9_ba4 bank audit 1

8/4/2019 9_ba4 Bank Audit 1

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IRAC NORMS

SEMINAR ON

VIPUL K. CHOKSI, FCA

BANK BRANCH AUDIT

Organised by: W.I.R.C OF I.C.A.ISATURDAY 19TH MARCH 2011


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AGENDA

Objectives

RBI Circulars

Identification of Account as NPA

Vipul K. Choksi, FCA

xcept ons ar cat ons Projects under Implementation

Asset Classification and Provisioning Guidelines on Restructuring of Advances

Agricultural Debt Waiver Scheme


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Objectives The classification of assets of banks has to be done

on the basis of objective criteria, which wouldensure a uniform and consistent application of thenorms.


The provisioning should be made on the basis of theclassification of assets based on the period for whichthe asset has remained non-performing and the

availability of security and the realisable valuethereof.


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RBI Circular Reference Master Circular dated 1st July 2010 on IRAC Norms.

Circular dated 7th October 2010 on restructuring ofadvances.


Circular dated 23rd December 2010 on housing loansby banks .


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Asset Type STANDARD ASSET / PERFORMING ASSET

The account is not non-performing and does not carry morethan the normal risk attached to the business.

NON-PERFORMING ASSET NPA


The asset ceases to generate income for the bank.

Higher risk than normal risk attached to business.

Non performing as per various criteria for various types of

loans.


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Identification of Account as NPA

Loans or

Advance

Interest and/or installment remains

overdue for a period of more than 90days in respect of a term loan.

As per para 2.1.3, an account is


due and charged during any quarteris not serviced fully within 90 daysfrom the end of the quarter.

Exceptions Loans with moratorium for payment ofinterest .

Housing Loan or similar advance to staff.


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Identification of Account as NPA ...

Bills Purchased

and discounted

Bill remains overdue for a Discounted

period of more than 90 days.AgriculturalAdvances

Interest or installment remains overdue fortwo crop seasons for short duration crop,one cro season for lon duration cro .


DerivativeTransaction

Overdue receivables representing positivemark to market value of a derivativecontract remaining unpaid for a period of

90 days from specified due date.Liquidityfacility

Remains outstanding for more than 90 daysin respect of Securitisation transaction.


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Identification of Account as NPA ...

Cash Credit / Overdrafts Account remains

out of order


Outstanding Balance remains continuously in excess ofsanctioned limit/drawing power (for how many days?) or

No credit continuously for 90 days as on the date of BalanceSheet or

Credits in the account are not sufficient to cover interestdebited during the same period.


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Exceptions / Clarifications

Temporary deficiency

Outstanding Balance in account based on thedrawing power calculated from stock statements


& if such irregular drawing are permitted for aperiod of 90 days, account needs to be classified asNPA.

Non-renewal/ Non-regularisation of regular/adhoc limit within 180 days from the due date.


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Exceptions / Clarifications ...

Advances against term deposits, NSCs, IVPs,

KVPs and Life Insurance Policies need not be

treated as NPAs, till security cover is sufficient


v . Income to be recognised subject to availability

of margin.

Advance against gold ornaments /

Government securities not exempt.


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Central Government guaranteed advance to be

classified as NPA only if Governmentrepudiates the guarantee when invoked.


All facilities granted to a borrower shall be treated asNPA & not only that facility which has becomeirregular.

Exception: Credit facility to Primary Agricultural CreditSociety (PACS) and Farmers Service Societies (FSS)under on lending arrangement.


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Consortium Advances

Member banks shall classify the accountsaccording to their own record of recovery.


recovery or obtain an express consent from theLead Bank.


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Straightaway Classification

Where realisable value of security is less than50% of the value assessed, account to be


Where realisable value of security is less than10% of outstanding balance, account to be

straightaway classified as Loss Asset.


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Valuation of Securities

In respect of NPAs with the balance of Rs. 5.00crores & above, bank needs to formulate policy for


respect of immovable properties, valuation to becarried out once in 3 years by approved valuer.


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Solitary Credit Entry

Care should be taken that a solitary or few credits

in the account made at/near the balance sheet


date extinguishing the overdue interest/principalis not the only criteria for classifying the asset as

standard.


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Regularisation of Account

Account need not be classified as NPA if account

has been regularised by the date of Balance sheet


y payment o over ue t roug genu ne sourcesnot by sanction of additional facility or transfer of

funds between accounts.


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Classification - Projects under

Implementation

'Project Loan' would mean any term loan which has beenextended for the purpose of setting up of an economic

venture. Banks should fix a Date of Commencement ofCommercial Operations (DCCO) for all project loans at thetime of sanction of the loan / financial closure.


For all projects financed by the FIs/ banks after 28thMay, 2002, the date of completion of the project should

be clearly spelt out at the time of financial closure of theproject.

