Income Recognition, Asset Classification and Income Recognition, Asset Classification and Provisioning NormsProvisioning Norms

PolicyPolicy

• Income Recognition to be objective • Be based on recovery • Classification of assets to be based on objective criteria• Provisioning to be made on the basis of asset category• Security/Net worth are no considerations for

classification of assets• Health Code System ceased to be of supervisory interest

and no reporting is required.

NPANPA• An asset becomes Non Performing when it ceases to generate

income.• NPA was initially based on “ Past due concept” meaning instalment

and or interest has not been repaid for 30 days beyond due date, for specific period of time. The concept has been dispensed w.e.f. March 31, 2001.

• w.e.f Specific period• 31.03.1993 4 quarters• 31.03.1994 3 quarters• 31.03.1995 2 quarters• 31.03.2004 90 days (Exemption: Gold

• /small loans upto Rs.1 lakh)

NPA contd….NPA contd….• Interest and or instalment is overdue for 90/180 days • An account is “out of order “ for 90/180 days in OD/CC • Bills (Purchased/Discounted) Overdue for 90/180 days• Interest / instalment is overdue for two Harvest seasons, not

exceeding two half years in case of Agricultural Loans • Any amount overdue for 90/180 days • Overdue- Any amount due to the bank under any credit facility but

has not been repaid on due date • Out of Order – means outstanding balance is more than sanctioned

limit / drawing power, or there are no credits for 90/180 days or credits are not sufficient enough to cover the interest.

• Crop Loans- Overdue for two crop seasons in short duration crops and one crop season in case of long duration crop.

ExemptionsExemptions

• As advised vide Circular UBD(PCB)Cir No.1/09.140.00/05-06 dated July 4,2005 the following categories of UCBs to classify Loan Accounts as NPAs based on 180 days norms instead of the extant 90 day norm.

• (i) Unit banks i.e banks having a single branch/HO with deposits upto Rs.100 crore

• (ii) Banks having multiple branches within a single district with deposits upto Rs.100 crore

• The deposit base of Rs.100 crore will be determined on the basis of average of the fortnightly Net Demand and Time Liabilities in the financial year concerned.

• This norm is for three years commencing March 31,2005 to March 31, 2007.Not to be applied for the loans classified as on March 31, 2004.

Operational AspectsOperational Aspects

• Identification of NPAs to be done on an on-going basis.• Provisions for NPAs to be made on quarterly basis.• NPAs are not be evergreened to upgrade the classification.• NPAs to be classified borrower-wise and not facility wise.• Exceptions are multiple/consortium banking arrangements.• Temporary abberations do not qualify for NPA status.• Interest to be charged at Monthly rests (April 1, 2003).• Effective interest rates not to go up because of monthly interest

debits.• Monthly interest application is not applicable to agricultural

advances. Compounding of interest to be synchronised with harvest / marketing seasons in case of crop loans / allied agricultural activities.

• NPA reporting – in prescribed pro-forma to RO by May 30 every year.

NPAs - Special circumstancesNPAs - Special circumstances

• Calamity effected borrowers of agricultural loans need concessional treatment.

• Banks to consider re-schedulement of loans.• Banks may sanction fresh loans • Both the loans be treated as “ current dues” and not be classified as

NPAs.• Staff housing loans – Interest and instalment shall be repaid

separately.• Central Government Guaranteed Loans- Not to be treated as NPAs

but the income should not be recognised.• State Government Guaranteed Loans- If the guarantee is invoked,

NPA norms to apply.

NPAs - Special circumstancesNPAs - Special circumstances

• Project Loans- Interest falls due after moratorium or gestation. • Upgradation of NPAs- only after one year of satisfactory

performance.

• Re-structioning/Re-scheduling norms- applicable only for standard/sub-standard assets. Not applicable to Trader related facilities.

• Term Deposit/NSCs/KVPs/Life Policies loans not to be treated as NPAs.

• Gold loans for agricultural purposes- Interest rates to be charged at yearly intervals and repayment to coincide with harvesting of crops.

NPAs v/s Repayment scheduleNPAs v/s Repayment schedule

• Unscientific repayment schedule leads to higher incidence of NPAs. Therefore, the repayment schedule should :

• Be realisitic

• Have adequate gestation period

• Synchronise with harvest/marketing/income generation of borrowers

• Have adequate length

Investment incomeInvestment income

• NPA norms are also applicable to investments (Non-SLR).

