INCOME RECOGNITION, ASSET
CLASSIFICATION, AND PROVISIONING
S Dwivedi
ACA-TM-37 (v2.2-20-Nov-10)
ALL BANKS IRRESPECTIVE OF
SIZE OF BRANCH
“ONE SIZE FITS ALL”
PRINCIPLE
NORMS ARE WITH 90 DAYS DELINQUENCY
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ACA-TM-37 (v2.2-20-Nov-10)
IRAC NORMS & PROVISIONING
WHY?
In line with international best practices.
As per Narsimham committee
recommendations.
In a phased manner
Greater consistency and transparency in
published books of accounts of banks.
To improve intrinsic health of banks
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ACA-TM-37 (v2.2-20-Nov-10)
DEFINATION OF NON PERFORMING ASSET [ NPA ]
and
IMPORTANT TERMINOLOGIES
NPA :
An Asset becomes Non Performing when it ceases to
generate income
OVERDUE :
due
Any amount due under any credit facility if not paid by the
date fixed by the bank becomes overdue
OUT OF ORDER :
An account should be treated as Out of Order if the
outstanding balance remains continuously in excess of the
sanctioned limit/ drawing power or if there are no credits for
specified number of days or credits are not enough to cover the
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interest
debited
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : ADVANCES
Term Loans
Interest and or installment of principal remain overdue for more
than 90 days
Overdraft / Cash Credit
The account remains Out of Order for a period of more than 90
days
Bank Guarantee
In case Bank Guarantee is invoked and the amount remains unpaid
for 90 days
Letter of Credit
In case Letter of Credit is devolved and the amount remains unpaid
for more than 90 days
Bills
The bill remains overdue for a period of more than 90 days
Agriculture Advance
Short duration loans - Installment or interest remains overdue for
two crop seasons
Long duration loans – Installment or interest remains overdue for
one crop season
Gold Loans, Loans
against Deposits, KVPs,
NSCs, IVPs.
Interest and or installment of principal remain overdue for 90 days
Any Other Amount
Any other amount to be received remains overdue for a period of
more than 90 days
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : TERM LOAN ACCOUNTS
Account Status
NPA
IF
Interest or Instalment is overdue for 90 days
Term Loan Account of XYZ
Date
Particulars
Debit
Credit
Balance
2010 Dec. 1
To Loan
5000.00
5000.00
Dec. 31
To Interest
50.00
5050.00
Dec. 31
By 1st Installment
2010 Jan. 31
To Interest
46.00
4596.00
2010 Feb. 28
To Interest
46.00
4642.00
2010 Mar. 31
To Interest
46.00
4688.00
500.00
4550.00
In the above example Borrower has not paid the interest which was charged on
Dec. 31 2010 amounting to Rs. 50.00 and the same was overdue for 90 days
hence this account shall be categorised as NPA as on 31st March 2011.
Thus all accounts disbursed after 1st Jan of the financial year can never be NPA.
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ACA-TM-37 (v2.2-20-Nov-10
)
AGRICULTURAL ADVANCES
SHORT DURATION
LONG DURATION
NPA IF
NPA IF
Installment or Interest
remains overdue for
two crop seasons
Installment or Interest
remains overdue for
one crop seasons
Where natural calamity has impaired the repaying capacity and the
crop loan is converted into Term Loan or Term Loan is rescheduled,
Term Loan or fresh short term loan may be treated as current dues
and need not be classified as NPA.
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ACA-TM-37 (v2.2-20-Nov-10)
WHAT IS SHORT TERM CROP AND
LONG DURATION CROP?
• “LONG DURATION CROP MEANS
CROP WITH CROP SEASON
LONGER THAN ONE YEAR AND
CROPS WHICH ARE NOT LONG
DURATION CROPS WOULD BE
TREATED AS SHORT DURATION
CROP”.
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ACA-TM-37 (v2.2-20-Nov-10)
AGRICULTURAL REVISED
NORMS….
• REVISED NORMS ARE APPLICABLE TO
DIRECT AGRICULTURAL ADVANCES
AND NOT ALLIED AGRI. ACTIVITIES
LIKE DAIRY, POULTRY, FISHERY,
PIGGERY, ETC.
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ACA-TM-37 (v2.2-20-Nov-10)
AGRI ADVANCE- NPA STATUS
CROP LOAN GRANTED IN JUNE 2008
REPAYMENT DUE DATE 31Mar 2009
AMOUNT NOT PAID ON DUE DATE
STATUS OF A/C ON 31 MAR. 09: STANDARD
STATUS OF A/C ON 31 MAR. 10: STANDARD
STATUS OF A/C ON 31 MAR .11 SUB-STND
DATE OF NPA WILL BE 31 JAN 2011
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri.
