thus it has to cope with the

changing principles and policies for the regulation of the

rising of NPAs.

The fallout of handloom sector is continuing as most

of the weavers Co-operative societies have become

defunct largely due to withdrawal of state patronage. The

rehabilitation plan worked out by the Central govt to

revive the handloom sector has not yet been

implemented. So the over dues due to the handloom

sectors are becoming NPAs.

INTERNAL FACTORS

Defective Lending process

There are three cardinal principles of bank lending that have been

followed by the commercial banks since long.

i. Principles of safety

ii. Principle of liquidity

iii. Principles of profitability

i. Principles of safety


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By safety it means that the borrower is in a position to repay the loan

both principal and interest. The repayment of loan depends upon the

borrowers:

a. Capacity to pay

b. Willingness to pay

Capacity to pay depends upon: 1. Tangible assets 2. Success in business

Willingness to pay depends on: 1. Character 2. Honest 3. Reputation

of borrower

The banker should, there fore take utmost care in ensuring that the

enterprise or business for which a loan is sought is a sound one and the

borrower is capable of carrying it out successfully .he should be a person

of integrity and good character.

Inappropriate technology

Due to inappropriate technology and management

information system, market driven decisions on real time

basis can not be taken. Proper MIS and financial

accounting system is not implemented in the banks, which

leads to poor credit collection, thus NPA. All the branches

of the bank should be computerised.

Improper swot analysis


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The improper strength, weakness, opportunity and threat

analysis is another reason for rise in NPAs. While providing

unsecured advances the banks depend more on the

honesty, integrity, and financial soundness and credit

worthiness of the borrower.

Banks should consider the borrowers own capital

investment.

it should collect credit information of the borrowers

from

a. From bankers

b. Enquiry from market/segment of trade, industry,

business.

c. From external credit rating agencies.

Analyse the balance sheet

True picture of business will be revealed on

analysis of profit/loss a/c and balance sheet.

Purpose of the loan

When bankers give loan, he should analyse the

purpose of the loan. To ensure safety and liquidity,

banks should grant loan for productive purpose only.

Bank should analyse the profitability, viability, long

term acceptability of the project while financing.

Poor credit appraisal system

Poor credit appraisal is another factor for the rise in NPAs.

Due to poor credit appraisal the bank gives advances to

those who are not able to repay it back. They should use

good credit appraisal to decrease the NPAs.

Managerial deficiencies


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The banker should always select the borrower very

carefully and should take tangible assets as security to

safe guard its interests. When accepting securities banks

should consider the 1. Marketability

2. Acceptability

3. Safety

4. Transferability.

The banker should follow the principle of

diversification of risk based on the famous maxim do notkeep all the eggs in one basket; it means that the banker

should not grant advances to a few big farms only or to

concentrate them in few industries or in a few cities. If a

new big customer meets misfortune or certain traders or

industries affected adversely, the overall position of the

bank will not be affected.

Like OSCB suffered loss due to the OTM Cuttack,and Orissa hand loom industries. The biggest defaulters of

OSCB are the OTM (117.77lakhs),

and the handloom sector Orissa hand loom WCS ltd

(2439.60lakhs).

Absence of regular industrial visit

The irregularities in spot visit also increases the NPAs.

Absence of regularly visit of bank officials to the customerpoint decreases the collection of interest and principals on

the loan. The NPAs due to wilful defaulters can be

collected by regular visits.

Re loaning process


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Non remittance of recoveries to higher financing agencies

and re loaning of the same have already affected the

smooth operation of the credit cycle.

Due to re loaning to the defaulters and CCBs and PACs,the NPAs of OSCB is increasing day by day.

PROBLEMS DUE TO NPA

1. Owners do not receive a market return on there capital .in

the worst case, if the banks fails, owners loose their

assets. In modern times this may affect a broad pool of

shareholders.

2. Depositors do not receive a market return on saving. In

the worst case if the bank fails, depositors loose their

assets or uninsured balance.

3. Banks redistribute losses to other borrowers by charging

higher interest rates, lower deposit rates and higher

lending rates repress saving and financial market, which

hamper economic growth.

