Income Recognition &

Assets Classification (IRAC)

an Overview
Dr S Chatterjee

S-18
 Income Recognition Norms
 Income should be recognized on accrual basis only
in performing Assets.

 For NPA a/cs Interest to be taken into income account

on actual basis and NOT on accrual basis.

 When a particular loan becomes NPA, then all other

loans given to the same borrower will treated as NPA

 If partial Interest is recovered in a loan a/c then the

same can be taken into Income a/c

 In case of past period of a NPA, if the Interest charged

but not realized will have to reversed.
 Area of our study:
1)What is NPA ?
2)NPA Types
3)Causes of NPA
4)Impact on the Banks & Indian
Economy
5) NPA Provisioning
6) NPA management and Recovery
7) RBI & Govt Initiatives
[ Sl no 6 & 7 will be discussed in
separate series of slides]
 ASSET TYPE

►STANDARD ASSET / PERFORMING ASSET

The account is performing ie Loan interest
and repayment are forthcoming as per
sanctioned terms and does not carry more
than the normal risk attached to the
business.

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 ►NON-PERFORMING ASSET(NPA)

 The Asset ceases to generate income for

the bank.ie Interest and loan repayments
are not forthcoming as per sanctioned
terms.
 Security /N.worth of borrower /guarantor
will not be considered while classifying a
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 Causes of NPA
1) Willful Default
2) Slow down in Domestic & Global economy
3) Industrial crisis
4) Lenient/excessive Lending Process
5) Improper Credit appraisal & disbursement
6) High Inflation & High Interest rate
7) High Leverage ratio ( Also called Capital
Gearing Ratio a measured by D/E Ration)
8) Mismanagement ,
9) Poor supervision & Monitoring
10) Financial Repression  Compeling Banks to
lend or invest in Low yielding securities(G.Secs)
11) Double Repression In both Asset & Liab .
Asset Classification
Loan Assets

Standard/ Non-performing
Perming Assets Assets

Spl Mention
Doubtful
Accounts
Dbtful-1yr
Standard SMA-0 Sub-std Loss
Dbtful->1 -3yr
SMA-1
Dbtful->3yrs
SMA-2
 ►NON-PERFORMING ASSET(NPA)
 2.1.2 NPA is a loan
i. Interest instalment of remain
and/or
overdue for more than
principal
90 days – TL
ii. Account remains “out of order” – OD /CC
iii. Bill remains overdue for more than 90 days – BP/BD
iv. Instalment of principal or interest remains
overdue for two crop seasons –short duration crops
v. Instalment of principal or interest remains
overdue
for one crop season – long duration crops
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 IDENTIFICATION OF NPA
► 2.2 “Out of Order”
 The account is treated as ‘out of order’ if :
►Outstanding Balance remains continuously in
excess of sanction limit / drawing power for 90
days
►Outstanding less than limit - No credits
continuously for 90 days as on the date
of Balance Sheet
►Credits are not enough to cover the interest
debited during the same period.

► 2.3 “Overdue” – amount not paid on due

date
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 ASSET CLASSIFICATION

• Standard Asset
The account is not non-performing.

• Categories of Standard Assets [Spl Mention

Accounts (SMA)](
• (i)SMA-0  Irregularity < 30 days
• (ii) SMA-1 --do– contd>30 upto 60 days
• (iii) SMA-2 --do—contd > 60 upto 90 days
• Explaind also at the end part
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 CLASSIFICATION NORMS
Substandard Assets - remained NPA for a
period of less than or equal to 12 months

Doubtful Assets – Remained in NPA

(Substandard) category for more than 12 months
Doubtful 1- if it remains Dft for 1yr after sst period
Doubtful 2- Remains doubtful >1 upto 3yr
Doubtful-3- Continue to be doubtful >3yrs

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 CLASSIFICATION NORMS

► Loss Assets
NPAs not supportd by any security/
Guarantee, and identified by the
bank or internal or external auditors
or by RBI Inspectors as wholly
irrecoverable but the amount for
which has not been written off wholly

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 CLASSIFICATION GUIDELINES
► Guidelines for Classification of Assets
 Upgradation of NPAs

