2/1/2018 Non Performing Assets - Prudential Norms - Bankers' Club

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Non Performing Assets –

Prudential Norms
by Jai | Apr 25, 2017 | Bank Promotion |

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Non Performing Assets – Prudential Norms

Category Treated as NPA if:

Interest and/or installment of principal remain overdue for a

Term Loan
period of more than 90 days

1) The account remains out of order continuously for 90

days.
Overdraft/
2) Drawings are allowed on DP calculated on stock
Cash Credit
statement older than three months continuously for a period
(OD/CC)
of 90 days
accounts
3) Limits have not been reviewed/renewed within 180 days

from due date of sanction.

If the installment of principal or interest thereon remains

Agricultural
overdue for two crop seasons for short duration crops and one
Loans
crop season for long duration crop.

Bills

Purchased / Bill remains overdue for a period of more than 90 days.

Discounted

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Net NPA=Gross NPA – (provisions held towards NPAs + Balances in Interest

Sundry Suspense A/c + part payments received in suit filed accounts and kept in

Sundry Suspense.+ claims received from ECGC/CGC and kept in Sundry

Suspense a/c).

Income recognition:

The policy of income recognition has to be objective and based on the record

of recovery. Income from nonperforming assets (NPA) is not recognized on

accrual basis but is booked as income only when it is actually received.

However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life

policies may be taken to income account on the due date, provided adequate

margin is available in the accounts.

Reversal of Income:

If an account becomes NPA for first time during the year the unrealized interest

that was taken to P&L account on accrual basis pertaining to the current year as

well as pertaining to the preceding year, if any, shall also be reversed. This will

apply to Government guaranteed accounts also.

Valuation of Security for provisioning purposes:

In cases of NPAs with balance of Rs.5 crore and above stock audit at

annual intervals by external agencies and collaterals such as immovable

properties charged in favour of the bank should be got valued once in two years

by valuers approved by the Board.

READ Dishonour of cheque for insufficiency of funds

(Section 138 of NI Act)

Asset classification:

Banks are required to classify non-performing assets further into the following

three categories based on the period for which the asset has remained
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2/1/2018 Non Performing Assets - Prudential Norms - Bankers' Club

nonperforming and the reliability of the dues:

Substandard Assets: A substandard asset would be one, which has remained

NPA for a period less than or equal to 12 months. It indicates credit weakness

and scope for loss if deficiencies are not corrected.

Doubtful Assets: An asset would be classified as doubtful if it has remained in

the substandard category for a period of 12 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. It is considered as uncollectible and it is not warranted to

continue as bankable asset since there is little scope for salvage or recovery

value.

Borrower wise classification:

Facilities granted by a bank to a borrower treated as NPA (except bills

discounted under LC) if any one facility of the borrower becomes NPA. Uniform

lowest classification shall be accorded to all facilities. In case of credit facilities

for a borrower at more than branch, the principal branch shall decide the NPA

status.

Advances under consortium arrangements:

Asset classification of accounts under consortium should be based on the

record of recovery of the individual member banks.

Erosion in the value of security:

Where there are potential threats for recovery on account of erosion in the

value of security or non- availability of security, asset should be straightaway

classified as doubtful or loss asset as appropriate.

Advances against Term Deposits, NSCs, KVPs, IVPs and LIC policies need not be

treated as NPAs. Advances against gold ornaments, government securities and

all other securities are not covered by this exemption.

Loans with moratorium for payment of interest: In the case of bank finance

given for industrial projects or for agricultural plantations etc. where moratorium
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is available for payment of interest, payment of interest becomes ‘due’ only after

the moratorium or gestation period is over.

READ Difference between promissory note and bill of

exchange

Government guaranteed advances:

Advances under this category, though overdue may be treated as NPA only

when the Government repudiates its guarantee when invoked. However, interest

can be recognized only on recovery basis not on accrual basis. State

Government guaranteed advances would attract asset classification and

provisioning norms if interest and/or principal or any other amount due to the

bank remains overdue for more than 90 days.

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 purpose of treating an advance as NPA or otherwise,

as income recognition is based on record of recovery.

Post-shipment Supplier’s Credit: To the extent Export Credit Guaranteed

amount is received from the EXIM Bank, the advance may not be treated as a

nonperforming asset for asset classification and provisioning purposes.

Provisioning Norms

Status Provision to be made

0.25% on Direct advances to agriculture and SME sectors.

Standard 1.00% on Commercial Real Estate

0.40% on all advances other than stated above

The provisioning norms in respect of new Restructured Standard Accounts

are increased from existing 2.75% to 5% in a phased manner i.e. 3.50% by

31st March 2014; 4.25% by 31st March 2015 and 5% by 31st March 2016.

Sub- 25% on unsecured exposures

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Standard 15% on other loans

Unsecured portion: 100%

Secured portion: if asset remained in doubtful <= 1 year 25%

Doubtful
If asset remained in doubtful – 1 to 3 years 40%

If asset remained in doubtful > 3 year 100%

Loss At 100% on the outstanding

Fraud Accounts:

In case of fraud accounts, the banks are required to provide entire amount due

to the bank, irrespective of the quantum of security held against such assets, or

for which the bank is liable (including in case of deposit accounts) for over a

period not exceeding four quarters commencing with the quarter in which the

fraud has been detected. However, where there has been delay, beyond the

prescribed period, in reporting the fraud to the Reserve Bank, the entire

provisioning is required to be made at once. These guidelines are effective from

1st April 2015.

READ Study Material for Bank Promotion - Negotiable

Instruments Act

Unsecured Exposure is one where realizable value of tangible security, as

assessed by the bank/approved valuers/RBI inspecting officers, is not more

than 10 percent, abinitio, of the outstanding exposure (funded and non-funded).

However, the following are the exempted categories from provisioning norms:

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and
life
Advances granted under rehabilitation packages approved by BIFR / Term
lending
Advances covered by CGTSI guarantee – No provision need be made towards
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Advances covered by ECGC /DICGC guarantee – provision should be made

only for the balance in excess of the amount guaranteed

Special Mentioned Accounts (SMA):

As per recent guidelines banks are required to submit data on large borrowers

having aggregate fund / non fund based exposure of Rs.5 crore and above to

RBI.

No Category Criteria

Principal or Interest payment not overdue for more than 30

days but account showing signs of incipient stress like non

submission of mandatory information, frequent cheque

1 SMA-0
returns, reduction of drawing power, non repayment of

devolved DPGs / BGs / LCs, Sale of promoter’s stake

(shares) etc.

Principal or Interest payment overdue between 31 to 60

2 SMA-1
days.

Principal or Interest payment overdue between 61 to 90

3 SMA-2
days.

RBI has set up a Central Repository of Information on Large Credits (CRILC).

Banks are required to submit SMA status of the borrowers to CRILC. If an

account is slipped in to SMA-2 at any time or SMA-1 for any two quarters or

SMA-0 for three quarters in a year, then the bank would be required to initiate

corrective action.

Restructured loans:

W.e.f. 01.04.2015 all restructured accounts will be treated as sub-standard

assets and attracts higher provisioning norms.

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