4. Non performing loans epitomise bad investment. They

misallocate credit from good projects, which do not

receive funding, to failed projects. Bad investment ends

up in misallocation of capital, and by extension, labour

and natural resources.

5. Non performing asset may spill over the banking system

and contract the money stock, which may lead to

economic contraction. This spill over effect can channelize

through liquidity or bank insolvency: a) when many

borrowers fail to pay interest, banks may experience

liquidity shortage. This can jam payment across the

country, b) illiquidity constraints bank in paying depositors

.c) undercapitalised banks exceeds the banks capital base.

Since high level of NPAs dampens the performance of the banks identification of potential problem

accounts and their close monitoring assumes importance. Though most banks have Early Warning


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Systems (EWS) for identification of potential NPAs, the actual processes followed, however, differ

from bank to bank. The EWS enable a bank to identify the borrower accounts which show signs of

credit deterioration and initiate remedial action. Many banks have evolved and adopted an elaborate

EWS, which allows them to identify potential distress signals and plan their options beforehand,

accordingly. The early warning signals, indicative of potential problems in the accounts, viz. persistent

irregularity in accounts, delays in servicing of interest, frequent devolvement of L/Cs, units financial

problems, market related problems, etc. are captured by the system. In addition, some of these banks

are reviewing their exposure to borrower accounts every quarter based on published data which also

serves as an important additional warning system. These early warning signals used by banks are

generally independent of risk rating systems and asset classification norms prescribed by RBI.

The major components/processes of a EWS followed by banks in India as brought out by a study

conducted by Reserve Bank of India at the instance of the Board of Financial Supervision are as

follows:

Designating Relationship Manager/ Credit Officer for monitoring account/s

Preparation of know your client profile

Credit rating system

Identification of watch-list/special mention category accounts

Monitoring of early warning signals

Relationship Manager/Credit Officer

The Relationship Manager/Credit Officer is an official who is expected to have complete knowledge of

borrower, his business, his future plans, etc. The Relationship Manager has to keep in constant touch

with the borrower and report all developments impacting the borrowable account. As a part of this

contact he is also expected to conduct scrutiny and activity inspections. In the credit monitoring

process, the responsibility of monitoring a corporate account is vested with RelationshipManager/Credit Officer.

Know your client profile (KYC)

Most banks in India have a system of preparing `know your client (KYC) profile/credit report. As a part

of `KYC system, visits are made on clients and their places of business/units. The frequency of such

visits depends on the nature and needs of relationship.

Read More: Know Your Customer (KYC)

Credit Rating System

The credit rating system is essentially one point indicator of an individual credit exposure and is used

to identify measure and monitor the credit risk of individual proposal. At the whole bank level, credit

rating system enables tracking the health of banks entire credit portfolio. Most banks in India have put

in place the system of internal credit rating. While most of the banks have developed their own

models, a few banks have adopted credit rating models designed by rating agencies. Credit rating

models take into account various types of risks viz. financial, industry and management, etc.

associated with a borrowable unit. The exercise is generally done at the time of sanction of new

borrowable account and at the time of review / renewal of existing credit facilities.

Watch-list/Special Mention Category

The grading of the banks risk assets is an important internal control tool. It serves the need of the

Management to identify and monitor potential risks of a loan asset. The purpose of identification of

potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the

bank to protect against the loan asset becoming non-performing. Most of the banks have a system to

put certain borrowable accounts under watch list or special mention category if performing advances
http://www.mbaknol.com/business-finance/business-finance/know-your-customer-kyc/http://www.mbaknol.com/business-finance/business-finance/know-your-customer-kyc/


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operating under adverse business or economic conditions are exhibiting certain distress signals.

These accounts generally exhibit weaknesses which are correctable but warrant banks closer

attention. The categorization of such accounts in watch list or special mention category provides early

warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and

take necessary preventive steps to avoid their slippage into non performing advances.