► Ifarrears of interest and principal are paid by

the borrower – account to be treated as
Standard

 Regularised near about BS date

► Solitary or few credits before BS date – handle with

care; If account indicates inherent weakness – treat as
NPA
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 CLASSIFICATION GUIDELINES
► Guidelines for Classification of Assets
 Advances under Consortium arrangements

► Basedon record of recovery of the individual

member banks

► Where remittances are pooled with one bank – not

parting with member banks share – treat it as NPA

► Where remittances are pooled with one bank / lead Bank

– get an express consent for transfer

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 CLASSIFICATION GUIDELINES
► 4.2 Guidelines for Classification of Assets
 4.2.13 Agricultural Advances
► i)Short duration Crops – principal or interest remains overdue for
two crop seasons;
Long duration Crops - principal or interest remains overdue for
one crop seasons;
Long duration – Crop season longer than one year
Crop Season – Period up to harvesting of crops raised as per SLBC
Short duration – which is not Long duration

Refer to : FIDD.CO.Plan.BC.54/04.09.01/2014-15 Dt 23 April,

2015
FIDD.No.FSD.BC.52/05.10.001/2014-15 Dt 25 March,
2015
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 CLASSIFICATION GUIDELINES
► 4.2 Guidelines for Classification of Assets
 4.2.13 Agricultural Advances
ii), Agricultural Advances affected by Natural Calamities

 Banks may decide to convert short term production loan to term

loan or re-schedulement of term, sanction fresh short-term loan
subject to conditions of RBI –
 NPA Classification governed by rescheduled terms
 Fresh Loans given after the rescheduled advances – regular
norms
 Rural Housing Advances under Indira Awas Yojana & Golden
Jubilee Rural Housing Finance Scheme – repayment to be linked
to crop cycles

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 CLASSIFICATION GUIDELINES
► 4.2 Guidelines for Classification of Assets

 4.2.14 Government Guaranteed Advances

►Central Govt. – only when Guarantee Invoked

►Exemption NOT for Recognition of Income !!

►State Government – No such relaxation – Normal 90

days norms apply

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 CLASSIFICATION GUIDELINES
► 4.2 Guidelines for Classification of Assets

 4.2.19 Advances granted under rehabilitation

package approved by BIFR / TLI
►Existing classification and provision to continue

►Upgradation only after one year – if package worked

satisfactorily.

►Additional facilities sanctioned – IRAC will apply after

one year.
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 CLASSIFICATION GUIDELINES
► 4.2 Guidelines for Classification of Assets

 4.2.21 Credit Card Accounts

►Minimum Due – Roll over the balance

►Minimum amount due not paid fully within 90 days

from the next statement date – gap between
statements should not be more than one month

►Banks should follow uniform method to determine

overdue status

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 PROVISIONING NORMS
Category of Advances Provision Rate %

Standard Loans
a) Direct loan to Agr & SME 0.25
b) Advances to Commercial Real Estate 1.00
c) All other advances not included in (a) or (b) 0.40
Sub Standard Loan
a) Secured Exposure 15
b) Un Secured Exposure 25
c) Un Sec exposure to Infrastructure loan with safe guard 20
Doubtful Advances Un Secured Loans 100
a)Doubtful secured loan up to 1 yr(within 2yrs of NPA date) 25
b)Doubtful sec loan> 1yr but up to 3 yrs 40
c) Doubtful Secured loan > 3yrs 100
Loss assets 100
 PROVISIONING NORMS
DOUBTFUL ASSETS
Period Provision
(Secured + Unsecured)

► Upto 1 25% + 100%

year 40% + 100%
► 1to 3 100% + 100%
years
► More than
3 yrs
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 Case study(Provisioning Problem
Solution: Prov Calculation
From the following information
Prov Rate Prov (Rs/Lac)
calculate Total Provision to be
made in P/L a/c of ABC Bank
Assets Rs / Lacs
0.40% 80
Standard Assets 20000
15 % 2400
Sub-Std Asst (Secured) 16000
25 % 1500
Dbtful (<1yr) (Secured) 6000
40 % 1600
--Do– (>1 to 3 yr) Sec 4000
100% 1000
--Do—( --do--) un-sec 1000
100% 500+1500=2000
--Do—(> 3yrs) RSV(500) 2000
100% 1500
Loss Assets 1500
Total Prov Reqd 10080
  GREENING ISSUES

 Sanction/extension of Additional
facility/Adhoc facility.
 Enhancement of Limit.
 Conversion of Overdue Limits.
 Frequent Reschedulement of Term Loans.
 Adjusting Loan of one borrower against other
borrower.

