Income Recognition, Asset Classification and Provisioning NPA NORMS Income Recognition, Asset Classification and Provisioning V. Sathyanarayanan Senior partner Varma & Varma 11/03/15 varma & Varma

RBI has issued 114 circulars on this which needs to be implemented 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 11/03/15 varma & Varma

Together with Annexure 7 , it has about 106 pages It has 3 parts – A,B and C and has two sub-parts Part A deals with Income recognition, Asset classification and provisions Part B is on restructuring of Advance Part C is on early detection of financial distress etc 11/03/15 varma & Varma

Provisioning is based on the period it is remaining as non-performing 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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

– Remaining outstanding for more than 90 days Derivative transaction 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 DCCO 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

Asset classification of NPAs Substandard : < 12 months as NPA Doubtful assets : 12 months in sub-standard Loss assets : Identified as such by auditors/RBI inspection Asset classification : To be borrower wise and not facility wise Consortium Advance : Based on recovery of each member bank 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

Erosion in Security/Frauds by Borrower Significant erosion in value of security Realizable value < 50% of value assessed by bank or RBI last inspection. To be classified as doubtful Realizable value < 10 % of loan Security to be ignored and to be written off or fully provided for 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 should not be recognized beyond 2 years from original DCCO 11/03/15 varma & Varma

Revised date of DCCO fixed on 10-3-2014 Revised date of DCCO 14-3-2016 Two year relaxation 15-3-2014 Revised date of DCCO fixed on 10-3-2014 Revised date of DCCO 14-3-2016 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 varma & Varma

STANDARD ADVANCE Direct advance to Agri & SME : 0.25% Advance to CRE : 1% Advance to CRE – RH : 0.75% Others : 0.40% 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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. 11/03/15 varma & Varma

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 11/03/15 varma & Varma

RESTRUCTURING OF ADVANCES Industrial units CDR Mechanism SME advances Other advances 11/03/15 varma & Varma

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 11/03/15 varma & Varma

STAGES OF RESTRUCTURING Before commencement of commercial production After CCP while performing After CCP under sub-standard or Doubtful 11/03/15 varma & Varma

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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

SPECIAL REGULATORY FRAME WORK Not extended to Consumer and Personal advances Capital market exposures Commercial real estate exposures Will be stopped by 31.3.2015 except change in DCCO   11/03/15 varma & Varma

ESSENTIAL COMPONENTS Incentive for quick implementation of the restructuring package Retention of asset classification in pre-restructuring classification 11/03/15 varma & Varma

During pendency normal classification rules apply If approved plan is implemented within 120 days, asset classification will restore Asset classification benefits – no further deterioration 11/03/15 varma & Varma

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 11/03/15 varma & Varma

EARLY DETECTION SMA – 0 : Not overdue for more than 30 days SMA-1 : 31 to 60 SMA-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 11/03/15 varma & Varma

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 11/03/15 varma & Varma

C.D.R Multiple banking > Rs. 10 crs exposure CDR 1 system : Standard/sub-standard in 90% by value CDR 2 system : Doubtful SME Debt Restructuring Mechanism upto Rs.10 crs. 11/03/15 varma & Varma

THANK YOU 11/03/15 varma & Varma

11/03/15 varma & Varma