Early Warning Signals

It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of

early warning signals are used by different banks for identification of potential NPAs. Most banks in

India have laid down a series of operational, financial, transactional indicators that could serve to

identify emerging problems in credit exposures at an early stage. Further, it is revealed that the

indicators which may trigger early warning system depend not only on default in payment of

installment and interest but also other factors such as deterioration in operating and financial

performance of the borrower, weakening industry characteristics, regulatory changes, general

economic conditions, etc. Early warning signals can be classified into five broad categories viz.

(a) Financial

(b) Operational

(c) Banking

(d) Management and

(e) External factors.

Financial related warning signals generally emanate from the borrowers balance sheet, income

expenditure statement, statement of cash flows, statement of receivables etc. Following common

warning signals are captured by some of the banks having relatively developed EWS.

Financial warning signals

Persistent irregularity in the account

Default in repayment obligation

Devolvement of LC/invocation of guarantees

Deterioration in liquidity/working capital position

Substantial increase in long term debts in relation to equity

Declining sales

Operating losses/net losses

Rising sales and falling profits

Disproportionate increase in overheads relative to sales

Rising level of bad debt losses Operational warning signals

Low activity level in plant

Disorderly diversification/frequent changes in plan

Nonpayment of wages/power bills

Loss of critical customer/s

Frequent labor problems

Evidence of aged inventory/large level of inventory

Management related warning signals

Lack of co-operation from key personnel

Change in management, ownership, or key personnel


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Desire to take undue risks

Family disputes

Poor financial controls

Fudging of financial statements

Diversion of funds

Banking related signals

Declining bank balances/declining operations in the account

Opening of account with other bank

Return of outward bills/dishonored cheques

Sales transactions not routed through the account

Frequent requests for loan

Frequent delays in submitting stock statements, financial data, etc. Signals relating to

external factors

Economic recession

Emergence of new competition

Emergence of new technology

Changes in government / regulatory policies

Natural calamities

2. Management/Resolution of NPAs

A reduction in the total gross and net NPAs in the Indian financial system indicates a significant

improvement in management of NPAs. This is also on account of various resolution mechanismsintroduced in the recent past which include the SRFAESI Act, one time settlement schemes, setting

up of the CDR mechanism, strengthening of DRTs. From the data available of Public Sector Banks as

on March 31, 2003, there were 1,522 numbers of NPAs as on March 31, 2003 which had gross value

greater than Rs. 50 million in all the public sector banks in India. The total gross value of these NPAs

amounted to Rs. 215 billion. The total number of resolution approaches (including cases where action

is to be initiated) is greater than the number of NPAs, indicating some double counting. As can be

seen, suit filed and BIFR are the two most common approaches to resolution of NPAs in public sector

banks. Rehabilitation has been considered/ adopted in only about 13% of the cases. Settlement has

been considered only in 9% of the cases. It is likely to have been adopted in even fewer cases. Data

available on resolution strategies adopted by public sector banks suggest that Compromise

settlement schemes with borrowers are found to be more effective than legal measures. Many banks

have come out with their own restructuring schemes for settlement of NPA accounts. State Bank of

India, HDFC Limited, M/s. Dun and Bradstreet Information Services (India) Pvt. Ltd. and M/s. Trans

Union to serve as a mechanism for exchange of information between banks and FIs for curbing the

growth of NPAs incorporated credit Information Bureau (India) Limited (CIBIL) in January 2001.

Pending the enactment of CIB Regulation Bill, the RBI constituted a working group to examine the

role of CIBs. As per the recommendations of the working group, Banks and FIs are now required to

submit the list of suit-filed cases of Rs. 10 million and above and suit filed cases of willful defaulters of

Rs. 2.5 million and above to RBI as well as CIBIL. CIBIL will share this information with commercial

banks and FIs so as to help them minimize adverse selection at appraisal stage. The CIBIL is in the

process of getting operationalised.


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3. Willful Defaulters

RBI has issued revised guidelines in respect of detection of willful default and diversion and siphoning

of funds. As per these guidelines a willful default occurs when a borrower defaults in meeting its

obligations to the lender when it has capacity to honor the obligations or when funds have been

utilized for purposes other than those for which finance was granted. The list of willful defaulters is

required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of

information of this nature helps banks in their due diligence exercise and helps in avoiding financing

unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions,

wherever required, and undertake a proactive approach in change in management, where

appropriate.

