Income

Recognition and
Asset Classification

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 Why do we need IRAC
Norms ?

02/13/17 2
 What is IRAC

A policy of income recognition on the

basis of record of recovery rather
than on any subjective
considerations.
The classification of assets of banks
on the basis of objective criteria
ensuring a uniform and consistent
application of the norms

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 What is Performing Asset

A performing asset is one which does

not disclose any problems and which
does not carry more than normal risk
attached to the business. Such an
asset is classified as Standard Asset

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 What is Non-Performing
Asset
A non performing asset is a loan or an advance
where:
(i) interest and/ or installment remain overdue
for a period of more than 90 days in respect of a
Term Loan
(ii) The amount remains out of order for a
period of more than 90 days, in respect of an
Overdraft/ cash credit
(iii) The bills remains overdue for a period of
more than 90 days in case of bills purchased and
discounted,

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 (iv) In case of direct agricultural advances if
the installment of principal thereon remains
overdue for more than two crop seasons (in
case of short duration crops) and more than
one crop season (in case of long duration
crop) ; crop pattern as determined by SLBC
(v) Similar treatment for gold loans granted
for agricultural purposes

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 Some exceptions
(vi) Gold loans for non agricultural purposes
will have the same treatment like any
other loans. However, in case of a
Board approved policy and subject to
adequate margin gold loan up to
Rs.1.0 lakh would not be NPA with
bullet repayment option (not
exceeding 12 months). It will be
NPA only after it is overdue form the
date of bullet repayment as fixed by
the bank. (Nov.26, 2007)

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 Some exceptions
(vii) Advances against term deposits, NSCs
eligible for surrender, IVPs, KVPs and Life
policies need not be treated as NPAs
provided adequate margin is available.
(viii) Central Govt. guaranteed accounts need
not be treated as NPAs. However,
income not to be recognised unless
interest/ inatallment is really paid.
(ix) Staff housing loan: as per the due date
fixed by the bank, where interest is
payable after recovery of principal.
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 What is an Out of Order A/c

the outstanding balance remains

continuously in excess of the sanctioned
limit/drawing power.
Or
there are no credits continuously for 90
days
or
credits are not enough to cover the
interest debited during the same period

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 A few other criteria of
classification of CASH
No monthly stock statement has been
submitted byCREDIT account
the borrower for as
lastNPA
six
months (3 months+90 days)
or
The Cash Credit account has not been
reviewed/ renewed for more than 90 days
or
Where there is a solitary or a few credit
entries before the balance sheet date but the
account goes out of order thereafter

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 Classification of Assets

Identification of assets as NPAs should be

done on an ongoing basis. Provisions to be
made at the end of each calendar quarter.
Charging of interest at monthly rests.
However, the date of classification of
an advance as NPA shall not change
on account of charging of interest at
monthly basis
Treatment of NPAs Borrower-wise not
Facility-wise, Bank-wise not borrower-wise
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 Classification of Assets

If the asset is non-performing, the

investment in the shares and bonds
of the same borrower shall also be
classified as NPA.
If the bank is not receiving regular
dividend, the investment shall be
classified as NPI.

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 ASSET CLASSIFICATION

Sub Standard Assets: The sub standard asset is one

which has remained as NPA for a period less than or
equal to 12 months.
Provision requirement 10% of total outstanding
irrespective of available security.
However, if there is an erosion in the value of security
(less than 50% of the original value as assessed by
the bank or accepted by RBI at the time of last
inspection) or a fraud has been committed by the
borrower, the account will be straight away classified
as doubtful category and will attract provision
accordingly.
02/13/17 CAB, RBI, PUNE 13
02/13/17 College of Agricultural Banking, RBI, PUNE 13
 ASSET CLASSIFICATION

Further, if the erosion in the value of

security is to the extent that the
realisable value of security depletes
to less than 10% of the outstanding
loan, the account can be straight
away classified as Loss and
provision shall be made accordingly.

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 Doubtful Asset
Doubtful Assets:
D I, D II, D III
An asset which has remained NPA for
more than 12 months but is less than
or upto 24 months is classified in
Doubtful I category
Provision required is 20% on secured
portion and 100% on unsecured
portion
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 Doubtful Asset

Doubtful II
NPA for more than 2 years and up to
4 years
Provision required is 30% on secured
portion and 100% on unsecured
portion
Doubtful III
More than 4 years
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 Doubtful Asset

Provision required:
100% for new (after April 1,2010) D
III accounts for both T I banks and T
II banks
For T II banks: 100% in case of old
D III accounts also.

