PRUDENTIAL NORMS FOR ASSET
CLASSIFICATION, INCOME
RECOGNITION AND PROVISIONING
Ritika Jain
WHAT ARE NPA’S?
An asset becomes non performing when it ceases to
generate income for the bank.
 A non performing asset (NPA) is a loan or an
advance where;
i. interest and/ or installment of principal remain
overdue for a period of more than 90 days in
respect of a term loan,
ii. the account remains ‘out of order’, in respect of an
Overdraft/Cash Credit (OD/CC),
iii. the bill remains overdue for a period of more than
90 days in the case of bills purchased and
discounted,

CONTD…
iv. the installment of principal or interest thereon remains
overdue for two crop seasons for short duration crops,
v. the installment of principal or interest thereon remains
overdue for one crop season for long duration crops,
vi. the amount of liquidity facility remains outstanding for
more than 90 days, in respect of a securitization
transaction undertaken in terms of guidelines on
securitization dated February 1, 2006.
vii. in respect of derivative transactions, the overdue
receivables representing positive mark-to-market value
of a derivative contract, if these remain unpaid for a
period of 90 days from the specified due date for
payment.
ASSET CLASSIFICATION
Categories of NPAs
Banks are required to classify nonperforming
assets further into the following three categories
based on the period for which the asset has
remained nonperforming and the realisability of
the dues:
 Substandard Assets
 Doubtful Assets
 Loss Assets

ASSET CLASSIFICATION
Assets
Performing
Assets
Standard
Assets
NPA
SubStandard
Assets
Doubtful
Assets
Loss Assets
STANDARD ASSETS

Standard Assets are one which do not pose any
problem relating to timely realization of interest
and recovery of loan and which do not carry more
than normal risk attached to the business. They
are not NPAs
SUBSTANDARD ASSETS
With effect from 31 March 2005, a substandard
asset would be one, which has remained NPA for
a period less than or equal to 12 months.
 In such cases, the current net worth of the
borrower/ guarantor or the current market value
of the security charged is not enough to ensure
recovery of the dues to the banks in full.
 The credit weaknesses of these assets are well
defined. There is possibility of under recovery of
the advances including interest due. Such under
recovery will cause loss to the bank if deficiencies
are not corrected

DOUBTFUL ASSETS
With effect from March 31, 2005, an asset would
be classified as doubtful if it has remained in the
substandard category for a period of 12 months.
 A loan classified as doubtful has all the
weaknesses inherent in assets that were
classified as substandard.
 These advances are so weak that collection in full
is considered highly improbable

LOSS ASSETS
A loss asset is one where loss has been identified
by the bank or internal/external auditors or by
the RBI inspections but the amount has not been
written off, wholly or partly
 They are considered un-collectible and of such
little value and their continuance as a Bankable
Asset is not warranted, even if there are some
salvage or recovery value

PRUDENTIAL NORMS
The following are the provisioning requirements
in respect of each class of assets (advances made
by bank) which are also called Prudential Norms:
1) Standard assets:A performing Assets with just normal risk attached
– 0.40%

PRUDENTIAL NORMS
2) Sub-standard Assets : (i) A general provision of 15 percent on total
outstanding
 (ii)
The ‘unsecured exposures’ which are
identified as ‘substandard’ would attract
additional provision of 10 per cent, i.e., a total of
25 per cent on the outstanding balance.
PRUDENTIAL NORMS
3) Doubtful Asset :i.
100 percent of the extent to which the advance is not covered
by the realizable value of the security to which the bank has a
valid recourse and the realizable value is estimated on a
realistic basis.
ii.
In regard to the secured portion, provision may be made on the
following basis, at the rates ranging from 25 percent to 100
percent of the secured portion depending upon the period for
which the asset has remained doubtful:
 Period for which the advance has remained in ‘doubtful’ category:
Provision requirement
(%)
Up to one year
25
One to three years
40
More than three years
100
PRUDENTIAL NORMS
4) Loss Assets
 Loss
assets should be written off. If
loss assets are permitted to remain in the books
for any reason, 100 percent of the outstanding
should be provided for.
INCOME RECOGNITION



Income recognition means considering the income
earned by a bank during a particular period.
Usually a bank prepares its P/L a/c on accrual basis.
But on the basis of the recommendations of
Narasimham Committee, the RBI has issued
guidelines to all banks to recognize income on
performing assets on accrual basis and income on non
performing assets on cash basis from the financial
year 1992-93 and onwards
Thus bank should consider interest only when it is
received.
Consequently,
banks
which
have
wrongly recognized income in the past should reverse
the interest if it was recognized as income during the
current year or make a provision for an equivalent
amount if it was recognized as income in the previous
year(s)
REASONS OF NPA
The major causes of high NPA are:
i.
Business failures
ii.
Poor Assessment of risk/ credit worthiness of
the borrowers
iii. Diversion of funds/ Misappropriations of funs
iv. Willful Defaulters

REASONS OF NPA
Business Failures:
The business failures may be caused by:
a) Managerial Deficiency
b) Unfavorable external environment
Managerial Deficiencies:
The primary cause of business failure is
mismanagement, which indeed accounts
for more than 50% of all business failure.
Numerous specific managerial faults can
cause the firm to fail. Few of them are as:1)
CONTD….
Poor Management
 Poor Production management
 Poor marketing management
 Poor
financial management poor Human
Resource
Unfavorable External Environment :
 Shortage of key inputs like power and basic raw
materials
 Development of new technology
 Shifts in consumer preferences
 Natural calamities etc

REASONS OF NPA
2) Poor assessment of risk/credit worthiness
of the borrowers:
In the past, most of the banks did not have sound
appraisal systems and had not given much
importance to NPAs. This had resulted in higher
incidence of NPAs
3) Diversion of funds/Misappropriation of
funds:
Diversion
of
funds
also
mostly
for
expansion/diversification/ modernization, taking
up new projects and for promoting associate
concerns is also responsible for industrial
sickness and NPAs
REASONS OF NPA
4) Willful Defaulters:
Some of the entrepreneurs lack honesty and are
not very serious about the repayment of loans,
leading to higher levels of NPAs
SYMPTOMS OF NPA
Delay or default in payment to supplier
 Irregularity in the bank accounts
 Irregularity in payment to banks and financial
institutions
 Non-submission of information to banks and
financial institutions
 Frequent
requests to banks and financial
institutions for additional credit
 Decline in capacity utilization
 Excessive turnover of personnel
 Extension of accounting period
 Accumulation of inventories

RECOVERY MEASURES
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Reminder Systems
Personal Visits
Recovery Camps
Recovery Agent
Restructuring/ Rehabilitation
Corporate debt restructuring
Loan Compromise
Security Adjustment
Recalling of Advances
Securitization and Reconstruction of Financial assets
and Enforcement of Security Interest Act 2002
(SARFAESI )
Filing Suits
Write off
THANK YOU