Read :Legal and Regulatory Regimes to Tackle NPAs

Source: Scribd.com

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NPA means booking of money in terms of bad asset, which occurred due to wrong choice of client.

Because of the money getting blocked the prodigality of bank decreases not only by the amount of

NPA but NPA lead to opportunity cost also as that much of profit invested in some return earning

project/asset. So NPA doesnt affect current profit but also future stream of profit, which may lead to

loss of some long-term beneficial opportunity. Another impact of reduction in profitability is low ROI

(return on investment), which adversely affect current earning of bank.

Liquidity:

Money is getting blocked, decreased profit lead to lack of enough cash at hand which lead to

borrowing money for shot\rtes period of time which lead to additional cost to the company. Difficulty in

operating the functions of bank is another cause of NPA due to lack of money. Routine payments and

dues.

Involvement of management:

Time and efforts of management is another indirect cost which bank has to bear due to NPA. Time

and efforts of management in handling and managing NPA would have diverted to some fruitful

activities, which would have given good returns. Now days banks have special employees to deal and

handle NPAs, which is additional cost to the bank.

Credit loss:

Bank is facing problem of NPA then it adversely affect the value of bank in terms of market credit. It

will lose its goodwill and brand image and credit which have negative impact to the people who are

putting their money in the banks.

RESERVE BANK OF INDIA GUIDELINES REGARDING INVESTMENT PORTFOLIO OF THE URBANCOOPERATIVE BANKS (UCBs) :

1. INTRODUCTION

As a major element of the Financial Sector Reforms in India, RBI introduced prudential norms for banking regulation.Capital adequacy, exposure ceilings for lending to individual and group of borrowers, marking to market of theinvestment portfolio and, income recognition, asset classification and provisioning norms for the loan portfolio (IRAC inshort) formed the core of prudential regulation. The IRAC norms serve two primary purposes - (i) to depict the trueposition of a bank's loan portfolio and (ii) to help arrest its deterioration. The Committee on Financial System (CFS),under the Chairmanship of Shri M. Narasimham, recommended a policy of income recognition and asset classificationbased on record of recovery and other objective criteria as also provisioning based on the classification of assets intodifferent categories. RBI largely accepted the recommendations of the CFS and introduced the IRAC norms for theUrban Cooperative Banks (UCBs) in a phased manner over a three-year period from the year 1992-93.

2. Income recognition

(i) Effective from April 1, 1992, banks cannot consider as income interest on loan accounts, classified as Non-Performing Assets (NPA), unless actually received. Such unrealised interest on NPA taken as income in the earlier yearhas to be provided for. In other words, income from NPA is booked as income only when actually received, and not onaccrual basis.

(ii) Accrued interest on NPA

Banks should not debit to the borrowers accounts interest accrued on NPA, but show them separately under"Interest Receivable Account" and a corresponding amount under "Overdue Interest Reserve Account" on the assetsand liabilities side of the balance sheet respectively. (The amount held in the Overdue Interest Reserve Account,however, cannot be regarded as a "reserve" or as part of the owned funds of the Bank as it is not created out of incomeactually received by the bank).

(iii) Accrued interest on performing assets


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In respect of loan accounts, classified as performing assets, accrued interest can be debited to the borrowersaccount and taken to income account. If the relevant credit facility becomes NPA later, the bank should provide for theinterest accrued and credited to income account. In such cases, while making provision the amount held in "OverdueInterest Reserve Account" should be deducted from the advances outstanding.

(iv) Partial recovery of interest

Banks can take partial recovery of interest on NPA to their income account, provided such recovery is not out offresh / additional credit facilities sanctioned to the borrowers concerned.

(v) Income recognition on investments classified as NPA

Investments also are subjected to prudential norms on income recognition. As such, banks should not take to incomeinterest on accrual basis in respect of any security irrespective of the category in which it is included, where interest /principal in respect of which is in arrears for more than 90 days.