• Income not to be recognised, if it is in arrears for 90 days.

Classification Classification

• Standard Assets

• Sub-standard Assets

• Doubtful Assets

• Loss Assets

Standard AssetsStandard Assets

• It is an asset with normal business risks. The borrower has been repaying the interest/instalment on or before due dates. Accounts are in order.

Sub-standard AssetSub-standard Asset

• A facility had become NPA and had been so for 18 months(31/3/2001) and for 12 months and 18 months (31.3.2005) for exempted class of UCBs.

Doubtful assetDoubtful asset

• An asset remained as NPA for more than 12 months and 18 months in case of exempted class of UCBs.

• Doubtful asset are further graded into three categories• Doubtful- I- upto one year• Doubtful II- one to three years• Doubtful III- above three years• Tangibility of the security is an important consideration to retain an

asset in doubtful category rather than the tenure of NPA.• All doubtful assets with the underlying securities having less than

50% of original value need to be considered for classification as Loss assets.

Loss AssetsLoss Assets

• It is an asset which has no salvage value, recoveries are not possible, the value of the security has been eroded.

• All instances of frauds need to be classified as Loss assets.

• An asset need not wait or graduate from sub-standard through doubtful category to reach Loss assets. All NPAs which require full provisioning need to be classified as Loss assets

Identification of NPAsIdentification of NPAs

• Banks to have appropriate internal systems.• Banks not to postpone the identification.• To have proper validation systems.• All instances of doubts need to get clarified within one month

through internal channels.• Banks depending on the size need to classify high value accounts

for the expeditious identification of NPAs.• All instances of deviations attract deterrent action by RBI

Income recognitionIncome recognition

• Be based on recovery.• Interest not to be charged to NPAs and taken to income account.• Interest on loans against NSC/KVP/Life policies may be booked on

accrual basis provided there is adequate margin.• Interest not to be booked in Government Guaranteed advances on

accrual basis.• Income on UTI units /equity of AIFIs to be booked on cash basis.• Income from bonds/securities of Government/PSUs/AIFIs may be

booked on accrual basis provided there are no arrears.• Income not to be booked if it is by sanctioning other loans.• Banks to reverse interest if not received

NPAs –application of interestNPAs –application of interest

• Not to debit interest in NPA accounts to book income• Interest debited in NPA account should be shown separately.• Interest accrued to be shown as • “Interest Receivable account” on the asset side• “Overdue interest Reserve account” on the liability side.• OIR is not a reserve

Provisioning NormsProvisioning Norms

• Loss assets- need to be written off in the ordinary course. If not possible, 100% provisioning need to be made.

• Doubtful assets- • D1- 20% of security + 100% of unsecured portion• D2- 30% of security + 100% of unsecured portion• D3- 50% of security + 100% of unsecured portion• For Non-exempted UCBs• D3- 60% w.e.f 31/3/2005 • D3-75% w.e.f.31/3/2006• D3-100% w.e.f 31/3/2007• Sub-standard Assets• 10% of outstanding amount• No allowance for DICGC or ECGC cover

Provisioning Norms…. contdProvisioning Norms…. contd

• Standard assets- • 0.25% of outstanding amount for exempted category • 0.40% for banks (unit banks or banks with branches in one district

with deposits more than Rs.100 crore and banks with branches in other districts.

• To be maintained as contingent provisions against standard assets• To be segregated from BDDR.• Eligible for Tier II capital upto 1.25% of risk weighted assets.

Provisioning Norms…. Contd.Provisioning Norms…. Contd.

• State Government Guaranteed Advances attract normal provisioning norms w.e.f. 1/4/2000 to be phased upto 31/3/2003 with a minimum provisioning of 25% each year.

• Fixed deposits/NSC/KVP/Life Policies loans do not require provisioning.

• Loans secured by gold/government securities /other securities attract provisioning norms.

• Loans under the cover of DICGC/ECGC need to be provided for balances in excess of the amount of the guarantee.

Tangibility of securityTangibility of security

• Security value of less than 10% of the outstanding amount need to be ignored.

• Devolved LC / guarantee need to be provided for.• Current assets to be valued by the statutory audit.• Stock audit need to be done annually.• Immovable property to be valued once in three years.