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NPA NORMSIncome Recognition, Asset Classification and

Provisioning

V. SathyanarayananSenior partner

Varma & Varma

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• Proper classification of advances is the responsibility of Management and Statutory auditors• RBI has issued 114 circulars on this which needs to be implemented• All the circulars are codified in the Master Circular issued by RBI every

year, incorporating various amendments on these circulars• RBI has issued Master Circular RBI/2014-15/74DBOD on

BP.BC.9/21.04.048/2014-15 dt. 1.7.2014 on it for the year 2004-15• www.rbi.org.in

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Together with Annexure 7 , it has about 106 pagesIt has 3 parts – A,B and C and has two sub-partsPart A deals with Income recognition, Asset

classification and provisionsPart B is on restructuring of AdvancePart C is on early detection of financial distress etc

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Classification of advances into performing and non-performing is based on the record of recovery

Provisioning is based on the period it is remaining as non-performing

In respect of NPAs income is recognized on receipt basis and not on accrual basis

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Out of order : Balance is in excess of sanctioned limit/DP for 90 days No credits for 90 days Credits not enough to cover interest debited for the same period

Overdue : Dues not paid on the due date

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N.P.A : Term loan : interest/principal overdue for more than 90 days OD/CC :• Out of order• Stock statements older than 3 months and drawing permitted for

90 days BP/BD : Remains overdue for more than 90 days Adhoc limits : Unless renewed within 180 days Short duration crops : Principal / interest overdue for 2 crop season Long duration crops : Principal / interest overdue for 1 crop season

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Liquidity facility as per securitization transaction guidelines dt.1.2.2006

– Remaining outstanding for more than 90 days Derivative transaction – MTM overdue receivable for a period of 90 days Infrastructure projects – Not commenced within 2 years from DCCO Other projects – Not commenced within 1 year from DCCO11/03/15

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Income Recognition

• Interest on NPAs, including Government guaranteed accounts, only on receipt basis• Interest on TD,NSC,IVP,KVP and life policies to be on

accrual basis, if adequate margin is available• Fees and commission as a result of renegotiations or

rescheduling of outstanding debts should be recognized on accrual basis over the extended period

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Reversal of Income

•Un realised interest outstanding in all NPAs to be reversed• Similarly fees and commissions, remaining

uncollected, to be reversed• Finance charge component of lease income on assets

as per AS-19 to be reversed or provided, if not collected

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Appropriation of Recovery of NPA

•Credits in NPAs should be real and not out of fresh/additional facilities•Appropriation between interest/principal to be uniform and consistent• Interest realized on such appropriation to be taken to income

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Asset classification of NPAs

Substandard : < 12 months as NPADoubtful assets : 12 months in sub-standardLoss assets : Identified as such by auditors/RBI inspectionAsset classification : To be borrower wise and not facility wiseConsortium Advance : Based on recovery of each member bank

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Account with temporary deficiencies

•Not relevant for classifying as NPA•Old stock statements not permitted ( > 3 months old )•Ad hoc /regular limits to be renewed within 180 days•Audit to be diligent

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Up gradation of Loan Accounts

• If delinquency is made good to be upgraded•Where solitary or a few credits are recorded before

the Balance Sheet date, to be careful•Audit to be diligent•Asset classification borrower wise

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Erosion in Security/Frauds by Borrower

Significant erosion in value of securityRealizable value < 50% of value assessed by bank or

RBI last inspection. To be classified as doubtful

Realizable value < 10 % of loanSecurity to be ignored and to be written off or fully

provided for

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Projects Under Implementation

•DOC/DCCO to be spelt out and documented in the appraisal note during sanction•Retention of asset classification•Bank Board to approve

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Project Loan for Infrastructure Sector

• As per RBI circular on “Definition of infrastructure lending”• To be classified as NPA before CCO based on 90 days recovery norm• To be classified as NPA if CCO is not happening within 2 years from

DCCO• To continue as Standard if such a standard asset is restructured any

time during the period upto 2 years from original DCCO if fresh DCCO is fixed within 4/2 years ( arbitration /Court and others ) and asset continues to remain serviced • Where moratorium of interest is granted, interest on accrual basis

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DCCO 15-3-2012

Two year relaxation 15-3-2014

Revised date of DCCO fixed on 10-3-2014

Revised date of DCCO 14-3-2016

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Additional provision for such standard assets from date of restructuring to 2 years or till revised DCCO, whichever is later• If revised DCCO is upto - 0.04% 2 years of original DCCO• If 3 or 4 years :

• Restructured w.e.f. 1.6.2012 - 5%• Restructured as on 31.5.2013 - 3.5% 13-14

( 2.75% ) - 4.25% 14-15

- 5% 15-16

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NON-INFRASTRUCTURE SECTOR (Other than CRE)

• To be classified as NPA if CCO is not achieved within 1 year from the original DCCO• Restructuring permitted upto 2 years by giving fresh DCCO• In case of moratorium not to recognize income on accrual basis beyond one year from

the date of DCCO• Additional provision as standard assets for 2 years from restructuring –• If revised DCCO is upto 1 year - 0.40%• If upto 2 years