(vi) Others

Wherever the State Cooperative Societies Acts prescribe a more stringent accounting procedure, the same shouldbe followed. Further, where the bank has a more stringent accounting procedure, it can continue to follow such a

procedure.

3. Non-performing assets

A credit facility is considered non-performing when it ceases to generate income for the bank. Earlier, an asset wasclassified as NPA if interest and / or instalment of principal remained past due for a specific period. Past due wasreplaced by overdue with effect from the year ended March 31, 2001. Any dues to a bank under a credit facility will beoverdue if not paid by the due date fixed by the bank. RBI implemented the 90 days delinquency norm for NPAclassification for the UCBs from the year ended March 31, 2004. Given the heterogeneity of the sector, RBI prescribedrelaxed IRAC norms for smaller UCBs. Details of those relaxations, together with relaxation in provisioningrequirements, are in the Annex. The criteria for treating a loan account as NPA depend on the nature of facility asunder:

(i) Term loan:

A term loan is to be classified as NPA if interest and / or principal remained overdue for more than 90 days.

(ii) Cash credit and overdraft account:

A cash credit / overdraft account is classified as NPA if the account is out of order for more than 90 days. Anaccount is treated as out of order if the balance outstanding is continuously in excess of the sanctioned limit or drawingpower (whichever is lower) or where the outstanding balance in the principal operating account is within the sanctionedlimit or drawing power, but there are no credits continuously for 90 days as on the date of balance sheet, or creditsmade are not enough to cover the interest debited during the same period.

(iii) Bills purchased and discounted:

A bill is treated as NPA, if it remains overdue and unpaid for a period of more than 90 days. Overdue interest shouldnot be charged or taken to income account in respect of overdue bills, unless it is realised.

(iv) Other credit facilities:

Any other credit facility is to be treated as NPA, if it remains outstanding for a period of more than 90 days.

(v) Agricultural advances:

In case of all direct agricultural advances, effective September 30, 2004 an account should be treated as NPA ifinterest and / or instalment of principal remained overdue for two crop seasons from the due date for short duration

crops and one crop season from the due date for long duration crops. Long duration crops have a crop season longerthan one year and crops, which are not long duration crops are treated as short duration crops. Depending upon theduration of crops raised by a farmer, the above NPA norms would also be applied to agricultural term loan availed of by


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him. The crop season for each crop, which means the period up to harvesting, has to be decided by the State LevelBankers Committee in each state. In respect of other activities like horticulture, floriculture or allied activities such asanimal husbandry, poultry farming etc., NPA classification would be done on 90 days impairment norm as in the case ofother advances.

Few exceptions

(a) Housing loans to staff members:

Housing loans or similar advances granted to staff members, where interest is payable after recovery of principalshould be classified as NPA only when there is a default in payment of interest on due date.

(b) Project finance:

In the case of project finance, (industrial) where moratorium is allowed for payment of interest / principal, therespective amounts will become due only after moratorium / gestation period is over.

(c) Credit facilities guaranteed by Government

Credit facilities backed by Central Government guarantee, though overdue, should not be treated as NPA. Therefore,no provision is required to be made on such accounts. Interest on such advances, however, should not be taken toincome account unless it has been actually realised. From the year ended March 31, 2006, State Governmentguaranteed advances and investments in State Government guaranteed securities would attract extant IRAC norms, ifinterest and / or principal or any other amount due to a bank remains overdue for more than 90 days. A bank is notrequired to invoke the guarantee before classifying such advances / investments as NPA.

(d) Advances against Term Deposits, NSCs etc.

Advances against fixed and other term deposits, National Savings Certificates (NSCs), life policies, Indira VikasPatras (IVPs) and Kisan Vikas Patras (KVPs) need not be treated as NPA although interest thereon is not paid. Intereston such advances may be taken to income account on the due dates, provided adequate margin is available in theaccounts.