These asset classification norms would apply to theproject loans before commencement of commercialoperations.


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Any change in the repayment schedule of a project loan dueto increase in the project outlay would not be treated asrestructuring if :

The increase in scope and size of the project takes place beforecommencement of commercial operations of the existing


Implementation


project. The rise in cost excluding any cost-overrun in respect of the

original project is 25% or more of the original outlay.

The bank re-assesses the viability of the project before

approving the enhancement of scope and fixing a fresh DCCP.On re-rating, (if already rated) the new rating is not below the

previous rating by more than one notch.


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Infrastructure Sector

Classify as NPA any time before commencement ofcommercial operations, if interest/ installment is 90days overdue unless restructured and eligible to be


Implementation


Classify as NPA if its fails to commence commercialoperations within two years from the original DCCOunless restructured and eligible to be classified a

standard.


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Permissible limit for extension of date ofcommencement of commercial operations.

Court cases : another two years beyond the extended period oftwo years

Other reason: another one year beyond the extended period of


Implementation


two years.

Other conditions:

Application for restructuring should be receive before the expiryof period of two years from original DCCO.

If there is a moratorium, bank should not recognise incomebeyond two years from original DCCO.

Bank should maintain necessary provision as long as these arestandard assets.


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Non Infrastructure Sector

Classify as NPA any time before commencement ofcommercial operations, if interest/ installment is 90days overdue unless restructured and eligible to be


Implementation


Classify as NPA if its fails to commence commercialoperations within six months from the original DCCOunless restructured and eligible to be classified a

standard.


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Permissible limit for extension of date ofcommencement of commercial operations.

Other reason: another one year beyond the extended period ofsix months.


Implementation


Other conditions:Application for restructuring should be receive before the expiry

of period of six months from original DCCO.

If there is a moratorium, bank should not recognise income

beyond six months from original DCCO.Bank should maintain necessary provision as long as these are

standard assets.


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Income Recognition

For NPA accounts income should be recognised onrealisation basis.

When an account becomes non-performing, unrealisedinterest of the previous periods should be reversed orprovided.


Interest income on additional finance in NPA account shouldbe recognised on cash basis.

In project loan, funding of interest in respect of NPA ifrecognised as income, should be fully provided.

If interest due is converted into equity or any otherinstrument, income recognised should be fully provided.


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Income Recognition

Adjustment of Recoveries - Priority

Unrealised Expenses

Unrealised Interest


Amount of Principal Outstanding

Clarification vide Master Circular - in the absence of clearagreement between the Bank and the Borrower, anappropriate policy to be followed in uniform and consistentmanner.


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Classification Norms

Standard AssetThe account is not non-performing.

Sub-Standard Asset

A sub standard Asset is one which has remained NPA for a


.

Loss Assets

These are accounts, identified by the bank or internal orexternal auditors or by RBI Inspectors as whollyirrecoverable but the amount for which has not been writtenoff.


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Classification Norms

Doubtful Asset - Three Categories

Category Period

Doubtful - I up to One Year


Doubtful II One to Three Years

Doubtful - III More than Three Years


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Provisioning Norms

Standard Asset

Agricultural and SMEs Sectors .25% Commercial Real Estate (CRE) Section 1%

Others .40%


e c rcu ar a e 23r ecem er 2010, prov s on on ous ngloan accounts has been increased to 2% with immediateeffect.

Sub-standard Asset 10% of total outstanding

20% of total outstanding if loan is unsecured


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Provisioning Norms

Doubtful Assets:

Period Provision (Secured + Unsecured)Up to 1 year 20% + 100%

1to 3 years 30% + 100%


More than 3 years 100% + 100%

Loss Asset:

100% should be provided forBanks should have total provisioningcoverage ratio of not less than 70%.


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Provisioning for Country Risk

Risk Category ECGC classification Provisioningrequirement (%)

Insignificant A1 0.25

In respect of a country where its net funded exposure is 1% ofits total exposure


Moderate B1 5

High B2 20

Very High C1 25

Restricted C2 100

Off-Credit D 100

Lower provision in respect of short term exposure


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Provisioning Norms

Provision Under Special Circumstances

Advance under rehabilitation programme approved byBIFR / Institutions, Provision should be continued to bemade on existing facilities.


Additional facilities no provision for a period of one year.

In case of advances guaranteed by CGTSI/ECGC, Provisionshould be made only for balance in excess of the amount

guaranteed by these corporations.


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Some other aspects

Take out Finance

Post-shipment supplier credit


Export Project Finance


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Guidelines on Restructuring

of AdvancesRestructuring divided in following four categories;

i. Industrial Units.

ii. Industrial Units under CDR Mechanism


iii. SMEs

iv. All other advances.