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri…
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri..
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri..
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri..
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ACA-TM-37 (v2.2-20-Nov-10)
Illustration :NPA Agri..
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
Limit
Sanctioned
Overdrawn beyond sanctioned limit
Balance between 01.01.09
to 31.03.09
Rs. 30.00 lacs
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Rs. 31.00 lacs
Status
Out of Order and hence
NPA on the 90th day I.e.
31.03.09 / Continuously
overdrawn beyond
sanctioned limit from
1.1.09 to 31.3.09 i.e. 90
days
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
Overdrawn beyond Drawing Power
Limit
Rs. 30.00 lacs
Drawing Power
Rs. 27.00 lacs
Balance between
01.01.09 to 31.03.09
Rs. 28.00 lacs
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Out of Order and hence
NPA on the 90th day i.e.
31.03.09 / Continuously
overdrawn beyond
Drawing Power from
1.1.09 to 31.3.09 i.e. 90
days
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
Insufficient Credits in to the Account
Limit
Rs. 30.00 lac
Status/Explanation
Balance as on 31.12.09
Rs. 29.00 lac
Well within the limit of Rs.
30.00 lacs
Interest debited for Dec. Rs. 35000.00
09
Total credits between
01.01.10 and 31.03.10
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Rs. 26000.00
During the entire stretch of 90
days between 01.01.10 and
31.03.09 credits are insufficient
to cover the interest debited and
hence it is NPA
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
No Credits in to the Account
Limit
Rs. 30.00 lac
Status/Explanation
Balance as on
31.12.09
Rs. 29.00 lac
Well within the limit of Rs.
30.00 lacs
Interest debited for
Dec. 09
Rs. 35000.00
During the entire stretch of
90 days between 01.01.10
and 31.03.10 there are no
credits and hence it is NPA
Total credits between Rs. NIL
01.01.10 and
31.03.10
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
Non renewal of OD/CC account for 180 days
Limit
Date of
Agreement
Date of Expiry
OD should have
been renewed by
at least
Rs. 30.00 lacs
01.10.08
30.09.09
31.03.10
OD facility was availed on 01.10.08
Secured by mortgage of Property worth Rs. 100 lacs.
Limit was valid upto 30.09.09
The operations were good with no irregularity
But the limit was not renewed
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The account should be
treated as NPA as the
limit was not renewed
within180 days
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ACA-TM-37 (v2.2-20-Nov-10)
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA
IF
Stock statement submitted
for
Drawing power is fixed on the basis of old stock
statements
DP for subsequent
month fixed on the
basis of stock
statement of
Drawings
allowed on the
basis of stock
statement of
March 2010
March 10
March 10
Standard Asset / within limit/DP
Not Submitted for April 10
March 10
March 10
Standard Asset / within limit/DP
Not Submitted for May 10
March 10
March 10
Standard Asset / within limit/DP
Not Submitted for June 10
March 10
March 10
Standard Asset / within limit/DP
Not Submitted for July 10
Sept. 10
March 10
March 10
Drawings allowed from 1st May
on Stock statement of Mar. 10
would be treated as irregular w.e.f
from 1st July. If such irregularity
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for 90 days A/c. would
become NPA w.e.f 30th Sept
ACA-TM-37 (v2.2-20-Nov-10)
Status / Explanation
NPA : OVERDRAFT AND CASH CREDIT LIMITS
Account Status
NPA OR STANDARD ?
Period
OD Limit
Sanctioned
OD Balance
BG/LC
Limit
Sanctioned
BG/LC
devolved
liability
Total
Liability
Explanation
01.01.07 to
19.01.07
30.00
21.00
20.00
10.00
31.00
OD A/c. out
of order
20.01.07 to
28.02.07
30.00
23.00
20.00
20.00
43.00
OD A/c. out
of order
01.03.07 to
30.03.07
30.00
26.00
20.00
10.00
36.00
OD A/c. out
of order
31.03.07
30.00
29.00
20.00
10.00
39.00
OD A/c. out
of order
If BG/LC is devolved and Balance in OD along
with balance of devolved LC is more than the
sanctioned limit of Rs. 30.00 lacs 23
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ACA-TM-37 (v2.2-20-Nov-10
)
CLASSIFICATION OF ASSET
Category of
Assets
Definitions
STANDARD
Asset which does not disclose any problems and which
does not carry more than normal risk attached to
business and continues to generate income.