(e) Advances affected by natural calamity

Where natural calamities impair the repaying capacity of the agricultural borrower, UCBs may consider i) convertingthe crop loan in to an agricultural term loan or rescheduling the repayment period and ii) sanctioning fresh short-termloans. In such cases, the term loan or the fresh short-term loan will be treated as current dues and need not beclassified as NPA. Asset classification of these loans will be governed by the revised terms and conditions and thesewould be classified as NPA as per the extant norms applicable for classifying agricultural advances as NPA.

4. Asset Classification

In order to facilitate assessment of quality of the advances portfolio and to enable them to make adequate provisions,the UCBs should classify loan assets into the following categories.

CATEGORY FEATURE

1 Standard Assets, which do not disclose any problem and do not carry more than thenormal risk attached to the business. Such assets are not NPA.

2 Sub-standard Effective from year ended March 31, 2005, assets are classified sub-standard if they remain non-performing for less than or equal to 12months. They have well defined credit weaknesses and are characterisedby the distinct possibility that the bank will sustain some loss if thedeficiencies are not rectified.

An account, where the terms of loan agreement relating to payment ofinterest and repayment of principal have been negotiated or rescheduled


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after commencement of production, should be classified as sub-standard andretained as such for at least one year of satisfactory performance under therenegotiated terms.

3 Doubtful Effective from year ended March 31, 2005, assets are classified doubtful ifthey remain non-performing for more than 12 months. They have all theweaknesses inherent in sub-standard assets with the added characteristicthat collection or liquidation of the dues is highly improbable. As in the case

of sub-standard asset, rescheduling does not entitle a bank to upgrade thequality of the account automatically.

4 Loss These are assets where loss has been identified by the bank or internal /external auditors or RBI inspection, but the amount has not been written off,wholly or in part. Such assets are considered uncollectible and of so littlevalue that their continuance as bankable assets is not warranted, eventhough there may be some salvage or recovery value.

5. Guidelines for asset classification

Assets are to be classified generally on the basis of well-defined credit weaknesses and the extent of dependence oncollaterals for realisation of dues. Net worth of borrower / guarantor should not be taken into account while determining

whether an advance is NPA. Banks should bear in mind the following RBI guidelines for asset classification.

(i) Identification of assets as NPA on on-going basis

Banks should identify assets as NPA on an on-going basis. They should evolve a system to eliminate the tendency todelay or postpone identification of NPA, particularly in respect of high-value accounts. They should internally resolvedoubts regarding asset classification within one month of the date by which the account would have been classified asNPA as per prescribed norms.

(ii) Treatment of accounts as NPA

a) Record of recovery

The classification of an asset as NPA has to be done on the record of recovery. Banks should not classify anaccount as non-performing due to the existence of temporary deficiencies such as balance exceeding limit, non-availability of adequate drawing power, non-submission of stock statement or non-renewal of accounts on due date. Ifan account is

regularised before the balance sheet date by repayment of overdue through genuine sources (not by sanction ofadditional facilities or transfer of funds between accounts), the account need not be treated as NPA. It should, however,be ensured that the account remains in order subsequently and a solitary credit made in the accounts near about thebalance sheet date to extinguish the overdue interest or instalment of principal is not reckoned as the sole criterion fortreating the account as a standard asset. In other genuine cases, banks must furnish to the Statutory Auditor / RBIInspecting Officer satisfactory evidence of regularisation of the account.

b) Borrower-wise and not facility-wise

Where one credit facility extended to a borrower becomes NPA, all the other facilities, even if the operations in thoseaccounts are satisfactory, are required to be treated as NPA.

(iii) Potential threats to recovery

In respect of accounts where there are potential threats to recovery on account of erosion in the value of security orexistence of factors such as frauds committed by borrowers, such accounts should be straightway classified as doubtfulor loss asset, as the case may be, irrespective of the period for which they have remained as NPA. Similar treatmentshould be provided to accounts where there is significant erosion in value of security, i. e. less than 50% of the valueassessed by the bank or accepted by RBI at the time of last inspection.

(iv) Classification as NPAfor arrears in submission of stock statements

Outstanding in the account based on drawing power calculated from stock statements older than three monthswould be considered as irregular. A working capital account will be classified as NPA if such irregular drawings areallowed for more than 90 days.


