BACKGROUND

� Norms are introduced by the Reserve Bank of India to keep

in line with international practices as per the

recommendation made by the committee on the financial

system headed by Shri M. Narsimham.

� The purpose is to move towards greater consistency &

transparency in published accounts.

1

RBI NORMS

• First circular on Non Performing Loans is issued by RBI on 31/10/1990.

• Norms were introduced for the first time by Reserve bank ofIndia during the financial year 1992-93 i.e. for the yearended 31st March 1993.

• Every year RBI issues master circular incorporating up todate changes. The latest master circular isDBOD.NO.BP.BC.9/21.04.048/2012-13.This mastercircular has now been suitably updated by incorporatinginstructions issued up to June 30,2012.

• Master circular is divided into 3 parts, 21 paragraphs & 9annexure.

2

GENERAL

• Norms introduced to keep in pace withinternational practices & are based onrecommendations of Narasimham Committee.

• Policy of income recognition and assetclassification should be objective and based onrecord of recovery. Provisioning should be madeclassification should be objective and based onrecord of recovery. Provisioning should be madeon the basis on the period for which asset hasremained non performing and the availability ofrealizable value of security.

• With the introduction of prudential norms

health –code based system for classification of

advance ceased.

3

DEFINITION OF NPA

� An asset, including a leased asset, becomes non -performing when it ceases to generate income for the bank.

� A non performing asset (NPA) is a loan or an advancewhere:where:

� Term loan - interest and or installment of principalremain overdue for a period of more than 90 days.

� Overdraft/cash credit (CC/OD) – the accounts remains‘out of order”. (Annexure 1)

� Bill Purchased/Discounted – Bill remains overdue for aperiod of more than 90 days.

4

DEFINITION….CONTINUED

• Short Duration Crops – Installment of principal or interest thereon remains overdue for two crop seasons.

Long Duration Crops – Installment of principal or interest thereon remains overdue for one crop season.

For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops, would be treated as “short duration” crops. The crop season for each crop, which means the period up to harvesting of “long duration” crops, would be treated as “short duration” crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State

• In case of securitization transaction the amount of liquidity facility remains outstanding for more than 90 days.

• In respect of derivation transactions, overdue receivables representing mark-to-market value of a derivative contract remain unpaid for a period of 90 days from the specified due date of payment.

5

INCOME RECOGNITION

� Generally and ordinarily income from NPA is not recognized on accrual basis

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

� However interest on advances against deposits,NSCs, LIC policies may be

taken to income account provided adequate margin is available.

� Fees and Commissions earned by banks as result of rescheduling of

outstanding debts should be recognised on an accrual basis over the period

of time covered by renegotiated or rescheduled extension of credit.

CA PRAMOD LELE M/S JOSHI AND KARANDIKAR CA

of time covered by renegotiated or rescheduled extension of credit.

� If Govt guaranteed securities turned NPA interest should be taken into

account on CASH basis.

� Interest realised on NPAs may be taken to income account provided the

credits in account are not out of fresh credit facilities sanctioned to

borrower concerned.

� If any advance turns NPA the entire interest accrued and credited but not

realised should be reversed .

6

INCOME RECOGNITION...CONTINUED

• Post- shipment credit –

In respect of post-shipment credit extended by the banks covering exportof goods to countries for which the ECGC’s cover is available, EXIM Bankhas introduced a guarantee-cum-refinance programme whereby, in theevent of default, EXIM Bank will pay the guaranteed amount to the bankwithin a period of 30 days from the day the bank invokes the guaranteeafter the exporter has filed claim with ECGC.after the exporter has filed claim with ECGC.

Accordingly, to the extent payment has been received from the EXIMBank, the advance may not be treated as a nonperforming asset forasset classification and provisioning purposes.

• Export Project Finance –

There could be an instance that importer has deposited the dues to thebank abroad but the bank in turn unable to remit the funds on accountof some political reasons such as war, strife & the lending bank able toprove the same, the asset classification may be made after a period ofone year from the date the amount was deposited by importer in thebank abroad.

7

INCOME RECOGNITION….CONTINUED

� Takeout finance:

It is the product emerging in the context of the funding of long-term infrastructure projects. Under this arrangement, institution/the bank, financing the infrastructure projects will have an arrangement with any financial institution for have an arrangement with any financial institution for transferring to the latter the outstanding in respect of such financing in their books on a pre determined basis.

