HEAD OFFICE, FINANCE DIVISION, SECTOR-10, DWARKA, NEW DELHI

ANNEXURE D

GUIDELINES ON PROVISIONING

The Primary responsibility for making adequate provisions for any diminution in the
value of loan assets is that of the Branch Manager (and Concurrent Auditor,
wherever posted). Therefore it shall be the responsibility of the Branch Manager to
ensure that proper data is fed into LADDER system/CBS records particularly with
reference to Date of NPA, Value of Security, and Special categories of the Assets
etc. to enable the LADDER system/ to correctly classify the NPA accounts and
calculate the provisions. The detailed instructions relating to provision requirements
of different categories of assets are given hereunder:

D.1. Loss Assets

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If loss assets are permitted to remain in the books for any reason, 100% of
the outstanding should be provided for.

D.2. Doubtful Assets

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100 percent of the extent to which the advance is not covered by the
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realisable value of the security to which the bank has a valid recourse and
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the realisable value is estimated on a realistic basis.

PLUS

In regard to the secured portion, provision may be made on the following

basis, at the rates ranging from 25 percent to 100 percent of the secured
portion depending upon the period for which the asset has remained doubtful:

Period for which the advance has Provision requirement (%)

remained in ‘doubtful’ category
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Up to one year DB-1 25%

One to three years DB-2 40%

More than three years DB-3 100%

(Accounts which are in Doubtful category (DB-3) and where 100%

Provisions have been made merely due to ageing need not to be
classified as Loss.)

D.3. Sub-standard

A general provision of 15 percent on total outstanding should be made without

making any allowance for ECGC guarantee cover and securities available.

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HEAD OFFICE, FINANCE DIVISION, SECTOR-10, DWARKA, NEW DELHI
D.4 Additional Provision for Unsecured Exposures

D.4.1 The ‘unsecured exposures’ which are identified as ‘substandard’ would attract
additional provision of 10 per cent, i.e., a total of 25 per cent on the
outstanding balance. However, in view of certain safeguards such as escrow
accounts available in respect of Infrastructure lending, Infrastructure loan
accounts which are classified as Sub Standard will attract a provisioning of
20% instead of aforesaid prescription of 25%. To avail of this benefit of lower
provisioning, the bank should have in place an appropriate mechanism to
escrow the cash flows and also have a clear and legal first claim on these
cash flows.

D.4.2. The rights, licenses, authorizations, etc. charged to the Banks as collateral in
respect of projects (including infrastructure projects) financed by them should
not be reckoned as tangible security. Such advances shall be reckoned as
unsecured.

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D.4.3. However annuities under Build-Operate-Transfer (BOT) model in respect of
road/highway projects and toll collection rights where there are provisions to
compensate the project sponsor if a certain level of traffic is not achieved may
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be treated as tangible securities subject to the condition that bank’s right to
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receive annuities and toll collection rights is legally enforceable and

irrevocable.
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D.4.4 It is noticed that most of the infrastructure projects, especially road/highway

projects are user-charge based, for which the Planning Commission has
published Model Concession Agreements (MCAs). These have been adopted
by various Ministries and State Governments for their respective public-
private partnership (PPP) projects and they provide adequate comfort to the
lenders regarding security of their debt. In view of the above features, in case
of PPP projects, the debts due to the lenders may be considered as secured
to the extent assured by the project authority in terms of the Concession
Agreement, subject to the following conditions:
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(i) User charges / toll / tariff payments are kept in an escrow account where
senior lenders have priority over withdrawals by the concessionaire;

(ii) There is sufficient risk mitigation, such as pre-determined increase in user

charges or increase in concession period, in case project revenues are
lower than anticipated;

(iii) The lenders have a right of substitution in case of concessionaire default;

(iv) The lenders have a right to trigger termination in case of default in debt
service; and

(v) Upon termination, the Project Authority has an obligation of (i) compulsory
buy-out and (ii) repayment of debt due in a pre-determined manner.

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HEAD OFFICE, FINANCE DIVISION, SECTOR-10, DWARKA, NEW DELHI
In all such cases, banks must satisfy themselves about the legal enforceability
of the provisions of the tripartite agreement and factor in their past experience
with such contracts.

D.4.5 The provisioning requirement for unsecured ‘doubtful’ assets is 100%.

D.4.6 Unsecured exposure is defined as an exposure where the realisable value of

the security, as assessed by the bank/approved valuers/Reserve Bank’s
inspecting officers, is not more than 10 percent, ab-initio, of the outstanding
exposure. ‘Exposure’ shall include all funded and non-funded exposures
(including underwriting and similar commitments). ‘Security’ will mean tangible
security properly discharged to the bank and will not include intangible
securities like guarantees (including State government guarantees), comfort
letters etc.

It is further clarified that:

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(i) Loan accounts are to be categorized as “Secured or Unsecured
“based on the latest sanction of the loan accounts.
(ii) Loans where the realizable value of the security, as assessed by the
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Bank/ Approved Valuers/ RBI Officers is not more than 10% of the
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exposure based on the latest sanction/ disbursement is to be

categorized as UNSECURED EXPOSURE. This is to be decided
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reckoning all facilities sanctioned to the party/ borrower together

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including non-fund based facilities as mentioned above.

