NPA NORMS

Income Recognition, Asset Classification and

Provisioning
V. Sathyanarayanan
Senior partner
Varma & Varma

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• 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

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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

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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

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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

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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
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 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

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 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

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 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

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 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

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 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

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 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

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 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

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 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

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 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

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 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

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 DCCO 15-3-2012

Two year relaxation 15-3-2014

Revised date of DCCO fixed on 10-3-2014

Revised date of DCCO 14-3-2016

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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

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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

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 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

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 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

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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%

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 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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 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

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 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

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 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.

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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

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 RESTRUCTURING OF ADVANCES

• Industrial units
• CDR Mechanism
• SME advances
• Other advances

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 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

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 STAGES OF RESTRUCTURING

• Before commencement of commercial production

• After CCP while performing
• After CCP under sub-standard or Doubtful

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 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

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 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

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 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

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 ESSENTIAL COMPONENTS

• Incentive for quick implementation of the restructuring package

• Retention of asset classification in pre-restructuring classification

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During pendency normal classification rules apply
If approved plan is implemented within 120 days, asset classification
will restore
Asset classification benefits – no further deterioration

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 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

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 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

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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

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 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.

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