The norms of assets classification will have to be followed by the concerned bank/financial institution. If the asset taken over is NPA the lending institution should recognize income on cash basis.

8

ASSET CLASSIFICATION AND

PROVISIONING NORMS

9

• Asset classification should be borrower- wise & not facility-wise. However bills discounted under LC favoring a borrowermay not be classified as a NPA, unless the same is nothonored on due date & not immediately made good by theborrower.

Asset classification of accounts under consortiumarrangements should be based on the record of recovery ofthe individual member banks. In case of facilities delegated to

ASSET CLASSIFICATION.

arrangements should be based on the record of recovery ofthe individual member banks. In case of facilities delegated to

branch other than original branch the classification of asset isdone on the basis it is classified in the books of originalbranch.

• In respect of accounts where there are potential threats forrecovery on account of erosion in the value of security or non-availability of security and existence of some other factorssuch as fraud committed by the borrower, credit facilities tosuch borrower should be straightway to be classified asdoubtful or loss asset.

10

ASSET CLAISSIFICATION

Depending on the type of loans, RBI has laid down the norms for classification of asset as NPA & accordingly recognize the income on such assets(NPA) only on actual realization – shifting from accrual basis to cash basis.basis.

Different Norms depending on the nature of advances such as:

� Advances against Consortium Arrangements

(ANNEXURE 2)

� Government guaranteed advances (ANNEXURE 3)

11

ASSET CLAISSIFICATION …CONTINUED

� Loans with moratorium for payment of Interest

(Annexure 4)

� Agricultural Advances (Annexure 5)

� Project loans for Infra sector ( Annexure 6)� Project loans for Infra sector ( Annexure 6)

� Project loans for Non Infra sector (Annexure 7)

12

ADVANCES AGAINST TERM DEPOSITS, NSCS,

KVP/IVP, GOLD LOANS

� Advances against term deposits, NSCs eligible for

surrender, IVPs, KVPs and life policies need not be treated

as NPAs, provided adequate margin is available in the

accounts.

� Advances against gold ornaments, government securities� Advances against gold ornaments, government securities

and all other securities are not covered by this exemption.

� However Bullet payment is allowed in case of gold loans up

to Rs. 1 lakhs only.

13

INTRODUCTION: PROVISIONING NORMS

� Financial institutions must exert due care and diligence in maintaining stringent monitoring of loans and advances, both during approval and through their existence.

� A realistic valuation of assets & prudent recognition of income & expense are critical factors in evaluating the financial condition and performance of financial institutions.

Charging- off irrecoverable assets & provisioning against non-� Charging- off irrecoverable assets & provisioning against non-performing assets(NPA) must be done without regard to the potential impact on the Profit & Loss account of a particular year or period.

� Credit extensions, loan restructuring and simple renewals of problematic loans will not change the treatment or aging of past due loans unless new effective repayment guarantees are brought in.

14

PROVISIONING NORMS…CONTINUED

In conformity with the prudential norms, provisions should be made on thenonperforming assets on the basis of classification of assets into prescribedCategories:

a. Standard Assets

b. Sub-standard Assets

c. Doubtful Assets

d. Loss Assets

15

A. Standard Assets:� Banks should make general provision for standard assets at the followingRates:(i) direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at

0.25 per cent;(ii) advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;(iii) all other loans and advances at 0.40 per cent except on hosing loans at teaser

rates @2% during the period of teaser rate.

PROVISIONING NORMS …CONTINUED

rates @2% during the period of teaser rate.

B. Sub-standard 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.

� A general provision of 15 percent on total outstanding should be made withoutmaking any allowance for ECGC guarantee cover and securities available.additional provision of 10% on unsecured exposure identified as sub standard

16

C.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.

� In regard to the secured portion, provision may be made on the followingbasis:

Period for which the advance hasremained in ‘doubtful’ category

Provision requirement(%)

Up to one year 25

PROVISIONING NORMS…CONTINUED

Up to one year 25

One to three years 40

More than three years 100

D. 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.

� 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.