(iii) In case of borrowers’ accounts where sanction/ disbursement is made
other than as mentioned at para (ii) above are to be categorized as
SECURED. Such accounts when slipped into NPA category with serious
credit impairment are directly to be classified as Doubtful or Loss as the
case may be and provision upto the extent of 100% of the shortfall in
security is to be made.
(iv) Branches having such unsecured exposure, ab-initio should indicate so in
the relevant field in the LADDER system for classifying such accounts as
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Sub-standard and calculation of additional 10% of provision.

D.5. Standard Assets (other than Restructured Advances)

For standard assets, for the funded outstanding on global loan portfolio basis
(made at HO level) provisioning requirements (category-wise) are
summarized below:

S. Category of standard asset Rate of

N Provisioning
o
a Direct Advances to agricultural and Small & Micro 0.25%
Sectors (**)
b Advances to Commercial Real Estate (CRE) sector 1.00%
b. Advances to Commercial Real Estate – Residential 0.75%
1 Housing Sector (CRE - RH) (***)

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HEAD OFFICE, FINANCE DIVISION, SECTOR-10, DWARKA, NEW DELHI

c Housing loan granted at ‘Teaser Rates (*) 2.00%

d All other loans and advances not included in ‘a’ ‘b’ & 0.40%
‘c’ above
(*) The provisioning on these assets would revert to 0.40% after 1 year from the
date on which the rates are reset at higher rates if the accounts remain
‘standard’.
(**) It is clarified that Medium Enterprises shall attract 0.40% provisions.
Kindly be guided by the definition of Medium Enterprises as circulated by
MSME Division HO.
(***) CRE-RH would consist of loans to builders/developers for residential
housing projects (except for captive consumption) under CRE segment. Such
projects should ordinarily not include non-residential commercial real estate.
However, integrated housing projects comprising of some commercial space
(e.g. shopping complex, school, etc.) can also be classified under CRE-RH,
provided that the commercial area in the residential housing project does not

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exceed 10% of the total Floor Space Index (FSI) of the project. In case the FSI
of the commercial area in the predominantly residential housing complex
exceeds the ceiling of 10%, the project loans should be classified as CRE and
not CRE-RH. 12
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D.6 Advances covered by ECGC/ DICGC guarantee

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In the case of advances classified as doubtful guaranteed by DICGC/ECGC,

provision should be made only for the balance in excess of the amount
guaranteed by these Corporations. Further, while arriving at the provision
required to be made for doubtful assets, realisable value of the securities
should first be deducted from the outstanding balance in respect of the
amount guaranteed by these Corporations and then provision made as
illustrated hereunder:
(Rs. In lacs)
Position of account as on 31.03.15 Provision calculation for 31.03.15
Outstanding Balance 40.00 Outstanding Balance 40.00
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ECGC cover 50% Less Value of Security 15.00

Date of NPA 31.03.2012 Unsecured Balance 25.00
Asset Classification DB-II Less ECGC Cover 12.50
Value of Security Held 15.00 Net Unsecured Balance 12.50
Provision Required 31.03.15
100% Unsecured Portion 12.50
40% Secured Portion (DB-II) 6.00
Total 18.50

D.6.1 Advance covered by Credit Guarantee Trust for Micro & Small
Enterprises (CGTMSE) and Credit Risk Guarantee Fund Trust for Low
Income Housing (CRGFTLIH) guarantee

In case the advance covered by CGTMSE guarantee becomes non-

performing, no provision need be made towards the guaranteed portion. The

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HEAD OFFICE, FINANCE DIVISION, SECTOR-10, DWARKA, NEW DELHI
amount outstanding in excess of the guaranteed portion should be provided
for as per the extant guidelines on provisioning for non-performing
advances. An illustrative example is given below:

Example
(Rs. In lacs)
Position of account as on 31.03.15 Provision calculation for 31.03.15
Outstanding Balance 25.00 Outstanding Balance 25.00
CGTMSE cover 75% (Max Less Value of Security 3.75
Rs.37.50
lacs)
Date of NPA 31.03.2010 Unsecured Balance 21.25
Asset Classification DB-III Less CGTMSE Cover (75%) 15.94
Value of Security Held 3.75 Net Unsecured Balance 5.31
Provision Required 31.03.15
100% Unsecured Portion 5.31

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100% Secured Portion (DB- 3.75
III)
Total 9.06
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D.7 Advances under rehabilitation package approved by BIFR/ Term

Lending Institutions:
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D.7.1 Banks are not permitted to upgrade the classification of any advance in
respect of which the terms have been negotiated unless the package of
renegotiated terms has worked satisfactorily for a period of one year. While
the existing credit facilities sanctioned to a unit under rehabilitation
packages approved by BIFR/Term Lending Institutions will continue to be
classified as Sub standard or doubtful as the case may be, in respect of
additional facilities sanctioned under the rehabilitation packages, the
Income Recognition, Asset Classification norms will become
applicable after a period of one year from the date of disbursement. So
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provision on additional facilities sanctioned need not be made for a

period of one year from date of disbursement.

D.7.2 The provision should continue to be made in respect of dues to the bank on
the existing credit facilities as per their classification as sub standard or
doubtful asset.

D.7.3 In respect of additional credit facilities granted to SSI units which are
identified as sick (as per extant RBI guidelines) and where rehabilitation
packages / nursing programmes have been drawn by the banks themselves
or under consortium arrangements, no provision need be made for a period
of one year. In respect of additional credit facilities granted to SME or other
units where rehabilitation packages/ nursing programmes have been drawn
by the banks themselves or under consortium arrangements, no provision
need be made for a period of one year.

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