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(v) Classification as NPAfor non-review ornon-renewal of limits

An account where regular / ad-hoc credit limits are not reviewed or not renewed within 90 days from the due date ordate of ad-hoc sanction will be classified as NPA.

(vi) Treatment of loss assets

If the realizable value of the security, as assessed by the bank or approved valuer or RBI, is less than 10% of theoutstanding in the borrowers account, existence of security should be ignored and the account should be classifiedstraightway as a loss asset.

(vii) Classification of accounts under consortium

Asset classification of accounts under consortium will be done on the record of recovery in individual banks.However, where remittances by the borrower under consortium lending arrangements are pooled with one bank, andthat bank does not part with the share of a member bank, the account in the member bank will be treated as not havingbeen serviced and will be treated as NPA as per extant norms.

(viii) Fixing realistic repayment schedules

UCBs should fix monthly / quarterly instalments for repayment of gold loans for non-agricultural purposes after taking into account the income generation pattern and repayment capacity of the borrower. Such gold loans should be classifiedas NPA if interest and / or instalment remain overdue for more than 90 days. In case of gold loans for agriculturalpurpose, interest has to be charged at yearly intervals as per the Supreme Court judgement and payment shouldcoincide with harvesting. Such advances will be NPA only if instalment and / or interest become overdue after the duedate.

6. Provisioning

(i) In conformity with prudential norms, UCBs should make provisions on the NPAs based on classification of assets into prescribed categories as detailed in paragraph 4 above. Considering the time lag between an account becomingdoubtful of recovery, its recognition as such, the realisation of the security and erosion in the value of security over time,banks are required to make provisions as detailed below against loss, doubtful and sub-standard assets:

Assetcategory

Provision required

1 Loss The bank should write off the entire outstanding. Otherwise, it has to make100% provisioning for the outstanding.

2 Doubtful (a) 100% of the portion not covered by the realisablevalue of security

(b) Over and above item (a) depending upon the periodup to which the asset has remained doubtful, 20% -100% of the secured portion (i.e. estimated realisablevalue) as given below:

Period Provision %

Up to 1 year 20

1 3 years 30

Over 3 years

Outstanding stock of NPA as on March 31, 2007

i) 50 up to

31.3. 2007

ii) 60 as on

31. 3. 2008

iii) 75 as on 31. 3.2009

iv) 100 as on 31. 3.2010

Advances classified as doubtful for more than threeyears on or after April 1, 2007

100

3 Sub-standard A general provision of 10% on total outstanding


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ii) Provision on Standard Assets

UCBs were required to make a general provision of 0.25% on standard assets from the year ended March 31, 2000.The general provisioning requirement on standard assets, barring UCBs direct advance to agriculture and SME sector,

was raised to 0.40% in November 2005. In order to ensure maintenance of asset quality in the context of high creditgrowth, RBI raised the general provisioning requirement for UCBs on standard advances in respect of personal loans,loans and advances qualifying as capital market exposure and commercial real estate loans from 0.40% to 1.0% inJune 2006. Certain categories of loans continued to experience high growth; personal loans witnessed a higher defaultrate. Therefore, provisioning requirement in respect of personal loans, loans and advances qualifying as capital market

exposure and commercial real estate loans (excluding residential housing loans) was raised from 1% to 2% in February2007. Simultaneously, RBI decided to increase provisioning for loans and advances to Non-Deposit TakingSystematically Important Non-Banking Finance Companies (NBFC-ND-SI) from 0.40% to 2% (A systematicallyimportant NBFC is defined as an Non-Deposit Taking NBFC with an

asset size of Rs.100.00 crore or more as per the last audited balance sheet). The standard asset provisioningrequirements for UCBs, after the above changes, stand as summarized below:

Sr.No.

