norms of NPA's

8/6/2019 norms of NPA's

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Income Recognition, Asset Classification

and Provisioning1

Prudential Norms onIncome Recognition, Asset Classificationand Provisioning pertaining to Advances

Anonymous


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Income Recognition, Asset Classification and Provisioning2

Health Code system

On 7/11/1985 RBI introduced uniform health code systemindicating the quality or health of individual advances

Description Health codeSatisfactory 1Irregular 2Stick:Viable-under nursing 3Stick:Non-viable/sticky 4

Advances recalled 5


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Health Code system

Description Health code

Suit file accounts 6

Decreed accounts 7

Bad and doubtful debts 8

With the introduction of prudential norms on 27/04/1992 healthCode-based system has ceased to be a subject of supervisoryinterest. Banks may, however, continue the system at their

discretion as a management information tool


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Master Circular on NPA

First circular on Non Performing Loans by RBI on 31/10/90

First Circular on IR, AC and Provisioning on 27-04-1992 RBI No. 2006-07/31 DBOD No. BP. BC. 15 / 21.04.048 / 2006-

07 dated July 1, 2006

Contents of circular are categorised into six paragraphs, twoAnnex and one Appendix

1. General2. Definitions

3. Income Recognition


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Master Circular on NPA

4. Assets Classification

5. Provisioning norms

6. Writing-off of NPAs

7. Annex I on reporting format of NPA

8. Annex II on list of agricultural advances

9. Appendix


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General

Norms as per the international practice and onrecommendation of Narasimham Committee

Policy of income recognition should be objective and based onrecord of recovery

While granting loans and advances, realistic repaymentschedules may be fixed on the basis of cash flows withborrowers


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Definition of NPA

An asset, including a leased asset, becomes non-performing whenit ceases to generate income for the bank

A non-performing asset (NPA) is a loan or an advance where; interest and/ or installment of principal remain overdue for a

period of more than 90 days in respect of a term loan

the account remains out of order in respect of anOverdraft/Cash Credit (OD/CC)


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Definition of NPA

the bill remains overdue for a period of more than 90 days inthe case of bills purchased and discounted

a loan granted for short duration crops will be treated as NPA,if the installment of principal or interest thereon remainsoverdue for two crop seasons.

a loan granted for long duration crops will be treated as NPA, ifthe installment of principal or interest thereon remains overdue

for one crop season.


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Out of order

the outstanding balance remains continuously in excess of thesanctioned limit/drawing power.

In cases where the outstanding balance in the principaloperating account is less than the sanctioned limit/drawingpower,but there are no credits continuously for 90 days as onthe date of Balance Sheet or credits are not enough to coverthe interest debited during the same period.


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Example ofOUTOFORDER

Sanctioned limit Rs.60,00,000/-Drawing power Rs.55,00,000/-

Amount outstanding continuously from 1.01.2006 to 31.03.2006Rs. 47,00,000/-

Total interest debited Rs.3,42,000/-Total credits Rs.1,25,000/-Category Sub-standardSince the credit in the account is not sufficient to cover the

interest debited during the period the account will be said asNPA.


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Any amount due to the bank under any credit facility is

overdue if it is not paid on the due date fixed by the bank.

Banks should, classify an account as NPA only if the interest

charged during any quarter is not serviced fully within 90 days

from the end of the quarter.


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INCOME RECOGNITION

Income from non-performing assets (NPA) is not recognised onaccrual basis but is booked as income only when it is actually

received The Accounting Standard 9 (AS 9) on `Revenue Recognition'

issued by the Institute Of Chartered Accountants of India (ICAI)requires that the revenue that arises from the use by others ofenterprise resources yielding interest should be recognizedonly when there is no significant uncertainty as to itsmeasurability or collect ability.


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INCOME RECOGNITION

Interest on advances against term deposits, NSCs, IVPs, KVPsand Life policies may be taken to income account on the due

date, provided adequate margin is available in the accounts

Fees and commissions earned by the banks as a result of re-negotiations or rescheduling of outstanding debts should berecognised on an accrual basis over the period of time coveredby the re-negotiated or rescheduled extension of credit


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Reversal of income

The finance charge component of finance income [as definedin AS 19 - Leases issued by the Council of the Institute of

Chartered Accountants of India (ICAI)] on the leased assetwhich has accrued and was credited to income account beforethe asset became non-performing, and remaining unrealised,should be reversed or provided for in the current accountingperiod.