17

ADDITIONAL PROVISIONS FOR RESTRUCTURED

STANDARD ASSETS

� In case of Infra PROJECTS

Until two years from the

original DCCO

0.40%

During the third and fourth 2.00%

IN Case of Non Infra projects

18

Until the first six months

from the original DCCO

0.40%

DURING THE NEXT SIX

MONTHS

2.00%

During the third and fourth

year after original DCCO

2.00%

VALUATION OF SECURITIES FOR PROVISIONING

PURPOSES

� With a view to bringing down divergence arising out of

difference in assessment of the value of security, in cases of

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

annual intervals by external agencies appointed as per the

guidelines approved by the Board would be mandatory in orderguidelines approved by the Board would be mandatory in order

to enhance the reliability on stock valuation. Collaterals such as

immovable properties charged in favour of the bank should be

got valued once in three years by valuers appointed as per the

guidelines approved by the Board of Directors.

19

RESTURCURING, RESCHEDULMENT

OF CREDIT EXPOSURE

20

RESTRUCTURING, RESCHEDULMENT OF CREDIT EXPOSURE

� Restructuring of credit exposure – when the borrower is

sanctioned with the modification of original terms and

conditions of loans the same is termed as restructuring of

credit exposure. Restructuring can be done by way of:

� Change in the type or structure of facility.

� Changes to existing terms and conditions to assist � Changes to existing terms and conditions to assist

borrower to overcome genuine short term financial

difficulties

Restructuring facility can be sanction only to those

borrowers who have been regular and have genuine

unforeseen financial constraints – particularly where the

longer term prospect of the business or project is deemed

to viable.

21

ELIGIBILITY CRITERIA FOR RESTRUCTURING OF

ADVANCES

� Bank may restructure the accounts classified Standard, Sub-

Standard and Doubtful categories.

� Bank cannot reschedule/restructure/renegotiate borrowed

accounts with retrospective effect.

� Restructuring cannot take place unless alteration/changes in � Restructuring cannot take place unless alteration/changes in

the original loan agreement are made with the formal

consent/application of the debtor.

� No account will be taken up for restructuring by the banks

unless financial viability is established.

� Borrowers indulging in Frauds and Malfeasance will continue to

remain ineligible for restructuring.

22

Rescheduled Credit Facility

When the borrower is sanctioned with modifications in terms of repayment without any significant change in principle terms and conditions of contract the same is termed as rescheduled credit facility. Normally the same is

RESTURCURING, RESCHEDULMENT OF CREDIT EXPOSURE……CONTINUED

termed as rescheduled credit facility. Normally the same is to be permitted if all interest arrears have been paid by the borrower from primary sources other than through creation of new loans. If the financial institution is satisfied that the borrower is unable to pay the installment due to circumstances beyond his control and the problem is of short term nature. Rescheduling may take form of lengthening the repayment period.

23

RESCHEDULED CREDIT FACILITY….CONTINUED

Following are the guiding principles:

– As per the prudential norms financial institutions are permitted to reschedule the loan only once in two years & not more than 3 times during the term of loan. Further to avoid ever-greening of loan, financial institution must reassess the financial position & carry out the credit evaluation of the financial position & carry out the credit evaluation of the borrower’s financial condition & prospects of repayment before granting the rescheduling.

– When the rescheduling occurs before a loan is classified as non-performing, the account will be continued to be classified as performing. It will be classified as non-performing, when the borrowers fails to follow the rescheduled terms of repayment for 90 days or more from the first day of default.

24

RESCHEDULED CREDIT FACILITY….CONTINUED

• Up Gradation of rescheduled loans

When the rescheduling occurs after a loan account is

classified as non-performing, the account will be continued

to be classified as non-performing. It can be classified as

performing if the new terms of repayment have been

to be classified as non-performing. It can be classified as

performing if the new terms of repayment have been

complied with for a continuous period of one year from the

date when the first payment of Interest or installment falls

due under the terms of restructuring package.

25

RESTRUCTURING OF CREDITS….INCOME

RECOGNITION NORMS

Standard Accounts -:

In the case of Restructured accounts classified as

Standard, the income, if any, generated by these

instruments may be recognized on accrual basis.instruments may be recognized on accrual basis.

Non-Performing Accounts -:

In the case of restructured accounts classified as non-

performing assets, the income, if any, generated by these

instruments may be recognized only on Cash basis.

26

THANK YOU

27

OUT OF ORDER (ANNEXURE 1)

� An account should be treated as 'out of order' if

1. The outstanding balance remains continuously in the

excess of the sanctioned limit / Drawing power for

consecutive period of 90 days or,

2. Where the outstanding balance in the principal

operating account is less than the sanctioned limit /

Where the outstanding balance in the principal

operating account is less than the sanctioned limit /

drawing power and

A. There are no credits continuously for 90 days or,

B. The credits are not enough to cover the interest

debited during the same period.