Category of standard asset Provisioningpercentage

(a) Direct loans to agriculture and SME sectors 0.25%

(b) Personal loans, loans qualifying as capital market exposure,commercial real estate loans (excluding residential housing loans)and loans and advances to NBFC-ND-SI

2.00%

(c) All other loans and advances not included under (a) and (b)above

0.40%

The provision towards standard assets need not be netted from gross advances but should be shown separately asContingent Provision towards Standard Assets under Other Funds and Reserves in the Balance Sheet. In case abank is having provision in excess of what is required for non-performing assets under Bad & Doubtful Debt Reserve

(BDDR), additional provision required for standard assets may be segregated from BDDR and parked under ContingentProvision towards Standard Assets with the approval of the Board of Directors. This contingent provision will beavailable for inclusion in Tier II capital.

(iii) Guidelines for Provisions

1. a) Advances covered by DICGC / ECGC guarantee

In respect of advances guaranteed by ECGC/DICGC, provisioning is to be made only for the balance exceeding theamount of guarantee. Further, while arriving at the provision for Doubtful assets, realisable value of the securities shouldbe deducted from the outstanding balance before the guarantee is set off.

1. b) Additional facilities under rehabilitation package

If under a rehabilitation package approved by BIFR / term lending institution, banks allow additional credit facilities toa unit, which has been categorised as sub-standard or doubtful, they need not make provisions for a period of one yearfrom the date of disbursement of such additional facilities. Similar treatment should be made in respect of sick SSI unitsunder a nursing programme. However, banks should make provisions on existing credit facilities classified as sub-standard or doubtful in both the cases.

1. c) Certain advances exempted

Advances against banks own term deposits, NSCs, KVPs, IVPs and life policies are exempted from provisioningrequirements. However, advances against gold ornaments, government securities and all other securities attractprovisioning.

1. d) Valuation of security


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To have uniform assessment of valuation of security and reduce divergence in provisioning requirements, banks shouldundertake annual stock audit of current assets by external agencies in respect of NPAs with balance of Rs.10.00 lakhand above. Besides, immoveable property charged to the bank should be valued once in three years by the banksapproved valuers.

ANNEX

Relaxed Prudential Norms on Asset Classification and Provisioning for certain categories of UCBs

Unit banks i.e. banks having a single branch / Head Office with deposits up to Rs.100 crore and banks having morethan one branch within a single district with deposits up to Rs.100 crore are exempted from the extant assetclassification and provisioning norms as under:

Sr.

No.

Extant Norm Relaxed Norm Remarks

1. Asset classification norm:

i) With effect from the yearended March 31, 2004 the

norm for classification on anasset as NPA has beenreduced to 90 days from 180days

These banks will continue toidentify NPAs based on 180-

day delinquency norm forthree more years commencingMarch 31, 2005, i.e. up toMarch 31, 2007.

The 180-day delinquencynorm for NPAs has since

been extended by onemore year i.e. up to March31, 2008.

ii) With effect from the yearended March 31, 2005 anasset would be classified asdoubtful if it remained in thesub-standard category for 12months

A sub-standard account willcontinue to be classified asdoubtful after 18 monthsinstead of 12 months up toMarch 31, 2007.

The 12-month period forclassification of a sub-standard asset in doubtfulcategory has since beenextended by one moreyear i.e. up to March 31,2008.

2. Provisioning norms

i) General provisioningrequirement on standardassets (excepting directagriculture and SME) raisedfrom 0.25% to 0.40% and to2% on specific sectors

General provisioningrequirement on standardassets continue to remain at0.25% for the exemptedbanks.

ii) 100% provisioning onsecured portion of advancesclassified as Doubtful III onor after April 1, 2007

100% provisioning to be madeby the exempted banks onsecured portion of advancesclassified as Doubtful III on orafter April 1, 2010.

iii) For the outstanding stockof D-III advancesas onMarch 31, 2007 banks wouldbe required to provide asunder:

50% up to March 31, 2007

60% as on March 31, 2008

75% as on March 31, 2009

100% as on March 31, 2010

For the outstanding stock ofD-III advances as on March31, 2010 the exempted bankswould be required to provideas under:

50% up to March 31, 2010

60% as on March 31, 2011

75% as on March 31, 2012

100% as on March 31, 2013


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6190404 Non Performing Assets

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