SUB-STANDARD
If an Asset remains NPA for a period of 12 months
RESCHEDULED/
RENEGOTIATED
A/cs.
Rescheduled/Renegotiated terms of Project it remains in
this category with satisfactory performance
DOUBTFUL
ASSET
If an Asset remains NPA for more than 12 months
LOSS ASSET
Where loss has been identified by the bank or Internal /
External Auditors or by the Cooperative Department or by
RBI inspection but the amount has not been written off.
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ACA-TM-37 (v2.2-20-Nov-10)
EROSION IN THE VALUE OF
SECURITY
An NPA need not go through the various stages
of classification in cases of serious credit
impairment.
If the realisable value of the security is <50%
such NPAs may be classified as DOUBTFUL
directly.
If the realisable value of security is <10%, then
the account should be straight way classified as
LOSS ASSET.
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ACA-TM-37 (v2.2-20-Nov-10)
REPAYMENT WITH MORATORIUM
PERIOD
Where moratorium period is available for payment of
interest, payment of intt. becomes ‘due’ only after the
moratorium is over.
So non-payment of intt.during moratorium does not
make account NPA.
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ACA-TM-37 (v2.2-20-Nov-10)
PROVISIONING NORMS - BANKS
STANDARD ASSETS
Type of Bank
Personal Loans
& Commercial
Real Estate
Loans
Agri. Direct
Loans & SME
Loans
All other
Standard
Loans
All Banks
1.00 %
0.25 %
0.40 %
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ACA-TM-37 (v2.2-20-Nov-10)
PROVISIONING NORMS - BANKS
SUB - STANDARD ASSETS
Entity
All Banks
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Provision
15 % (w.e.f. FYending March 2012) on Total
Outstanding without any allowance for
DICGC / ECGC Guarantee cover and
Securities available
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ACA-TM-37 (v2.2-20-Nov-10)
PROVISIONING NORMS - BANKS
DOUBTFUL ASSETS
All Entities
Period for which the advance has
remained in Doubtful category
Secured Portion
Unsecured
Portion
25 Per Cent (wef FY ending
March 2012)
100 Per Cent
One to Three Years
40 Per Cent
100 Per Cent
More than 3 years
ii) Advances classified as Doubtful for more than Three
years on or after April 1, 2006
100 Per Cent
100 Percent
Up to One Year
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ACA-TM-37 (v2.2-20-Nov-10)
PROVISIONING NORMS - BANKS
LOSS ASSETS
Entity
All Banks
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Provision
100 % on Total Outstanding
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ACA-TM-37 (v2.2-20-Nov-10)
Income Recognition
• Income Recognition Policy
- Based on objective criteria and on the record
of recovery
- Income from NPAs is not recognized on
accrual basis but only when actually received
- Banks should not charge and take to Income
account interest on any NPA
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ACA-TM-37 (v2.2-20-Nov-10)
Income Recognition
• Income Recognition Policy
-Fees / Commissions earned due to
renegotiations/rescheduling
to
be
recognized on accrual basis
- Interest on Govt. guaranteed advances not
to be taken unless interest realized
- Accrued interest on investments may be
taken to P&L A/c till maturity. However, it is
to be provided for fully, if interest is not
realized on due date / date of maturity
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ACA-TM-37 (v2.2-20-Nov-10)
Income Recognition
• Reversal of Income
- If any account becomes NPA, the entire
interest accrued and credited to income
account in the past periods should be
reversed if the same is not realised. Applies
to Government guaranteed accounts also
- Fees, commission and similar income that
have accrued should cease to accrue and
past dues if uncollected to be reversed
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ACA-TM-37 (v2.2-20-Nov-10)
Income Recognition
• Appropriation of recovery in NPA
- Interest realized on NPAs may be taken to
income account provided credits are not out
of fresh / additional credit facilities
- In the absence of a clear agreement banks to
exercise right of appropriation of recoveries
in a uniform and consistent manner
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ACA-TM-37 (v2.2-20-Nov-10)
Income Recognition
• Interest application
- Reversal of interest already charged but not
collected by debiting Profit and Loss A/c and
stop further application of interest
- Banks may continue to record accrued
interest in a Memorandum Account
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ACA-TM-37 (v2.2-20-Nov-10)
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ACA-TM-37 (v2.2-20-Nov-10)