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Reversal of income

If any advance becomes NPA as at the close of any year,interest accrued and credited to income account in the

corresponding previous year, should be reversed or providedfor if the same is not realised.

Fees, commission and similar income that have accrued shouldcease to accrue in the current period and should be reversed orprovided for with respect to past periods, if uncollected.


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Appropriation of recovery in NPAs

Interest realised on NPAs may be taken to income accountprovided the credits in the accounts towards interest are not

out of fresh/ additional credit facilities sanctioned to theborrower concerned

In the absence of a clear agreement for the purpose of appropriation of recoveries in NPAs (i.e. towards principal orinterest due), banks should adopt an accounting principle and

exercise the right of appropriation of recoveries in a uniformand consistent manner.


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Categories of NPAs

Classification is only for the purpose of computing the amountof provision that should be made with respect to bank

advances and certainly not for the purpose of presentation ofadvances in the banks balance sheet.


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Categories of NPAs

Sub-standard Assets - which has remained NPA for a periodless than or equal to 12 months

Doubtful Assets - has remained in the sub-standard categoryfor a period of 12 months

Loss Assets - loss has been identified by the bank or internal orexternal auditors or the RBI inspection but the amount has notbeen written off wholly.


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Guidelines for classification of

assets

Take into account the degree of well-defined credit weaknessesand the extent of dependence on collateral security for

realisation of dues. Establish appropriate internal systems to eliminate the

tendency to delay or postpone the identification of NPAs,especially in respect of high value accounts.

Responsibility and validation levels for ensuring proper assetclassification may be fixed by the banks.


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Accounts with temporary

deficiencies

Bank should not classify an advance account as NPA merelydue to the existence of some deficiencies which are temporary

in nature such as non-availability of adequate drawing powerbased on the latest available stock statement, balanceoutstanding exceeding the limit temporarily, non-submission ofstock statements and non-renewal of the limits on the duedate, etc


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Accounts regularised near about

the balance sheet date

Where the account indicates inherent weakness on the basis ofthe data available, the account should be deemed as a NPA.

In other genuine cases, the banks must furnish satisfactoryevidence to the Statutory Auditors/Inspecting Officers aboutthe manner of regularisation of the account to eliminate doubtson their performing status


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Asset Classification to be borrower-wise and not facility-wise

It is difficult to envisage a situation when only one facility to aborrower/one investment in any of the securities issued by the

borrower becomes a problem credit/investment and not others. All the facilities granted by a bank to a borrower and

investment in all the securities issued by the borrower willhave to be treated as NPA and not the particularfacility/investment or part thereof which has become irregular


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Advances under consortium

arrangements

Asset classification of accounts should be based on the recordof recovery of the individual member banks

Where the remittances by the borrower are pooled with onebank and/or where the bank receiving remittances is notparting with the share of other member banks, the account willbe treated as not serviced in the books of the other memberbanks and therefore, be treated as NPA.


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Advances under consortium

arrangements

The banks should, therefore, arrange to get their share ofrecovery transferred from the lead bank or get an express

consent from the lead bank for the transfer of their share ofrecovery, to ensure proper asset classification in theirrespective books


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Erosion in the value of security/frauds

committed by borrowers

Such accounts should not go through various stages of assetclassification.

The realisable value of the security is less than 50 per cent ofoutstanding in the borrowal accounts such NPAs may bestraightaway classified under doubtful category

The realisable value of the security, as assessed by the bank isless than 10 per cent of the outstanding in the borrowalaccounts, the asset should be straightaway classified as loss

asset


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Agricultural advances

A loan granted for short duration crops will be treated as NPA,if the installment of principal or interest thereon remains

overdue for two crop seasons A loan granted for long duration crops will be treated as NPA, if

the installment of principal or interest thereon remains overduefor one crop season.

