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09 April 2012 Please gide me about npa in banks and their provising norms and what about their interest part.

C A S.S.Agarwal, M.Com.,LL.B,

C A S.S.Agarwal, M.Com.,LL.B, (Expert)
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10 April 2012 NPA stands for Non Performing Assets.

Whenever a bank gives loan, it is expected that the interest due and also the loan amount is recovered as planned at the time of issue of the loan.

But circumstances change, and many clients find it difficult to repay the interest, leave aside the loan amount or EMIs.

In private banks, ‘collection agents’ were being hired, who would use all sorts of pressure tactics to get the loan and interest back to the bank.

In PSU banks, things were totally different. Like in any and every govt department, it was ‘Baba Ka Bagicha’ ….

‘Who cares?’ was the attitude, and the bank employees were NOT too keen in the recovery of the loan, for obvious reasons.

This used to allow the NPA figure getting increased month by month and year by year, but the [ir]responsible officers never gave a damn, because it was being shown as ‘recoverable’ in the balance sheets and NOT as a loss. So, why would one worry?

It was the courts that came to the rescue of the common man, who is the actual owner of all Public sector enterprises, and issued an order, that any NPA in excess of Six Months, be treated as a loss.

This brought the pressure on the [ir] responsible officers, who were now required to make efforts for the recovery, a job that they had never ever done earlier in their tenure with that bank.

Many officers took advantage of the VRS offered by the PSU banks and walked out. A lot of sum remained as an NPA and was written off as loss.

But that could NOT be done every now and then. So, there after, the banks are required tom ensure that the NPAs are cleared within 6 months, to avoid getting them converted to loss. Because if that happens, such officers shall have to give reasons and/or may face enquiry for being incompetent. Therefore, technically, the officers visit the clients and physically grab the asset that was earlier hypothecated to the bank, and show the recovery.

The said asset, in real terms, is NOT of any use to the bank, and if possible, is sold separately to square-off the NPAs. But in such cases, nominal amount of loss or profit gets booked along with the squaring off of the NPAs.

This is my understanding of NPAs, based on my readings and also viewing the TV news items. But being an engineer, I am NOT the authority, and might have erred.

Bills Purchased/Discounted
:If the bills purchased or dis-counted remains overdue ora period of more than 90 daysrom its due date.
Agricultural Advances: aloan granted or
i) Short duration crops willbe treated as NPA, if the installment o principal orinterest thereon remainsoverdue or two crop sea-sons.ii) Long duration crops willbe treated as NPA, i theinstallment of principal orinterest thereon remainsoverdue or one cropseason.For the purpose of theseguidelines, “long duration”crops would be crops with cropseason longer than one year andcrops, which are not “long du-ration” crops would be treatedas “short duration” crops. Thus an auditor will haveto veriy the nature/durationo crop circle and accordingly veriy whether an agriculturalaccount is NPA as on 31stMarch 2006.
Other Credit Facility:
Incase o any other credit acil-ity, i the amount to be receivedremains overdue or more than90 days, then the account willbe classied as NPA.
Accounts with temporarydefciencies:
Even though criteria laiddown or identication o anaccount as NPA are objective,an account should not be classi-ed as NPA, i the deciencieslike non-submission o stock statement and, non-renewal o acility in the account are tem-porary in nature. RBI guide-lines in this regard as under.a) Drawing power is re-quired to be arrived atbased on the stock state-ment, which is current.However, considering thediculties o large bor-rowers, stock statementsrelied upon by the banksor determining draw-ing power should not beolder than three months. The outstanding in theaccount based on draw-ing power calculatedrom stock statementsolder than three months, would be deemed as ir-regular. A working capi-tal borrowal account willbecome NPA i such ir-regular drawings are per-mitted in the account ora continuous period o 90days even though the unitmay be working or theborrower’s nancial posi-tion is satisactory. Thus, i a borrower is al-lowed drawing on thebasis o stock statemento September’05, the ac-count will be classied asNPA as on 31st March2012.b) Regular and adhoc creditlimits need to be re- viewed/regularised notlater than three monthsrom the due date/dateo ad hoc sanction. Incase o constraints suchas non-availability o -nancial statements andother data rom the bor-rowers, the branch shouldurnish evidence to show that renewal/review o credit limits is already onand would be completedsoon. In any case, delay beyond six months is notconsidered desirable as ageneral discipline. Hence,an account where the reg-ular/ adhoc credit limitshave not been reviewed/renewed within 180 daysrom the due date/dateo ad hoc sanction will betreated as NPA.
Income Recognition
i) Income rom NPA isnot recognised on ac-crual basis but is bookedas income only when it isactually received. There-ore interest on any NPAshould not be recognizedunless realized.However, interest on ad- vances against term de-posits, NSCs, IVPs, KVPsand Lie policies may betaken to income accounton the due date, providedadequate margin is avail-able in the accounts.For example: A borrowerhas taken loan o Rs.1lac against term deposito Rs.1.25 lacs. Balancein the account as on 31stMarch’06 is Rs.1.10 lacs.Even though account isover drawn, income wouldbe recognized since valueo deposit is more thanthe balance outstanding.ii) Fees and commissionsearned by the banks as aresult o re-negotiationsor rescheduling o out-standing debts should berecognised on an accrualbasis over the period o time covered by the re-negotiated or rescheduledextension o credit.iii) I Government guaran-teed advances becomeNPA, the interest on suchadvances should not betaken to income accountunless the interest hasbeen realised.
Reversal of income
i) I any advance, includingbills purchased and dis-counted, becomes NPAas at the close o any year,interest accrued and cred-ited to income account inthe corresponding previ-ous year, should be re- versed or provided or i the same is not realizedduring the year underaudit. This will apply toGovernment guaranteedaccounts also.
Regularand ad-hoc creditlimits needto bereviewed/regularisednot laterthan threemonthsfrom thedue date/date of adhocsanction.

