NPA –ASSETS CLASSIFICATION &
INCOME RECOGNITION
NPA – Asset Classification & Income Recognition
Objectives
▪ The R B I. introduced the NPA norms relying on the Narsimham Committee
recommendations & prudential norms for Income
Recognition, Asset Classification and provisioning for the advance
portfolio of the banks with the intention for proper disclosure of profit &
loss and reflect the financial health of bank.
▪ The
classification of assets has to be done on the basis of objective criteria
and based on record of recovery rather than on any subjective
considerations.
▪ The provisioning should be made on the basis of classification of assets
based on the period for which the assets has remained non performing
and the availability of security and the realisable value thereof.
NPA – Asset Classification & Income Recognition
Non Performing Asset Identification
An asset becomes non-performing when it ceases to generate income for the bank & or becomes
non-productive assets & it can be broadly classified as given below.
Type of loan Identification
Term Loan Account is treated Interest and/ or instalment remains over due for a period of more
than 90 days.
sanctioned limit/drawing power. •There are no
Cash Credit & Overdraft
accounts credits continuously for more than 90 days in the
Account is treated as NPA if it remains out of order
account i.e. the account is non-operative.
for a period of more than 90 days. An account is
•The credits during the aforesaid period in
treated as out of order if,
accounts are not sufficient to cover the interest
•The outstanding balance remains continuously in
debited during the same period.
excess of sanctioned/drawing power limit or
•Though the outstanding balance is less than the
NPA – Asset Classification & Income Recognition
Non Performing Asset Identification Type of
loan Identification
Bill Purchased/ Discounted
Agricultural Advances
for two crop seasons
• In case of long
duration crops, the
installment of
Bill remains over due for a Discounted period of principle or interest
more than 90 days.
thereon remains overdue for one crop season.
• In case of Short duration crops, the installment • thereon remains overdue for one crop season.
of principle or interest thereon remains overdue
Liquidity facility Remains outstanding for more than 90 days in respect of
securitization transaction.
Derivative Transactions remaining unpaid for a period of 90 days from
Overdue receivables representing positive mark
specified due date.
to market value of a derivative contract
NPA – Asset Classification & Income Recognition
Asset Classification
B..
After identification NPA assets are classified into four categories in view of their status as NPA,
availability of security and factors affecting the recovery of their dues. On the basis of said
classification provisions are to be made.
i) Standard assets: -
These are assets which are regular in paying interest/installment & its operations are
normal.
ii) Sub-standard assets: -
If the loan is NPA upto 12 months the same is called Sub Standard Assets.
NPA – Asset Classification & Income Recognition
Asset Classification
B..
iii) Doubtful
assets: -
If
an
asset is a sub-standard asset for a period exceeding 12 months, it should be classified as
doubtful asset. The said doubtful assets are further classified age-wise i.e. doubtful assets
upto 1 year, 1to 3 years & over three years respectively.
Doubtful Assets upto NPA
1 year Of twenty four months
1 to 3 years Over twenty four month & upto forty eight month 3 years &
above Above forty eight months.
iv) Loss Assets :-
An asset identified by Bank or by internal/external auditor/RBI as loss assets with a little
salvage value.
NPA – Asset Classification & Income Recognition
Asset Classification
v) In respect of accounts where there are potential threats to recovery because of erosion in value
of Security or fraud by borrower, such accounts should directly be classified as
doubtful/ loss irrespective of period for which is remained as NPA.
vi) Upgradation of Accounts
• Reschedule of recovery cannot give the advance a better classification than the
previous one.
• NPA accounts can be upgraded to Performing Accounts, provided all overdues are
adjusted or atleast reduced to a period of less than 90 days.
• Upgradation within the NPA category is not permitted i.e. Doubtful account cannot
be made substandard even if the overdues are reduced to less than 18 months.
NPA – Asset Classification & Income Recognition
Notes To Be Considered for
calculation of NPA
▪ Accounts should not be classified as NPA merely due to existence of some deficiencies of
temporary nature such as non-availability of adequate drawing power, balance outstanding
exceeding the limit, non submission of stock statements (Stock statement older than 90 days
temporary deficiency & becomes NPA on 90 days thereafter) subject to overall performance of
conduct is satisfactory.
▪ An account where the regular/Adhoc credit limits has not been reviewed/renewed within 90 days
from the due date/date of ad-hoc sanction will be treated as NPA.
▪ The accounts are regularised before Balance Sheet date by repaying overdues through genuine
sources (Not by sanction of additional facilities or transfer of funds between
accounts) then these accounts need not be treated as N.P.A. However, such classification
should be handled with due care and without any subjectivity.
NPA – Asset Classification & Income Recognition
▪ In case of consortium advances – classification be done on the recoverability of advance in the books of
account of the individual member bank. Bank needs to arrange to get their share of recovery or obtain
an express consent from the Lead Bank.
▪ Asset Classification to be borrower-wise and not facility-wise
If one facility of borrower is NPA, all the facilities of that borrower are to be treated as NPA under the
same category of classification. It may be noted that if a borrower has cash credit & term loan and
if one becomes NPA, both these facilities will have to be treated as NPA and classified either as
substandard/doubtful/as the case of first NPA facility.