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Eligibility

Any account classified as standard, sub standard or doubtful.Restructuring cannot be done retrospectively and usual asset

classification norms would continue to apply.


of Advances


es ruc ur ng s ou e su ec o cus omer agree ng o erms

and conditions.

Financial viability should be established.

Borrowers indulging in frauds and malfeasance or in eligible.

BIFR cases eligible for restructuring subject to approval fromBIFR.


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Asset Classification Norms

Restructuring of accounts could take place infollowing stages:

Before commencement of commercial production


of Advances


After commencement of commercial production /operation but before the asset has been classified asSub Standard.

After the commencement of commercial production /

operation but after the asset has been classified as SubStandard or doubtful.


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Asset Classification Norms (Contd)

Standard Asset would get reclassified as sub standard andaccount which is already NPA would continue to have thesame classification.


of Advances


period of one year. All restructured accounts, classified as NPA upon

restructuring would be eligible for upgradation after

observation of satisfactory performance for the period ofone year.


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Provisioning Norms

Total provision required would be normal provision plusprovision in lieu of diminution in fair value of advances.

Diminution in fair value would be required to be


of Advances


.

Banks have option of notionally computing thediminution in fair value and providing at 5% in case of allrestructured accounts where the total dues to bank is less

than one crore.


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Special Regulatory Treatment for asset classification.Not available to following categories of advances:

Consumer and personnel advances

Advances is classified as capital market exposure

Advances classified as commercial real estate ex osure.


of Advances


I. Incentive for quick implementation ofpackage

The asset classification status may be restored if theapproved package is implemented :Within in 120 days from the date of approval under CDR

Within 90 days from the date of receipt of application by Bank inother cases.

id li i


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II. Asset classification benefits

a. Standard advance will not be reclassified as sub standardupon restructuring if following conditions are satisfied.

i. Dues of the bank are fully secured by tangible security


of Advances


(except SSI borrower with outstanding upto Rs.25 lacs &infrastructure projects)

ii. Unit becomes viable in 10 years, if it is engaged in

infrastructure activities and in 7 years in case of other

units.

G id li i


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iii. Repayment period including moratorium does not exceed15 and 10 years for infrastructure and other projects

respectively ( 10 years ceiling wont apply to restructuredhosing loan accounts)

iv. Promoters sacrifice and additional funds brought by themshould be a minimum of 1 % of banks sacrifice Ref RBI


of Advances


Circular dated 7th

October 2010)v. Personal guarantee is offered by promoters.

vi. The restructuring is not repeated restructuring

b. During the specified period the asset classification of substandard / doubtful accounts will not deteriorate, ifsatisfactory performance is demonstrated during thespecified period.

A i lt l D bt W i


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Agricultural Debt Waiver

Scheme Prudential norms. Agricultural debt waiver and debt

relief scheme 2008.

Amount eligible for waiver to be transferred to a separateaccount named Amount receivable from Government of


India under gricultural Debt Waiver Scheme 2008.

Banks neither to claim nor recover from the farmer,interest in excess of the principal amount, penal interest,

legal charges, miscellaneous charges etc for the assetswhich are NPA at the time of restructuring.

A i lt l D bt W i


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The balance may be treated as performing asset providedadequate provision is made for loss in present value term.

Assumptions for receipt of money from Government ofIndia.

a) 32% by 30th September 2008.


Scheme


b) 19% by 31st

July 2009c) 39% by July 2010

d) 10% by July 2011.

(Since Government of India has decided to pay intereston balance installments, loss in PV term need not beprovided).

Discount rate 9.56%.

A i lt l D bt W i


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Provision required under the current norms of standard assetneed not be provided.

Provision already held in NPA account may be reckoned formeeting the required provision on PV basis.

Prudential provision more than the amount of provision may be


Scheme


reverse n e propor on o , , an ur ng e

year ended, March 2009, 2010, 2011 and 2012 only after theinstallments for the relative year have been received.

In case of rejection of claims normal prudential norms beapplied

Under the Scheme, in case of other farmers 75% of the amountshould be released in three installments of 30th September 2008,31st March 2009 and 30th June 2009.



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Vide circular dated June 25, 2009, there was a relaxation

permitting farmers to pay the amount in single installment by 30th

June 2009.

Vide circular dated August 31, 2009, this date extended to 31st

December 2009.


Scheme


Banks allowed to recover less than 75% of the amount provided theydont claim difference from Govt.

Farmers relevant account may be treated as standard provided.

i) Adequate provision is made by the bank for the loss in PV terms.

ii) The farmers have given undertaking to pay their share and pay them

share of the settlement within one month of due date.

Fresh Agricultural loan be treated as standard.


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9_ba4 bank audit 1

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