These accounts should be treated as 'out of order'.

28

ADVANCES UNDER CONSORTIUM ARRANGEMENTS (

ANNEXURE 2 )

� Asset classification of accounts under consortium should be basedon the record of recovery of the individual member banks and otheraspects having a bearing on the recoverability of the advances.

� Where the remittances by the borrower under consortium lendingarrangements are pooled with one bank and/or where the bankreceiving remittances is not parting with the share of other memberbanks, the account will be treated as not serviced in the books of thebanks, the account will be treated as not serviced in the books of theother member banks and therefore, be treated as NPA. The banksparticipating in the consortium should, therefore, arrange to get theirshare of recovery transferred from the lead bank or get an expressconsent from the lead bank for the transfer of their share of recovery,to ensure proper asset classification in their respective books.

29

GOVERNMENT GUARANTEED ADVANCES (

ANNEXURE 3)

� The credit facilities backed by guarantee of the Central Governmentthough overdue may be treated as NPA only when the Governmentrepudiates its guarantee when invoked. This exemption fromclassification of Government guaranteed advances as NPA is not forthe purpose of recognition of income.

� The requirement of invocation of guarantee has been delinked fordeciding the asset classification and provisioning requirements indeciding the asset classification and provisioning requirements inrespect of State Government guaranteed exposures. With effect fromthe year ending 31 March 2006 State Government guaranteedadvances and investments in State Government guaranteedsecurities would attract asset classification and provisioning norms ifinterest and/or principal or any other amount due to the bankremains overdue for more than 90 days.

30

LOANS WITH MORATORIUM FOR PAYMENT OF INTEREST (

ANNEXURE 4)

� In the case of bank finance given for industrial projects or for agricultural

plantations etc. where moratorium is available for payment of interest,

payment of interest becomes 'due' only after the moratorium or gestation

period is over. Therefore, such amounts of interest do not become overdue

and hence do not become NPA, with reference to the date of debit of

interest. They become overdue after due date for payment of interest, ifinterest. They become overdue after due date for payment of interest, if

uncollected.

� In the case of housing loan or similar advances granted to staff members

where interest is payable after recovery of principal, interest need not be

considered as overdue from the first quarter onwards. Such loans/advances

should be classified as NPA only when there is a default in repayment of

installment of principal or payment of interest on the respective due dates.

31

AGRICULTURAL ADVANCES ( ANNEXURE 5 )

� A loan granted for short duration crops will be treated as NPA, if

the installment of principal or interest thereon remains overdue

for two crop seasons. A loan granted for long duration crops will

be treated as NPA, if the installment of principal or interest

thereon remains overdue for one crop season. .

� Where natural calamities impair the repaying capacity of

agricultural borrowers, banks may decide on their own as a relief agricultural borrowers, banks may decide on their own as a relief

measure conversion of the short-term production loan into a term

loan or re-schedulement of the repayment period; and the

sanctioning of fresh short-term loan.

32

PROJECT LOANS FOR INFRA SECTOR (ANNEXURE 6)� A loan for an infrastructure project will be classified as NPAduring any time before commencement of commercialoperations as per record of recovery (90 days overdue),unless it is restructured and becomes eligible forclassification as 'standard asset.

� A loan for an infrastructure project will be classified as NPAif it fails to commence commercial operations within twoyears from the original DCCO, even if it is regular as perif it fails to commence commercial operations within twoyears from the original DCCO, even if it is regular as perrecord of recovery, unless it is restructured and becomeseligible for classification as 'standard asset.

� Infra projects are allowed further extension of

A. Two Years from extended DCCO where arbitration ispending in court

B. One year from extended DCCO other than court caseswhere reason of extension beyond power of borrower

33

PROJECT LOANS FOR NON INFRA SECTOR (

ANNEXURE 7 )� A loan for a non-infrastructure project will be classified as

NPA during any time before commencement of commercial

operations as per record of recovery (90 days overdue),

unless it is restructured and becomes eligible for

classification as 'standard asset‘.

� A loan for a non-infrastructure project will be classified as

NPA if it fails to commence commercial operations within sixNPA if it fails to commence commercial operations within six

months from the original DCCO, even if it is regular as per

record of recovery, unless it is restructured and becomes

eligible for classification as 'standard asset‘.

� DCCO can further be extended up to 6 months if application

for restructuring is received before expiry of six months from

original DCCO.

34