The crop season for each crop means the period up toharvesting of the crops raised as would be determined by the

State Level Bankers Committee in each State


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Agricultural advances

Long duration crops would be crops with crop season longerthan one year

Crops, which are not long duration crops, would be treated asshort duration crops

Where natural calamities impair the repaying capacity ofagricultural borrowers, banks may decide on their own as arelief measure - conversion of the short-term production loaninto a term loan or re-schedulement of the repayment period

and the sanctioning of fresh short-term loan


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Government guaranteed advances

The credit facilities backed by guarantee of the CentralGovernment though overdue may be treated as NPA only when

the Government repudiates its guarantee when invoked. State Government guaranteed advances and investments in

State Government guaranteed securities would attract assetclassification and provisioning norms if interest and/orprincipal or any other amount due to the bank remains overduefor more than 90 days


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Restructuring/ Rescheduling of

Loans

The stages at which the restructuring / rescheduling /renegotiation of the terms of loan agreement could take place,

can be identified as under:a) before commencement of commercial production

b) after commencement of commercial production but before theasset has been classified as sub standard,

c) after commencement of commercial production and after theasset has been classified as sub standard


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Treatment ofRestructured

Standard Accounts

At any of the foregoing first two stages

A rescheduling of the installments of principal alone,would not

cause a standard asset to be classified in the sub standardcategory provided the loan/credit facility is fully secured

A rescheduling of interest element would not cause an asset tobe downgraded to sub standard category subject to thecondition that the amount of sacrifice, if any, in the element ofinterest, measured in present value terms, is either written off

or provision is made to the extent of the sacrifice involved


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Treatment of restructured sub-

standard accounts

A rescheduling of the installments of principal alone, wouldrender a sub-standard asset eligible to be continued in the sub-

standard category for the specified period, provided theloan/credit facility is fully secured

A rescheduling of interest element would render a sub-standardasset eligible to be continued to be classified in sub standardcategory for the specified period subject to the condition thatthe amount of sacrifice, if any, in the element of interest,

measured in present value terms, is either written off orprovision is made to the extent of the sacrifice involved


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Upgradation of restructured

accounts

The sub-standard accounts which have been subjected torestructuring etc., whether in respect of principalinstallment or interest amount would be eligible to beupgraded to the standard category only after the specifiedperiod i.e., a period of one year after the date when firstpayment of interest or of principal, whichever is earlier,falls due, subject to satisfactory performance during theperiod

The amount of provision made earlier could also bereversed after the one year period


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Availability of security / net worth

of borrower/ guarantor

The availability of security or net worth of borrower/ guarantorshould not be taken into account for the purpose of treating an

advance as NPA or otherwise, as income recognition is basedon record of recovery.


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Take-out Finance

Used for funding of long-term infrastructure projects

The norms of asset classification will have to be followed by

the concerned bank/financial institution in whose books theaccount stands as balance sheet item as on the relevant date

Taking over institution, on taking over such assets, shouldmake provisions treating the account as NPA from the actualdate of it becoming NPA even though the account was not in its

books as on that date


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Export Project Finance

There could be instances where the actual importer has paidthe dues to the bank abroad but the bank in turn is unable toremit the amount due to political developments such as war,strife, UN embargo, etc.

Where the lending bank is able to establish throughdocumentary evidence the above fact, the asset classificationmay be made after a period of one year from the date theamount was deposited by the importer in the bank abroad.


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Provisioning norms

The primary responsibility for making adequate provisions forany diminution in the value of loan assets, investment or other

assets is that of the bank managements and the statutoryauditors.

The assessment made by the inspecting officer of the RBI isfurnished to the bank to assist the bank management and thestatutory auditors in taking a decision in regard to makingadequate and necessary provisions in terms of prudential

guidelines.


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Provision on Loss assets

Loss assets should be written off. If loss assets are permittedto remain in the books for any reason, 100 percent of the

outstanding should be provided for


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Provision on Doubtful assets

100 percent of the extent to which the advance is not coveredby the realisable value of the security

In regard to the secured portion, provision may be made on, atthe rates ranging from 20 percent to 100 percent of thesecured portion depending upon the period for which the assethas remained doubtful


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Provision on sub standard assets

A general provision of 10 percent on total outstanding shouldbe made

The unsecured exposures which are identified as substandardwould attract additional provision of 10 per cent.

