Prudential Norms on Income Recognition, Asset Classification and Provisioning -
Pertaining to Advances
DBOD No. BP.BC/ 20 /21.04.048 /2001-2002 dated September 1, 2001
GENERAL
. Provisioning should be made on the basis of the classification of assets based on
the period for which the asset has remained non-performing and the availability of
security and the realisable value thereof.
Definitions
Non-performing assets
An asset, including a leased asset, becomes non-performing when it ceases to
generate income for the bank.
A Non-performing Asset (NPA) shall be an advance where
interest and/or instalment of principal remain overdue for a period of more than
180 days in respect of a Term Loan,
the account remains ‘out of order’ for a period of more than 180 days, in respect of
an Overdraft/Cash Credit (OD/CC),
the bill remains overdue for a period of more than 180 days in the case of bills
purchased and discounted,
interest and/or instalment of principal remains overdue for two harvest seasons but
for a period not exceeding two half years in the case of an advance granted for
agricultural purposes, and
any amount to be received remains overdue for a period of more than 180 days in
respect of other accounts.
t ‘90 days’ overdue’ norm is to be adopted for identification of NPAs, from the
year ending March 31, 2004.
Out of Order' status
An account should be treated as 'out of order' if the outstanding balance remains
continuously in excess of the sanctioned limit/drawing power. In cases where the
outstanding balance in the principal operating account is less than the sanctioned
limit/drawing power, but there are no credits continuously for six months as on the
date of Balance Sheet or credits are not enough to cover the interest debited during
the
same period, these accounts should be treated as 'out of order'.
‘Overdue’
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.
INCOME RECOGNITION
Income recognition – Policy
Banks should not charge and take to income account interest on any NPA.
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 provided for if the same is not realised. This will apply to Government
guaranteed accounts also.
In respect of NPAs, fees, commission and similar income that have accrued should
cease to accrue in the current period and should be reversed or provided for with
respect to past periods, if uncollected.
Appropriation of recovery in NPAs
Interest realised on NPAs may be taken to income account provided the credits in
the accounts towards interest are not out of fresh/ additional credit facilities
sanctioned to the borrower concerned.
In the absence of a clear agreement between the bank and the borrower for the
purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest
due), banks should adopt an accounting principle and exercise the right of
appropriation of recoveries in a uniform and consistent manner.
Interest Application
There is no objection to the banks using their own discretion in debiting interest to
an NPA account taking the same to Interest Suspense Account or maintaining only
a record of such interest in proforma accounts.
ASSET CLASSIFICATION
Categories of NPAs
Banks are required to classify non-performing assets further into the following
three categories based on the period for which the asset has remained non-
performing and the realisability of the dues:
Sub-standard Assets
Doubtful Assets
Loss Assets
4.1.1 Sub-standard Assets
A sub-standard asset was one, which was classified as NPA for a period not
exceeding two years. With effect from 31 March 2001, a sub-standard asset is one,
which has remained NPA for a period less than or equal to 18 months
4.1.2 Doubtful Assets
A doubtful asset was one, which remained NPA for a period exceeding two years.
With effect from 31 March 2001, an asset is to be classified as doubtful, if it has
remained NPA for a period exceeding 18 months
Loss Assets
A loss asset is one where loss has been identified by the bank or internal or
external auditors or the RBI inspection but the amount has not been written off
wholly.
4.2.3 Accounts with temporary deficiencies
The classification of an asset as NPA should be based on the record of recovery.
4.2.5 Asset Classification to be borrower-wise and not facility-wise
4.2.7 Accounts where there is erosion in the value of security
A NPA need not go through the various stages of classification in cases of serious
credit impairment and such assets should be straightaway classified as doubtful or
loss asset as appropriate.
4.2.8 Advances to PACS/FSS ceded to Commercial Banks
In respect of agricultural advances as well as advances for other purposes granted
by banks to ceded PACS/ FSS under the on-lending system, only that particular
credit facility granted to PACS/ FSS which is in default for a period of two harvest
seasons (not exceeding two half years)/two quarters, as the case may be, after it has
become due will be classified as NPA.
4.2.9 Advances against Term Deposits, NSC’s, KVP/IVP, etc
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life
policies need not be treated as NPAs.
4.2.10 Loans with moratorium for payment of interest
In the case of bank finance given for industrial projects or for agricultural
plantations etc. where moratorium is available for payment of interest, payment of
interest becomes 'due' only after the moratorium or gestation period is over.