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 Doubtful Asset

For T I banks: In case of NPAs(D III)

as on March 31, 2010
(i) 60% w.e.f. March 31, 2011
(ii) 75% w.e.f. March 31,2012
(iii)100% w.e.f. March 31, 2013

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 Loss Asset

Loss Assets:
An NPA account where realisable value of
security is either nil or is less than 10% of the
outstanding. Realisibility is the main criterion
not the value of security per se.
Loss asset will attract 100% provision

02/13/17 CAB, RBI, PUNE 19

02/13/17 College of Agricultural Banking, RBI, PUNE 19
 Internal System for
classification of asset
Banks should establish appropriate internal
systems to eliminate the tendency to
postpone the identification of NPAs ,
especially in respect of high value accounts.
Responsibility and validation levels for
ensuring asset classification may be fixed
by the bank
RBI would continue to identify the
divergences arising due to non-compliance,
for fixing responsibility.

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 Prudential Guidelines on
restructuring of Advances

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 Prudential Guidelines on
Restructuring of Advances
Asset classification norms
As a general rule:
Standard accounts should be immediately
reclassified as sub standard assets upon
restructuring
The non performing asset would slip into
further lower asset classification category
as per extant asset classification norms
with reference to pre restructuring
repayment schedule.
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 Prudential Guidelines on
Restructuring of Advances
non-performing assets upon restructuring,
would be eligible for up-gradation to the
'standard' category after observation of
'satisfactory performance' during the
'specified period i.e. one year
the asset classification of the restructured
account would be governed as per the
applicable prudential norms with reference
to the pre-restructuring payment
schedule.
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 Restructured A/c-Income
recognition norms
However, this rule is not applicable in
case of (i) Project Financing, (ii)
borrowers engaged in important
business activities (iii) housing loan
This exceptional treatment is not available
to
(i) consumer and personal advances
(ii) Advances to traders

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 Restructuring of
Agricultural Advances
In case of default in payment of agricultural
loans due to natural calamities UCBs on
their own may decide to
- convert the short term production loan into a
long term loan or reschedule the repayment
period and
- sanction fresh short term loans
- these fresh/ restructured loans will not be
treated as NPAs and will be governed by
fresh terms and conditions
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 Restructured A/c-
Provisioning norms
PRECONDITIONS:
(i)Provision for diminution in the fair value of
restructured Advances
Interest sacrifice to be calculated on the
basis of discounting present value of cash
flow with both pre and post restructuring
rate of banks BPLR+ appropriate term
premium +credit risk premium
Simpler method:5% of the exposure
(ii)The dues of the bank are fully secured
with certain exceptions
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 Restructured A/cs-Income
recognition norms-
Exceptions of (ii)
(a) SSI borrowers where outstanding
is up to Rs.25.0 lakh
(b) Infrastructure projects with an
escrow account with valid legal claim
and where the cash flows generated
form the project are adequate for
repayment of the advance

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 Restructured A/cs-Income
recognition norms-
WCTL part (created out of irregular
principal repayment) may remain
unsecured with the condition that a
provisioning of 20% would be
required on standard restructured
asset and for substandard asset it
should be 20% in the first year with
yearly increase of 20% each
subsequent year
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 Restructured A/cs-Income
recognition norms-
(iii)The unit becomes viable in 10
years if it is engaged in infrastructure
and in 7 years in case of other units
(iv)The repayment period of the
restructured advance should not
exceed 15 years in case of
infrastructure and housing loans 10
years in all other cases.

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 Restructured A/cs-Income
recognition norms-
(v) Personal guarantee is offered by
the promoter (except when the unit
is affected by external factors
pertaining to the economy and
industry
(vi) The account should not be
subjected to repeated restructuring

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 Restructured A/cs-Income
recognition norms-
(vii)Promoters additional contribution
should not be less than 15% of
banks sacrifice
(viii) If FITL is created out of unpaid
interest, the unrealised income
should have a corresponding credit in
the account styled as Sundry
Liabilities Account (Interest
Capitalisation)
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 Other important issues

FITL will be classified in the same

category as the restructured advance
The bank should disclose in their
published annual Balance Sheet,
under Notes on Account information
relating to number and amount of
advances restructured and the
amount of diminution in the fair value
of advances
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 PROVISIONING
NORMS
Rate of Provisioning on Standard Asset:
Loan Type T II TI
banks banks

Direct advances to 0.25% 0.25%

Agriculture and SME sector
Commercial Real Estate 1.00% 1.00%
(CRE) sector
All other loans and advances 0.40% 0.25%
not included in (a) and (b)
above
02/13/17 CAB, RBI, PUNE 33
02/13/17 College of Agricultural Banking, RBI, PUNE 33
 Thank you

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