▪ Credit facility backed by Central Government guarantee though overdue may be treated as NPA only
when the Govt. repudiates its guarantee when invoked.
CA. Sanjay Rane
NPA – Asset Classification & Income Recognition
▪ Advances against Gold Ornaments, Shares, other Govt. Securities and other securities not exempt from
provisioning norms.
▪ Staff loans should not be treated NPA unless problematic cases.
▪
Loans
against Banks Fixed Deposits, NSC’s, LIC, UTI, Indira Vikas Patra, LIC Policies are of self liquidating
nature and where outstanding are within the maturity value not treated as NPAs.
▪ The restructured substandard account would be eligible to be upgraded to the standard category only
after one year after the date when the first payment of interest or of principal, whichever is earlier
fails due subject to satisfactory performance during the period.
NPA – Asset Classification & Income Recognition
▪ In case where after restructuring the performance is not as per revised repayment schedule for one
year, then the account will be downgraded / classified as per original repayment schedule.
▪ In case of accounts where there is erosion in the value of security or fraud has been
committed by borrower, the same should be straightaway be classified as doubtful or loss;
specifically-
• where value of security has eroded by more than 50%, account should be classified as ‘doubtful’ and •
where realisable value of security is less than 10% of the outstanding amount, the existence of security
should be ignored and the account should be classified as ‘loss’.
Provisioning
Norms
Category Period NPA
Provisioning
A. Standard - Non NPA 0.25%,1%, 2% & 0.40% on gross amount in
phased
manner as shown in Note 1
hereunder
40% Unsecured
B Sub-standar d exposure in
- NPA upto 12 respect of
months
Secured Exposure - 25 Infrastructure loan -
% 25%
Unsecured Exposure –
NPA – Asset Classification & Income Recognition
Provisioning Norms
Category Period NPA Provisioning
Over
C Doubtful Upto One One to
three years
year Three NPA upto 24 months
years
portion & 40% on portion & 40% on
NPA upto 48 months
realizable value of realizable value of
Assets. assets.
NPA above 48 months
100% on unsecured 100 %
100% on unsecured
D. Loss - - 100%
NPA – Asset Classification & Income Recognition
Provisioning Norms
1. Provision in respect of Standard Advances
a. 0.25% of gross amount for advances to agricultural and SME sectors.
b. 1% of advances to Commercial Real Estate (CRE)
c. 2% of advances to Housing loan at teaser rates. However after 1 year from the
date on
which
the
rates
are
reset at
higher
rates,
the provision should be 0.40%
d. 2% in case of Restructuring accounts classified as Standard advances
e. 0.40% of gross account for advances other than (a), (b), (c) & (d).
2. Realisable Value of Security shall be include Principal Security, Collateral Security,
DIGCC/CGS Claim, Sundry Credits, Net Worth of Borrower and Guarantors,
T
Deposits as per court order and Value of attached assets as per Court Order.
NPA – Asset Classification & Income Recognition
3. For all NPA accounts provisioning should be made on amounts outstanding less amount of
interest/other charges debited not recovered by the year end.
4. The country based risk provision ranging from 0.25 % to 100 % to be made.
5. A bank may voluntarily make specific provisions for advances at rates which are higher than the
rates prescribed under existing regulations, to provide for estimated actual loss in
collectable amount, provided such higher rate are approved by Board of Directors
6. The
amount of
liquidity
facility
drawn and
outstanding for more than 90 days, in respect of securitization transactions, should be fully
provided for.
7. In respect of NPA balance of Rs.5 crores & above, bank needs to formulate policy for annual stock
audit by external agencies & in respect of immovable properties, valuation to be
carried once in 3 years by approved value.
NPA – Asset Classification & Income Recognition
Provisioning Coverage Ratio
▪ Provisioning Coverage Ratio (PCR) is the ratio of provisioning to gross non-performing assets and
indicates the extent of funds a bank has kept aside to cover loan losses.
▪ Banks should have total provisioning coverage ratio of not less than 70%.
▪ The
surplus
provision under PCR vis-à-vis as required as per norms should be segregated into an account styled
as “countercyclical provisioning buffer”. The buffer will be allowed to be used by banks for making
specific provisions for NPAs during periods of system wide downturn, with the prior approval of
RBI
NPA – Asset Classification & Income Recognition
Income Recognition
▪ Banks should not charge and take to income accounts interest accrued on non-performing assets.
Income from non performing assets is not recognized on accrual basis but is booked as income only
when it is actually received.
▪ Interest on advance against Term deposits, NSC, Indira & Kisan Vikas Patra & LIC may be taken to
income subject to availability of Margin.
▪ In the
absence of clear agreement between the Bank and the Borrower, an appropriate policy to be
followed in uniform and consistent manner.
NPA – Asset Classification & Income Recognition
Income Recognition
▪ On an account turning NPA, banks should reverse the interest
already charged and not collected by debiting Profit and Loss
account, and stop further application of interest. However,
banks may continue to record such accrued interest in a
Memorandum account in their books. For the purpose of
computing Gross Advances, interest recorded in the
Memorandum account should not be taken into account.
