Income Recognition
and Asset Classification
M Rama Kumari
AGM & MoF
College of Agricultural Banking
Reserve Bank of India, Pune
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Why do we need IRAC
Norms ?
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What is IRAC
• A policy of income recognition on the
basis of record of recovery rather
than
on
any
subjective
considerations.
• The classification of assets of banks
on the basis of objective criteria
ensuring a uniform and consistent
application of the norms
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What is Performing Asset
• A performing asset is one which does
not disclose any problems and which
does not carry more than normal risk
attached to the business. Such an
asset is classified as Standard Asset
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What is Non-Performing Asset
• A non performing asset is a loan or an advance
where:
• (i) interest and/ or installment remain overdue
for a period of more than 90 days in respect of a
Term Loan
• (ii) The amount remains ‘out of order’ for a
period of more than 90 days, in respect of an
Overdraft/ cash credit
• (iii) The bills remains overdue for a period of
more than 90 days in case of bills purchased and
discounted,
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(iv) In case of direct agricultural advances if
the installment of principal thereon remains
overdue for more than two crop seasons (in
case of short duration crops) and more than
one crop season (in case of long duration
crop) ; crop pattern as determined by SLBC
(v) Similar treatment for gold loans granted
for agricultural purposes
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Some exceptions
(vi) Gold loans for non agricultural
purposes will have the same treatment
like any other loans. However, in case
of a Board approved policy and
subject to adequate margin gold
loan up to Rs.1.0 lakh would not be
NPA with bullet repayment option
(not exceeding 12 months). It will
be NPA only after it is overdue form
the date of bullet repayment as fixed
by the bank. (Nov.26, 2007)
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Some exceptions
(vii) Advances against term deposits, NSCs
eligible for surrender, IVPs, KVPs and
Life policies need not be treated as NPAs
provided adequate margin is available.
(viii) Central Govt. guaranteed accounts
need not be treated as NPAs. However,
income not to be recognised unless
interest/ inatallment is really paid.
(ix) Staff housing loan: as per the due date
fixed by the bank, where interest is
payable after recovery of principal.
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What is an Out of Order A/c
• the
outstanding
balance
remains
continuously in excess of the sanctioned
limit/drawing power.
Or
• there are no credits continuously for 90
days
or
• credits are not enough to cover the
interest debited during the same period
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A few other criteria of classification
of CASH CREDIT account as NPA
• No monthly stock statement has been
submitted by the borrower for last six
months (3 months+90 days)
or
The Cash Credit account has not been
reviewed/ renewed for more than 90 days
or
Where there is a solitary or a few credit
entries before the balance sheet date but
the account goes ‘out of order’ thereafter
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Classification of Assets
• Identification of assets as NPAs should be
done on an ongoing basis. Provisions to be
made at the end of each calendar quarter.
• Charging of interest at monthly rests.
However, the date of classification of
an advance as NPA shall not change
on account of charging of interest at
monthly basis
• Treatment of NPAs – Borrower-wise not
Facility-wise, Bank-wise not borrower-wise
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Classification of Assets
• If the asset is non-performing, the
investment in the shares and bonds
of the same borrower shall also be
classified as NPA.
• If the bank is not receiving regular
dividend, the investment shall be
classified as NPI.
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ASSET CLASSIFICATION
Sub Standard Assets: The sub standard asset is
one which has remained as NPA for a period less
than or equal to 12 months.
Provision requirement – 10% of total outstanding
irrespective of available security.
However, if there is an erosion in the value of security
(less than 50% of the original value as assessed by
the bank or accepted by RBI at the time of last
inspection) or a fraud has been committed by the
borrower, the account will be straight away classified
as doubtful category and will attract provision
accordingly.
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College of Agricultural Banking, RBI, PUNE
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ASSET CLASSIFICATION
• Further, if the erosion in the value of
security is to the extent that the
realisable value of security depletes
to less than 10% of the outstanding
loan, the account can be straight
away
classified
as
‘Loss’
and
provision shall be made accordingly.
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Doubtful Asset
• Doubtful Assets:
• D I, D II, D III
• An asset which has remained NPA for
more than 12 months but is less
than or upto 24 months is classified
in Doubtful I category
Provision required is 20% on secured
portion and 100% on unsecured
portion
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Doubtful Asset
• Doubtful II
• NPA for more than 2 years and up to
4 years
• Provision required is 30% on secured
portion and 100% on unsecured
portion
• Doubtful III
• More than 4 years
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Doubtful Asset
• Provision required:
• 100% for new (after April 1,2010) D
III accounts for both T I banks and T
II banks
• For T II banks: 100% in case of old
D III accounts also.