The provisioning requirement for unsecured doubtful assets is100 per cent.

Unsecured exposure is defined as an exposure where therealisable value of the security, as assessed by the bank is not

more than 10 percent


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Provision on standard assets

The banks should make a general provision of a minimum of0.25 percent on standard assets on global loan portfolio basis

All scheduled commercial banks are required to increase thegeneral provision on standard advances from 0.25 percent to0.40 percent except for direct advances to agricultural and SMEsectors (as per circular issued by RBI on 8th of Nov 2005)


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Advances granted under rehabilitation

packages approved by BIFR

Provision should continue to be made in respect of dues to thebank on the existing credit facilities as per their classification as

sub-standard or doubtful assets Additional facilities sanctioned as per package finalised by BIFR

and/or term lending institutions, provision on additionalfacilities sanctioned need not be made for a period of one year

from the date of disbursement


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General points

Advances against term deposits, NSCs eligible for surrender,IVPs, KVPs, and life policies would attract provisioning

requirements as applicable to their asset classification status Advances against gold ornaments, government securities and

all other kinds of securities are not exempted from provisioningrequirements


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Advances covered by ECGC

guarantee

Provision should be made only for the balance in excess of theamount guaranteed by the Corporation.

While arriving at the provision required to be made for doubtfulassets, realisable value of the securities should first bededucted from the outstanding balance in respect of theamount guaranteed by the Corporation


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NPA AND CRM

NPAs are a result of past action whose effects are realized inthe present i.e they represent credit risk that has already

materialized and default has already taken place CRM is a much more forward-looking approach and is mainly

concerned with managing the quality of credit portfolio beforedefault takes place.An attempt is made to avoid possibledefault by properly managing credit risk


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NPA AND CREDITRATING

Credit Rating implies evaluating the creditworthiness of aborrower by an independent rating agency.

Credit rating agencies generally slot companies into riskbuckets

Credit rating is not fool-proof

Enron was rated investment grade till as late as a month priorto it's filing for bankruptcy when it was assigned an in-defaultstatus by the rating agencies


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NPA AND STOCK PRICES

Stock prices are an important ( but not the sole ) indicator ofthe credit risk involved.

Stock prices are much more forward looking in assessing thecreditworthiness of a business enterprise.

Historical data proves that stock prices of companies such asEnron and WorldCom had started showing a falling trend manymonths prior to it being downgraded by credit rating agencies.


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REDUCTION IN NPA

The main purpose of this notice is to inform the borrower thateither the sum due to the bank be paid by the borrower or else

the former will take action by way of taking over thepossession of assets.

Banks can also takeover the management of the company.

Thus the bankers under the aforementioned Act will have themuch needed authority to either sell the assets of thedefaulting companies or change their management


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REDUCTION IN NPA

With the enactment of the Securitisation and Reconstruction ofFinancial Assets and Enforcement of Security Interest Act,

2002, banks can issue notices to the defaulters to pay up thedues

Once the borrower receives a notice from the concerned bankthe secured assets mentioned in the notice cannot be sold ortransferred without the consent of the lenders.


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REDUCTION IN NPA

Banks can now clean up their books by selling assets to ARCsat a discounted price or taking over the assets of a defaulter

and selling them to recover their dues without resorting tolong-winded legal procedures.

They can also generate funds locked in the existing assetsthrough securitisation that is, issuing bonds against thesecurity of assets


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REDUCTION IN NPA

Any willful defaulter with an outstanding balance of Rs 25 Lakhor more attracts a severe penalty.

He does not get any new loans from financial intermediaries. Promoters are not allowed to raise resources for floating new

ventures for five years from the date of the RBI publishing theirnames in the list of wilful defaulters.


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Income Recognition, Asset Classification

and Provisioning52

THANK YOU

norms of NPA's

Documents

Transcript of norms of NPA's