• Restructured • w.e.f.1.6.13 - 5%• As on 31.5.13 - 3.5% 13-14

( 2.75% ) - 4.25% 14-15 - 5% 15-16

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PROJECT LOAN FOR CRE

• Extension of DCCO upto 1 year will not be treated as restructuring• No other change in terms• Asset classification to continue and retention benefit not eligible

ADVANCE UNDER BIFR/TLI• Upgrading only after 1 year of satisfactory performance• For new limits norms will become applicable only after a period of 1

year from date of disbursement

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CREDIT CARD ACCOUNTS

• NPA if minimum amount is not paid within 90 days from the next statement date• Gap between 2 statements should not be more than 1 month

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PROVISIONING NORMS

• Loss assets : 100%• Unsecured portion of doubtful assets : 100%• Secured portion of doubtful assets :

• Upto 1 year : 25%• One to 3 years : 40%• More than 3 years : 100%

• Sub standard : 15%• Unsecured substandard asset : 25%• Unsecured infrastructure sub- standard asset : 20%11/03/15

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STANDARD ADVANCE 

• Direct advance to Agri & SME : 0.25%• Advance to CRE : 1%• Advance to CRE – RH : 0.75%• Others : 0.40%

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FLOATING PROVISION

• Cannot be used for making specific provision• Cannot be used for standard advance provision• Contingency under extra ordinary circumstances with RBI/Board

approval• Cannot be credited to P/L

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PROVISION COVERAGE RATIO

• PCR 70% of gross NPA• Excess to be segregated into an account styled counter cyclical

provisioning buffer• Can be used for provisioning, after Board/RBI approval

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SALE TO RC/SC

• Normally sale will be of a NPA• Standard asset also can be sold where 75% of consortium agrees• Also an Asset reported under SMA -2 to Central Repository of Information on Large

Credits (CRILC )• Sale can be either as -without recourse

-with recourse• Shortfall to be debited to P&L a/c and contra cyclical/floating provision can be used• Sale from 26.2.14 to 31.3.15 – Loss to spread over 2 years• Cash profit realized on its sale can be credited to P/L.

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SALE OF NPA OTHER THAN TO RC/SC• Board to draft policy• Net Present Value of the NPA to be computed• NPV of sale consideration also to be computed• Sale only on without recourse basis• Entire sale on upfront consideration• Loss to be debited to P&L • Profit not to be reversed but carried forward to meet shortfall/loss on

account of sale of other NPA

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RESTRUCTURING OF ADVANCES

• Industrial units• CDR Mechanism• SME advances• Other advances

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GENERAL GUIDELINES

• Cannot restructure with retrospective effect• While under consideration normal provisions apply• Asset status as on sanction is relevant• Financial viability of the borrower is vital

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STAGES OF RESTRUCTURING

• Before commencement of commercial production• After CCP while performing• After CCP under sub-standard or Doubtful

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CLASSIFICATION

• Standard assets should be reclassified as sub-standard on restructuring• NPA would further slip as per pre-restructuring repayment schedule• Upgrading only after satisfactory performance for one year.• Additional finance to be treated as standard. But income on such

additional facilities to be recognized on cash basis• If restructured does not qualify for up gradation after 1 year,

additional facility to be classified in the same category

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PROVISION ON RESTRUCTURED ADVANCES

• Higher provision for moratorium period + 2 years thereafter• W.E.F 1.6.2013 - 5%• As on 31.5.2013(up from 2.75%) – 3.5% (4 Qtrs of 13-14) 4.25% ( 14-15) 5 % ( 15-16)• Diminution in fair value of advance based on NPV of inflows

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SPECIAL REGULATORY FRAME WORK

• Not extended to

Consumer and Personal advancesCapital market exposuresCommercial real estate exposures

• Will be stopped by 31.3.2015 except change in DCCO

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ESSENTIAL COMPONENTS

• Incentive for quick implementation of the restructuring package

• Retention of asset classification in pre-restructuring classification

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During pendency normal classification rules applyIf approved plan is implemented within 120 days, asset classification

will restoreAsset classification benefits – no further deterioration

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NECESSARY CONDITIONS

• Fully secured , except MSME & infrastructure• Viable in 8/5 years for infrastructure/others• Repayment in 15/10 years for infrastructure/others• Promoters sacrifice• Promoters contribution • Not repeated restructuring

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EARLY DETECTION

SMA – 0 : Not overdue for more than 30 daysSMA-1 : 31 to 60SMA-2 : 61 to 90

Central Depository of information on large credits of RBI(CRILC) reporting of Rs.50 million and above

If AE exceeds Rs.1000 million JLF to be formed

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Detailed guidelines for its working and implementation process

If implemented within 90 days asset classification will be restored

To be withdrawn effective 1.4.2015, except charge of DCCO

Banks not accepting JLF or not agreeing CAP to make accelerated provision

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C.D.R

Multiple banking > Rs. 10 crs exposureCDR 1 system : Standard/sub-standard in 90% by valueCDR 2 system : DoubtfulSME Debt Restructuring Mechanism upto Rs.10 crs.

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THANK YOU

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