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Doubtful Asset
• For T I banks: In case of NPAs(D III)
as on March 31, 2010
• (i) 60% w.e.f. March 31, 2011
• (ii) 75% w.e.f. March 31,2012
• (iii)100% w.e.f. March 31, 2013
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Loss Asset
Loss Assets:
An NPA account where realisable value of
security is either nil or is less than 10% of the
outstanding. Realisibility is the main criterion
not the value of security per se.
Loss asset will attract 100% provision
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College of Agricultural Banking, RBI, PUNE
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Internal System for classification of
asset
• Banks
should
establish
appropriate
internal systems to eliminate the tendency
to postpone the identification of NPAs ,
especially in respect of high value
accounts.
• Responsibility and validation levels for
ensuring asset classification may be fixed
by the bank
• RBI would continue to identify the
divergences
arising
due
to
noncompliance, for fixing responsibility.
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Prudential Guidelines on
restructuring of Advances
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Prudential Guidelines on Restructuring of
Advances
Asset classification norms
• As a general rule:
• Standard accounts should be immediately
reclassified as ‘sub standard assets’ upon
restructuring
• The non performing asset would slip into
further lower asset classification category
as per extant asset classification norms
with reference to pre restructuring
repayment schedule.
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Prudential Guidelines on Restructuring of
Advances
• non-performing assets upon restructuring,
would be eligible for up-gradation to the
'standard' category after observation of
'satisfactory performance' during the
'specified period‘ i.e. one year
• the asset classification of the restructured
account would be governed as per the
applicable prudential norms with reference
to the pre-restructuring payment
schedule.
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Restructured A/c-Income recognition
norms
• However, this rule is not applicable in
case of (i) Project Financing, (ii)
borrowers engaged in important
business activities (iii) housing loan
• This exceptional treatment is not available
to
• (i) consumer and personal advances
• (ii) Advances to traders
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•
-
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Restructuring of Agricultural
Advances
In case of default in payment of
agricultural loans due to natural calamities
UCBs on their own may decide to
convert the short term production loan into
a long term loan or reschedule the
repayment period and
sanction fresh short term loans
these fresh/ restructured loans will not be
treated as NPAs and will be governed by
fresh terms and conditions
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Restructured A/c- Provisioning
norms
• PRECONDITIONS:
(i)Provision for diminution in the fair value
of restructured Advances
• Interest sacrifice to be calculated on the
basis of discounting present value of cash
flow with both pre and post restructuring
rate of bank’s BPLR+ appropriate term
premium +credit risk premium
• Simpler method:5% of the exposure
(ii)The dues of the bank are fully secured
with certain exceptions
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Restructured A/cs-Income
recognition norms• Exceptions of (ii)
• (a) SSI borrowers where outstanding
is up to Rs.25.0 lakh
• (b) Infrastructure projects with an
escrow account with valid legal claim
and where the cash flows generated
form the project are adequate for
repayment of the advance
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Restructured A/cs-Income
recognition norms-
• WCTL part (created out of irregular
principal repayment) may remain
unsecured with the condition that a
provisioning of 20% would be
required on standard restructured
asset and for substandard asset it
should be 20% in the first year with
yearly
increase
of
20%
each
subsequent year
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Restructured A/cs-Income
recognition norms-
(iii)The unit becomes viable in 10
years
if
it
is
engaged
in
infrastructure and in 7 years in case
of other units
(iv)The repayment period of the
restructured advance should not
exceed 15 years in case of
infrastructure and housing loans 10
years in all other cases.
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Restructured A/cs-Income
recognition norms-
(v) Personal guarantee is offered by
the promoter (except when the unit
is affected by external factors
pertaining to the economy and
industry
(vi) The account should not be
subjected to repeated restructuring
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Restructured A/cs-Income
recognition norms-
(vii)Promoter’s additional contribution
should not be less than 15% of
bank’s sacrifice
(viii) If FITL is created out of unpaid
interest, the unrealised income
should have a corresponding credit in
the account styled as “Sundry
Liabilities
Account
(Interest
Capitalisation)”
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Other important issues
• FITL will be classified in the same
category as the restructured advance
• The bank should disclose in their
published annual Balance Sheet,
under ‘Notes on Account’ information
relating to number and amount of
advances
restructured
and
the
amount of diminution in the fair
value of advances
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PROVISIONING NORMS
Rate of Provisioning on Standard Asset:
Loan Type
T II
banks
TI
banks
Direct
advances
to 0.25% 0.25%
Agriculture and SME sector
Commercial
(CRE) sector
Real
Estate 1.00% 1.00%
All other loans and advances 0.40% 0.25%
not included in (a) and (b)
above
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College of Agricultural Banking, RBI, PUNE
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Thank you
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