4.2.11 Agricultural advances
In respect of advances granted for agricultural purpose where interest and/or
instalment of principal remains unpaid after it has become past due for two harvest
seasons but for a period not exceeding two half-years, such an advance should be
treated as NPA.
4.2.12 Government guaranteed advances
The credit facilities backed by guarantee of the Central Government though
overdue may be treated as NPA only when the Government repudiates its
guarantee when invoked.
4.2.13 Restructuring/ Rescheduling of Loans
A standard asset where the terms of the loan agreement regarding interest and
principal have been renegotiated or rescheduled after commencement of
production should be classified as sub-standard and should remain in such category
for at least one year of satisfactory performance.
4.2.14 Availability of security/ net worth of borrower/guarantor
The availability of security or net worth of borrower/ guarantor should not be taken
into account for the propose of treating an advance as NPA
4.2.18 Advances under rehabilitation approved by BIFR/ TLI
Banks are not permitted to upgrade the classification of any advance in respect of
which the terms have been re-negotiated unless the package of re-negotiated terms
has worked satisfactorily for a period of one year.
5. provisioning norms
5.1 General
The primary responsibility for making adequate provisions for any diminution in
the value of loan assets, investment or other assets is that of the bank managements
and the statutory auditors.
In conformity with the prudential norms, provisions should be made on the non-
performing assets on the basis of classification of assets into prescribed categories
5.2 Loss assets
The entire asset should be written off. If the assets are permitted to remain in the
books 100 percent of the outstanding should be provided for.
5.3 Doubtful assets
100 percent of the extent to which the advance is not covered by the realisable
value of the security to which the bank has a valid recourse and the realisable value
is estimated on a realistic basis.
In regard to the secured portion, provision may be made, at the rates ranging from
20 percent to 50 percent of the secured portion depending upon the period for
which the asset has remained doubtful:
iii) Additional provisioning consequent upon the change in the definition of
doubtful assets) effective from March 31, 2001 has to be made in phases as under:
As on 31.03.2001, 50 percent of the additional provisioning requirement on the
assets which became doubtful on account of new norm of 18 months for transition
from sub-standard asset to doubtful category.
As on 31.03.2002, balance of the provisions not made during the previous year, in
addition to the provisions needed, as on 31.03.2002.
5.4 Sub-standard assets
A general provision of 10 percent on total outstanding should be made without
making any allowance for DICGC/ECGC guarantee cover and securities available.
5.5 Standard assets
From the year ending 31.03.2000, the banks should make a general provision of a
minimum of 0.25 percent on standard assets on global loan portfolio basis.
5.6 Floating provisions
The floating provisions, wherever available, could be set-off against provisions
required to be made as per above stated provisioning guidelines.
5.7 Provisions on Leased Assets
i) Sub-standard assets
10 percent of the 'net book value'.
ii) Doubtful assets
100 percent of the extent to which the finance is not secured by the realisable value
of the leased asset:
iii) Loss assets
The entire asset should be written-off
5.8 Guidelines for Provisions under Special Circumstances
5.8.1 Government guaranteed advances (Refer to Master Circular)
5.8.2 Advances granted under rehabilitation packages approved by BIFR/term
lending institutions (Refer to Master Circular)
5.8.3 Treatment of interest suspense account
Amounts held in Interest Suspense Account should not be reckoned as part of
provisions.
5.8.4 Advances covered by ECGC/DICGC guarantee
In the case of advances guaranteed by DICGC/ECGC, provision should be made
only for the balance in excess of the amount guaranteed by these Corporations.
5.8.5 Advance covered by CGTSI guarantee
N.o provision need be made towards the guaranteed portion. The amount
outstanding in excess of the guaranteed portion should be provided for.
5.8.6 Take-out finance
The lending institution should make provisions against a 'take-out finance' turning
into NPA pending its take-over by the taking-over institution.
5.8.7 Reserve for Exchange Rate Fluctuations Account (RERFA)
In case Foreign Currency Denominated Loan assets need to be revalued as per
requirement of accounting practices or for any other requirement, the following
procedure may be adopted:
The loss on revaluation of assets has to be booked in the bank's Profit & Loss
Account.
Besides the provisioning requirement as per Asset Classification, banks should
treat the full amount of the Revaluation Gain relating to the corresponding assets,
if any, on account of Foreign Exchange Fluctuation as provision against the
particular assets.
5.9 Writing-off of NPAs
The banks should either make full provision as per the guidelines or write-off such
advances and claim such tax benefits as are applicable
5.10 Write-off at Head Office Level
Banks may write-off advances at Head Office level, even though the relative
advances are still outstanding in the branch books.