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 Restructuring of Assets

A stressed asset can be restructured by relaxing Terms

and condition, repayment schedule, etc based on lates
surplus availability position to accommodate difficulties
faced by the borrower provided the on going project is
otherwise viable.
 Write Off – NPA’s
 Banks may write off accounts at HO Level even
though the advances are still outstanding at
branches.
It is necessary that provision is made as per
the classification accorded to the respective
accounts .

► The banks should either make full provision as

per the guidelines or write off such advances &
claim such tax benefits as are applicable, by
evolving appropriate methodology in
consultation with their auditors/tax consultants.
Recoveries made in such accounts should be
10-03-2017 offered for tax purposes
VACAas per the rules. (8.3) 25
 Early Recognition of Financial Distress

Joint Lenders Forum (JLF) and Corrective Action Plan

(CAP)
 Applicable for Consortium and Multiple Banking
Advances read with Restructuring guidelines.

 Before an account becomes NPA, banks have to

identify incipient stress in the account by creating
three (3) Categories under Special Mention Accounts

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 Early Recognition of Financial Distress
SMA Basis for classification
Subcategories
SMA – 0 Principal or interest payment not
overdue for more than 30 days but
account showing signs of incipient
stress (Please see Appendix to Part
C)
SMA – 1 Principal or interest
payment overdue between 31-60
days
SMA – 2 Principal or interest
payment overdue between 61-90
days
RBI Circular No. DBS.CO.OSMOS/ B.C./4/ 33.04.006/ 2002-2003
dated 12.09.2012
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 Early Recognition of Financial Distress
RBI has set up Central Repository of Information on
Large Credits (CRILC) in 2014
 Banks to report credit information of borrowers.
 Banks are advised that as soon as an account is
reported by any of the lenders to CRILC as SMA-
2, they should mandatorily form a committee to
be called JLF if the aggregate exposure (AE) of
lenders in that account is Rs. 1000 million &
above.
 Lenders also have the option of forming a JLF
even when the AE in an account is less than
Rs.1000 million &/or when the account is
reported as SMA-0 or SMA-1.
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 Early Recognition of Financial Distress

The JLF may explore various options to resolve

the stress in the account to arrive at an early and
feasible solution to preserve the economic value
of the underlying assets as well as the lenders’
loans. Banks to report credit information of
borrowers.
Options under Corrective Action Plan (CAP)
- Rectification Of terms and condition
- Restructuring of terms and conditiond & relaxing
- Recovery

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 Early Recognition of Financial Distress

Accelerated Provisioning Required

► In cases where banks fail to report SMA status of

the accounts to CRILC or resort to methods with the
intent to conceal the actual status of the accounts
or evergreen the account, banks will be subjected
to accelerated provisioning for these accounts
and/or other supervisory actions as deemed
appropriate by RBI.

These guidelines have become effective from April 1,

2014.

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 Impact of NPA on Banks
& Indian Economy
1) Profitability:
i) No Income
ii) Provisioning at different rate for different NPAs
iii) Cost of Blocked Fund
iv) Recovery & Legal Exp, addl burden to P.L
2) Asset Contraction,
i) CAR Crisis
ii) Restraints Bank to lend
iii) Reduce Interest Income
iv) Economic Growth impeded
v) Banks start too much scrutiny & are afraid to
lend. Inefficiency Crips in .
vi) One a/c makes all Group a/cs NPA
 Impact of NPA Contd……
3) Liability Management gets effected
i) Due to high NPA & low profit Dep Rate is
reduced and Intt on Loan increased for
improving NIM
ii) Liquidity of the Banks become strained.
iii) Brand gets diluted that impacts public
confidence
4) GDP growth becomes sluggish.
5) Share value gets effected.
 NPA PROBLEMS
1)Asset Classification
2)Provision Calculation
3)Profit Management
Refer to w. Doc
 THANK YOU
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