ii) In respect o NPAs, ees,commission and similarincome that have accruedshould cease to accrue inthe current period andshould be reversed orprovided or with respectto past periods, i uncol-lected.iii) The nance charge com-ponent o nance in-come [as dened in ‘AS19 – Leases’ issued by theCouncil o the Instituteo Chartered Accoun-tants o India (ICAI)] onthe leased asset which hasaccrued and was creditedto income account beorethe asset became non-perorming and remainunrealised, should be re- versed or provided or inthe current accountingperiod.
Appropriation o recovery in NPAs
i) Interest realised on NPAsmay be taken to incomeaccount provided thecredits in the accounts to- wards interest are not outo resh/additional creditacilities sanctioned tothe borrower concerned.ii) In the absence o a clearagreement between thebank and the borroweror the purpose o appro-priation of recoveries inNPAs banks should adoptan accounting principleand exercise the right of appropriation o recover-ies in a uniorm and con-sistent manner. Thus, asper the consistent policy o the bank recovery may be appropriated towardsinterest or principal.iii) As per income recogni-tion norms, bank cannotrecognise income unlessrealised. However, bank can debit interest to NPAaccount provided it iscredited to interest sus-pense account.
Asset Classification
Having identied assetsas NPA, banks are required toclassiy them urther into ––a) Sub-standard Assetsb) Doubtul Assetsc) Loss Assetsi)
Sub-standard Assets:
A sub-standard asset isone, which has remainedNPA or a period o less than or equal to 12months.ii)
Doubtul Assets:
An asset is classiedas doubtul i it has re-mained in the sub-stan-dard category or a periodo 12 months.iii)
Loss Assets:
A loss asset is one whereloss has been identiedby the bank or internalor external auditors orthe RBI inspection butthe amount has not been written off wholly. Inother words, such an as-set is considered uncol-lectible and o such little value that its continuanceas a bankable asset is not warranted although theremay be some salvage orrecovery value.
Exceptions:
In respect of accounts wherethere are potential threats orrecovery on account o ero-sion in the value of security ornon-availability o security andexistence o other actors such as frauds committed by bor-rowers, it will not be prudentthat such accounts should gothrough various stages o assetclassication. In cases o suchserious credit impairment theasset should be straightaway classied as doubtul or lossasset as appropriate.i) Erosion in the value o se-curity can be reckonedas signicant when therealisable value o the se-curity is less than 50 percent o the value assessedby the bank or acceptedby RBI at the time o lastinspection, as the casemay be. Such NPAs may be straightaway classiedunder doubtul category and provisioning shouldbe made as applicable todoubtul assets.ii) If the realisable value o the security, as assessedby the bank/approved valuers/RBI is less than10 per cent o the out-standing in the borrowalaccounts, the existence o security should be ignoredand the asset should bestraightaway classied asloss asset. It may be either written off or ully pro- vided or by the bank.
Asset Classification– SomeClarifications:
(i) Asset Classifcation to be borrower-wise and not acility-wise
All the acilities granted by a bank to a borrower and in- vestment in all the securities is-sued by the borrower will haveto be treated as NPA/NPI andnot the particular acility/in- vestment or part thereo whichhas become irregular.
(ii) Advances under consortiumarrangements
Asset classication o ac-counts under consortium shouldbe based on the record o recov-ery o the individual memberbanks and other aspects havinga bearing on the recoverabil-ity o the advances. Where theremittances by the borrowerunder consortium lending ar-rangements are pooled withone bank and/or where thebank receiving remittances isnot parting with the share o other member banks, the ac-count will be treated as not ser- viced in the books o the othermember banks and thereore,be treated as NPA. If the banksparticipating in the consortium
A loss as-set is onewhere losshas been
identied
