2. ACA-TM-37 (v2.2-20-Nov-10 ) INCOME RECOGNITION, ASSET CLASSIFICATION, AND PROVISIONING S Dwivedi

3. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 2 ALL BANKS IRRESPECTIVE OF SIZE OF BRANCH “ONE SIZE FITS ALL” PRINCIPLE NORMS ARE WITH 90 DAYS DELINQUENCY

4. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 3 IRAC NORMS & PROVISIONING WHY?  In line with international best practices.  As per Narsimham committee recommendations.  In a phased manner  Greater consistency and transparency in published books of accounts of banks.  To improve intrinsic health of banks

5. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 4 DEFINATION OF NON PERFORMING ASSET [ NPA ] and IMPORTANT TERMINOLOGIES NPA : An Asset becomes Non Performing when it ceases to generate income OVERDUE : Any amount due under any credit facility if not paid by the due date fixed by the bank becomes overdue OUT OF ORDER : An account should be treated as Out of Order if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power or if there are no credits for specified number of days or credits are not enough to cover the interest debited during the same period

6. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 5 NPA : ADVANCES Term LoansInterest and or installment of principal remain overdue for more than 90 days Overdraft / Cash CreditThe account remains Out of Order for a period of more than 90 days Bank GuaranteeIn case Bank Guarantee is invoked and the amount remains unpaid for 90 days Letter of CreditIn case Letter of Credit is devolved and the amount remains unpaid for more than 90 days BillsThe bill remains overdue for a period of more than 90 days Agriculture AdvanceShort duration loans - Installment or interest remains overdue for two crop seasons Long duration loans – Installment or interest remains overdue for one crop season Gold Loans, Loans against Deposits, KVPs, NSCs, IVPs. Interest and or installment of principal remain overdue for 90 days Any Other AmountAny other amount to be received remains overdue for a period of more than 90 days

7. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 6 Term Loan Account of XYZ DateParticularsDebitCreditBalance 2010 Dec. 1To Loan5000.00 Dec. 31To Interest50.005050.00 Dec. 31By 1 st Installment500.004550.00 2010 Jan. 31To Interest46.004596.00 2010 Feb. 28To Interest46.004642.00 2010 Mar. 31To Interest46.004688.00 NPA : TERM LOAN ACCOUNTS Account Status NPA Interest or Instalment is overdue for 90 days IF In the above example Borrower has not paid the interest which was charged on Dec. 31 2010 amounting to Rs. 50.00 and the same was overdue for 90 days hence this account shall be categorised as NPA as on 31 st March 2011. Thus all accounts disbursed after 1 st Jan of the financial year can never be NPA.

8. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 7 AGRICULTURAL ADVANCES SHORT DURATION LONG DURATION NPA IF Installment or Interest remains overdue for two crop seasons NPA IF Installment or Interest remains overdue for one crop seasons Where natural calamity has impaired the repaying capacity and the crop loan is converted into Term Loan or Term Loan is rescheduled, Term Loan or fresh short term loan may be treated as current dues and need not be classified as NPA.

9. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 8 WHAT IS SHORT TERM CROP AND LONG DURATION CROP? “LONG DURATION CROP MEANS CROP WITH CROP SEASON LONGER THAN ONE YEAR AND CROPS WHICH ARE NOT LONG DURATION CROPS WOULD BE TREATED AS SHORT DURATION CROP”.

10. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 9 AGRICULTURAL REVISED NORMS…. REVISED NORMS ARE APPLICABLE TO DIRECT AGRICULTURAL ADVANCES AND NOT ALLIED AGRI. ACTIVITIES LIKE DAIRY, POULTRY, FISHERY, PIGGERY, ETC.

11. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 10 AGRI ADVANCE- NPA STATUS  CROP LOAN GRANTED IN JUNE 2008  REPAYMENT DUE DATE 31Mar 2009  AMOUNT NOT PAID ON DUE DATE  STATUS OF A/C ON 31 MAR. 09: STANDARD  STATUS OF A/C ON 31 MAR. 10: STANDARD  STATUS OF A/C ON 31 MAR.11 SUB-STND  DATE OF NPA WILL BE 31 JAN 2011

12. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 11 Illustration :NPA Agri.

13. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 12 Illustration :NPA Agri…

14. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 13 Illustration :NPA Agri..

15. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 14 Illustration :NPA Agri..

16. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 15 Illustration :NPA Agri..

17. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 16 Illustration :NPA Agri..

18. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 17 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA Overdrawn beyond sanctioned limit IF Limit Sanctioned Balance between 01.01.09 to 31.03.09 Status Rs. 30.00 lacsRs. 31.00 lacs Out of Order and hence NPA on the 90 th day I.e. 31.03.09 / Continuously overdrawn beyond sanctioned limit from 1.1.09 to 31.3.09 i.e. 90 days

19. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 18 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA Overdrawn beyond Drawing Power IF LimitRs. 30.00 lacs Drawing Power Balance between 01.01.09 to 31.03.09 Rs. 27.00 lacs Rs. 28.00 lacs Out of Order and hence NPA on the 90 th day i.e. 31.03.09 / Continuously overdrawn beyond Drawing Power from 1.1.09 to 31.3.09 i.e. 90 days

20. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 19 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA Insufficient Credits in to the Account IF LimitRs. 30.00 lacStatus/Explanation Balance as on 31.12.09Rs. 29.00 lacWell within the limit of Rs. 30.00 lacs Interest debited for Dec. 09 Rs. 35000.00During the entire stretch of 90 days between 01.01.10 and 31.03.09 credits are insufficient to cover the interest debited and hence it is NPA Total credits between 01.01.10 and 31.03.10 Rs. 26000.00

21. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 20 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA No Credits in to the Account IF LimitRs. 30.00 lacStatus/Explanation Balance as on 31.12.09 Rs. 29.00 lacWell within the limit of Rs. 30.00 lacs Interest debited for Dec. 09 Rs. 35000.00During the entire stretch of 90 days between 01.01.10 and 31.03.10 there are no credits and hence it is NPA Total credits between 01.01.10 and 31.03.10 Rs. NIL

22. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 21 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA Non renewal of OD/CC account for 180 days IF LimitDate of Agreement Date of ExpiryOD should have been renewed by at least Rs. 30.00 lacs01.10.0830.09.0931.03.10 OD facility was availed on 01.10.08 Secured by mortgage of Property worth Rs. 100 lacs. Limit was valid upto 30.09.09 The operations were good with no irregularity But the limit was not renewed The account should be treated as NPA as the limit was not renewed within180 days

23. ACA-TM-37 (v2.2-20-Nov-10 ) 22 NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA Drawing power is fixed on the basis of old stock statements IF Stock statement submitted for DP for subsequent month fixed on the basis of stock statement of Drawings allowed on the basis of stock statement of Status / Explanation March 2010March 10 Standard Asset / within limit/DP Not Submitted for April 10March 10 Standard Asset / within limit/DP Not Submitted for May 10March 10 Standard Asset / within limit/DP Not Submitted for June 10March 10 Standard Asset / within limit/DP Not Submitted for July 10 Sept. 10 March 10 Drawings allowed from 1 st May on Stock statement of Mar. 10 would be treated as irregular w.e.f from 1 st July. If such irregularity allowed for 90 days A/c. would become NPA w.e.f 30 th Sept

24. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 23 If BG/LC is devolved and Balance in OD along with balance of devolved LC is more than the sanctioned limit of Rs. 30.00 lacs PeriodOD Limit Sanctioned OD BalanceBG/LC Limit Sanctioned BG/LC devolved liability Total Liability Explanation 01.01.07 to 19.01.07 30.0021.0020.0010.0031.00 OD A/c. out of order 20.01.07 to 28.02.07 30.0023.0020.00 43.00 OD A/c. out of order 01.03.07 to 30.03.07 30.0026.0020.0010.0036.00 OD A/c. out of order 31.03.0730.0029.0020.0010.0039.00 OD A/c. out of order NPA : OVERDRAFT AND CASH CREDIT LIMITS Account Status NPA OR STANDARD ? NON PERFORMING ASSET

25. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 24 CLASSIFICATION OF ASSET STANDARDAsset which does not disclose any problems and which does not carry more than normal risk attached to business and continues to generate income. SUB-STANDARDIf an Asset remains NPA for a period of 12 months RESCHEDULED/ RENEGOTIATED A/cs. Rescheduled/Renegotiated terms of Project it remains in this category with satisfactory performance DOUBTFUL ASSET If an Asset remains NPA for more than 12 months LOSS ASSETWhere loss has been identified by the bank or Internal / External Auditors or by the Cooperative Department or by RBI inspection but the amount has not been written off. Category of Assets Definitions

26. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 25 EROSION IN THE VALUE OF SECURITY  An NPA need not go through the various stages of classification in cases of serious credit impairment.  If the realisable value of the security is <50% such NPAs may be classified as DOUBTFUL directly.  If the realisable value of security is <10%, then the account should be straight way classified as LOSS ASSET.

27. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 26 REPAYMENT WITH MORATORIUM PERIOD  Where moratorium period is available for payment of interest, payment of intt. becomes ‘due’ only after the moratorium is over.  So non-payment of intt.during moratorium does not make account NPA.

28. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 27 PROVISIONING NORMS - BANKS STANDARD ASSETS Type of BankPersonal Loans & Commercial Real Estate Loans Agri. Direct Loans & SME Loans All other Standard Loans All Banks1.00 %0.25 %0.40 %

29. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 28 PROVISIONING NORMS - BANKS SUB - STANDARD ASSETS EntityProvision All Banks15 % (w.e.f. FYending March 2012) on Total Outstanding without any allowance for DICGC / ECGC Guarantee cover and Securities available

30. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 29 PROVISIONING NORMS - BANKS DOUBTFUL ASSETS All Entities Period for which the advance has remained in Doubtful category Secured PortionUnsecured Portion Up to One Year25 Per Cent (wef FY ending March 2012) 100 Per Cent One to Three Years40 Per Cent100 Per Cent More than 3 years ii) Advances classified as Doubtful for more than Three years on or after April 1, 2006 100 Per Cent100 Percent

31. ACA-TM-37 (v2.2-20-Nov-10 ) 9/19/2015 1:35 PM 30 PROVISIONING NORMS - BANKS LOSS ASSETS EntityProvision All Banks100 % on Total Outstanding

32. ACA-TM-37 (v2.2-20-Nov-10 ) 31 Income Recognition Income Recognition Policy - Based on objective criteria and on the record of recovery - Income from NPAs is not recognized on accrual basis but only when actually received - Banks should not charge and take to Income account interest on any NPA

33. ACA-TM-37 (v2.2-20-Nov-10 ) 32 Income Recognition Income Recognition Policy -Fees / Commissions earned due to renegotiations/rescheduling to be recognized on accrual basis - Interest on Govt. guaranteed advances not to be taken unless interest realized - Accrued interest on investments may be taken to P&L A/c till maturity. However, it is to be provided for fully, if interest is not realized on due date / date of maturity

34. ACA-TM-37 (v2.2-20-Nov-10 ) 33 Income Recognition Reversal of Income - If any account becomes NPA, the entire interest accrued and credited to income account in the past periods should be reversed if the same is not realised. Applies to Government guaranteed accounts also - Fees, commission and similar income that have accrued should cease to accrue and past dues if uncollected to be reversed

35. ACA-TM-37 (v2.2-20-Nov-10 ) 34 Income Recognition Appropriation of recovery in NPA - Interest realized on NPAs may be taken to income account provided credits are not out of fresh / additional credit facilities - In the absence of a clear agreement banks to exercise right of appropriation of recoveries in a uniform and consistent manner

36. ACA-TM-37 (v2.2-20-Nov-10 ) 35 Income Recognition Interest application - Reversal of interest already charged but not collected by debiting Profit and Loss A/c and stop further application of interest - Banks may continue to record accrued interest in a Memorandum Account

37. ACA-TM-37 (v2.2-20-Nov-10 ) 36