1. 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

2. 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/ /74DBOD on BP.BC.9/ / dt on it for the year
11/03/15
varma & Varma

3. 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

4. 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

5. 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

6. 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

7. – Remaining outstanding for more than 90 days Derivative transaction
Liquidity facility as per securitization transaction guidelines dt
– 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. 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

14. 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

15. 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

16. 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

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

18. 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 %
2 years of original DCCO
If 3 or 4 years :
Restructured w.e.f %
Restructured as on %
( 2.75% ) %
- 5%
11/03/15
varma & Varma

19. 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 %
If upto 2 years
Restructured
w.e.f %
As on %
( 2.75% ) % %
11/03/15
varma & Varma

20. 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

21. 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

22. 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 : %
Unsecured substandard asset : %
Unsecured infrastructure sub-
standard asset : %
11/03/15
varma & Varma

23. 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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varma & Varma

24. 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

25. 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

26. 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 to – Loss to spread over 2 years
Cash profit realized on its sale can be credited to P/L.
11/03/15
varma & Varma

27. 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

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

29. 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

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

31. 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

32. PROVISION ON RESTRUCTURED ADVANCES
Higher provision for moratorium period + 2 years thereafter
W.E.F %
As on (up from 2.75%) – 3.5% (4 Qtrs of 13-14)
4.25% ( )
5 % ( )
Diminution in fair value of advance based on NPV of inflows
11/03/15
varma & Varma

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

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

35. 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

36. 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

37. EARLY DETECTION SMA – 0 : Not overdue for more than 30 days
SMA : 31 to 60
SMA : 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

38. Detailed guidelines for its working and implementation process
If implemented within 90 days asset classification will be restored
To be withdrawn effective , except charge of DCCO
Banks not accepting JLF or not agreeing CAP to make accelerated provision
11/03/15
varma & Varma

39. 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

40. THANK YOU
11/03/15
varma & Varma

41. 11/03/15
varma & Varma