Non Performing Assets/Prudential Norms
A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. High level of Non Performing Assets (NPA) suggests low credit quality and warrants high provisioning, which has direct bearing on profitability and net-worth of banks and value of shareholders. The increased incidence of NPA is one of the major concerns of Indian Banks in the recent years. An asset is classified as NPA, if due in the form of principal and interest are not paid by the borrower for a period of 90 days. If any advance or credit facility granted by banks to a borrower becomes non-performing, then the bank will have to treat all the advances/credit facilities granted to that borrower as non-performing without having any regard to the fact that there may still exists certain advances / credit facilities having performing status.
|Category||Treated as NPA if:|
|Term Loan||Interest and/or installment of principal remain overdue for a period of more than 90 days|
|Overdraft/ Cash Credit (OD/CC) accounts||1) The account remains out of order i.e., if the liability exceed limit/DP continuously for 90 days. If liability is within limit/DP, but there are no credits continuously for 90 days or credits are not enough to cover interest debited during the same period. 2) Drawings are allowed on DP calculated on stock statement older than three months continuously for a period of 90 days 3) Regular/adhoc credit limits have not been reviewed/renewed within 180 days from due date/date of adhoc sanction.|
|Agricultural Loans||A Loan is 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. “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 the crops raised would be determined by the SLBC in each state. In respect of agricultural loans which are not linked to harvesting season, term loans given to non agriculturists, identifications of NPAs would be done on the same basis as non– agricultural advances i.e. 90 days delinquency norm.|
|Bills Purchased / Discounted||Bill remains overdue for a period of more than 90 days.|
|Other a/cs||Any amount to be received remains overdue > 90 days.|
Potential NPA (PNPA): are those accounts showing overdues and irregularities persist beyond 30 days. These are also known as Border line Performing Assets.
Date of NPA: It is the date on which the overdues or the irregularities cross 90 days or the date on which the account comes under Income Recognition norms.
Overdue: Any amount due to the bank under any credit facility is ‘overdue’ if it not paid on the due date fixed by the bank.
Net NPA=Gross NPA – (provisions held towards NPAs + Balances in Interest Sundry Suspense A/c + part payments received in suit filed accounts and kept in Sundry Suspense.+ claims received from ECGC/CGC and kept in Sundry Suspense a/c).
Income recognition: The policy of income recognition has to be objective and based on the record of recovery. Income from nonperforming assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. However, interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.
Reversal of Income: If an account becomes NPA for first time during the year the unrealized interest that was taken to P&L account on accrual basis pertaining to the current year as well as pertaining to the preceding year, if any, shall also be reversed. This will apply to Government guaranteed accounts also.
Valuation of Security for provisioning purposes: In cases of NPAs with balance of Rs.5 crore and above stock audit at annual intervals by external agencies and collaterals such as immovable properties charged in favour of the bank should be got valued once in two years by valuers approved by the Board.
Asset classification: Banks are required to classify non-performing assets further into the following three categories based on the period for which the asset has remained nonperforming and the reliability of the dues:
Substandard Assets: A substandard asset would be one, which has remained NPA for a period less than or equal to 12 months. It indicates credit weakness and scope for loss if deficiencies are not corrected.
Doubtful Assets: An asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
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. It is considered as uncollectible and it is not warranted to continue as bankable asset since there is little scope for salvage or recovery value.
Multiple Limits/Branches: Facilities granted by a bank to a borrower will have to be treated as NPA (except bills discounted under LC) if any one facility of the borrower becomes NPA. Uniform lowest classification shall be accorded to all facilities. In case of credit facilities for a borrower at more than branch, the principal branch shall decide the NPA status.
Advances under consortium arrangements: Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks.
Accounts where there is erosion in the value of security: Where there are potential threats for recovery on account of erosion in the value of security or nonavailability of security, asset should be straightaway classified as doubtful or loss asset as appropriate.
Advances against Term Deposits, NSCs, KVPs, IVPs and LIC policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.
Loans with moratorium for payment of interest: 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.
Agricultural Advances: In cases of conversion or reschedulement short term production loan as a relief measure, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA.
Government guaranteed advances: Advances under this category, though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. However, interest can be recognized only on recovery basis not on accrual basis. State Government guaranteed advances would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days.
Availability of security/Net worth of borrower/Guarantor: The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on record of recovery.
Post-shipment Supplier’s Credit: To the extent Export Credit Guaranteed amount is received from the EXIM Bank, the advance may not be treated as a nonperforming asset for asset classification and provisioning purposes.
Ever greening: Rescheduling of a loan without assessing the viability of the activity for the purpose of avoiding an account becoming NPA.
|Status||Provision to be made|
|Standard||0.25% on Direct advances to agriculture and SME sectors.
1.00% on Commercial Real Estate
0.40% on all advances other than stated above
|The provisioning norms in respect of new Restructured Standard Accounts
are increased from existing 2.75% to 5% in a phased manner i.e. 3.50% by 31st
March 2014; 4.25% by 31st March 2015 and 5% by 31st March 2016.
|Sub-Standard||25% on unsecured exposures (20% in case of infra loans)
15% on other loans
|Doubtful||Unsecured portion: 100%
Secured portion: if asset remained in doubtful <= 1 year 25%
If asset remained in doubtful - 1 to 3 years 40%
If asset remained in doubtful > 3 year 100%
|Loss||At 100% on the outstanding|
Unsecured Exposure is one where realizable value of tangible security, as assessed by the bank/approved valuers/RBI inspecting officers, is not more than 10 percent, abinitio, of the outstanding exposure (funded and non-funded). However, the following are the exempted categories from provisioning norms:
- Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies.
- Advances granted under rehabilitation packages approved by BIFR / Term lending institutions.
- Advances covered by CGTSI guarantee – No provision need be made towards the guaranteed portion. The outstanding in excess of the guaranteed portion should be provided.
- Advances covered by ECGC /DICGC guarantee – provision should be made only for the balance in excess of the amount guaranteed by the Corporation.
Asset Quality – RBI Initiatives:
Deteriorating asset quality in the banking system has prompted RBI to initiate the following proactive steps to prevent slippages:
- Banks are required to carry out independent and objective credit appraisal instead depending on credit appraisal reports prepared by outside consultants.
- It is the responsibility of the banks to ascertain the source and quality of equity capital brought in by the promoters and ensures that debt of the parent company is not infused as equity.
- If any of the director’s names appears in the list of defaulters / willful defaulters, they are to be classified as “Non-co-operative borrowers”.
- Banks need to classify a new sub asset category called SMA “Special Mentioned Account” and which are further categorized into SMA-NF, SMA-1 and SMA-2 depending on the operations of the accounts. SMA-NF deals with non submission of mandatory information. SMA-1 represents a category where the principle or interest payment is overdue between 31 and 60 days, and SMA-2 where the overdue remain between 61 and 90 days.
- RBI proposes to set up a Central Repository of Information on Large Credits (CRILC) that will collect, store and disseminate credit data of the borrowers having aggregate exposure (fund ad non-fund) of Rs.5 crore and above. This applies to both Banks and Non Banking companies.
- Banks will also have to furnish details of all Current accounts of their customers with outstanding balances, both debit and credit, of Rs.1 crore and above.
- Banks will be required to submit SMA status of the borrowers to CRILC. If an account is slipped in to SMA-2 at any time or SMA-1 for any two quarters or SMA-NF for three quarters in a year, then the bank would be required to initiate corrective action.
- The proposals are in right direction, however, the challenge lies in their implementation. Let us hope the best in the ensuing years.