by the bankor internalor externalauditorsor the RBIinspectionbut theamount hasnot beenwritten offwholly. are able to arrange to get theirshare o recovery transerredrom the lead bank or get anexpress consent rom the leadbank or the transer o theirshare o recovery, they may beable to make proper classica-tion in their books.
(iii) Advances to PACS/FSS ced-ed to Commercial Banks
In respect o agriculturaladvances as well as advancesor other purposes granted by banks to ceded PACS (Primary agricultural credit society)/ FSS(Farmers Service Society) un-der the on-lending system, only that particular credit acility granted to PACS/FSS whichis in deault will be classiedas NPA and not all the creditacilities sanctioned to a PACS/FSS. The other direct loans & advances, i any, granted by thebank to the member borrowero a PACS/ FSS outside theon-lending arrangement willbecome NPA even i one o thecredit acilities granted to thesame borrower becomes NPA.
(iv) Advances against Term De- posits, NSCs, KVP/IVP, etc
Advances against term de-posits, NSCs eligible or sur-render, IVPs, KVPs and liepolicies need not be treated asNPAs. Advances against goldornaments, government securi-ties and all other securities arenot covered by this exemption.
(v) Loans with moratorium or payment o interest
(a) In cases where mora-torium is available orpayment o interest,payment o interest be-comes ‘due’ only ater themoratorium or gestationperiod is over. Thereore,such amounts o interestdo not become overdueand hence do not be-come NPA with reer-ence to the date o debito interest. They becomeoverdue ater due dateor payment o interest i uncollected.(b) In the case o housing loanor similar advances grant-ed to sta members whereinterest is payable ater re-covery o principal, inter-est need not be consideredas overdue rom the rstquarter onwards. Suchloans/advances should beclassied as NPA only when there is a deault inrepayment o instalmento principal or payment o interest on the respectivedue dates.
(vi) Government guaranteed advances
The credit acilities backedby guarantee o the CentralGovernment though overduemay be treated as NPA only when the Government repu-diates its guarantee when in- voked. This exemption romclassication o Governmentguaranteed advances as NPA isnot or the purpose o recogni-tion o income.State Government guaran-teed advances and investmentsin State Government guaran-teed securities would attractasset classication and provi-sioning norms i interest and/orprincipal or any other amountdue to the bank remains over-due or more than 90 days.
(vii) Upgradation o loan ac-counts classifed as NPAs
I arrears o interest andprincipal are paid by the bor-rower in the case o loan ac-counts classied as NPAs, theaccount should no longer betreated as non-perorming andmay be classied as ‘standard’accounts.
(viii) Accounts regularised near about the balance sheet date
The asset classicationo borrowal accounts wherea solitary or a ew credits arerecorded beore the balancesheet date should be care-ully checked and withoutscope or subjectivity. Wherethe account indicates inher-ent weakness on the basis o the data available, the accountshould be deemed as a NPA.In other genuine cases, the au-ditors must obtain satisactory evidence about the manner o regularisation o the accountto eliminate doubts on theirperorming status.
Restructuring/reschedulingOf Loans
i) The restructuring/reschedul-ing/renegotiation o the terms o loan agreement could take place:
a) beore commencement o commercial production;b) ater commencement o commercial productionbut beore the asset hasbeen classied as sub stan-dard,c) ater commencement o commercial productionand ater the asset has beenclassied as sub standard.
ii) Treatment o Restructured Standard Accounts
a) A standard asset (rsttwo categories) whoseinstalments are being re-structured need not beclassied as sub standardprovided the loan/creditacility is ully secured (se-curity would also includecollateral security providedit is tangible and chargedto the bank)b) A standard asset (rst twocategories) whose inter-est is being restructured would not cause it to bedowngraded to sub stan-dard category subject tothe condition that theamount o sacrice, i any,in the element o interest,measured in present valueterms, is either written o or provision is made to theextent o the sacrice in- volved. For the purpose,the uture interest due asper the original loan agree-ment in respect o an ac-count should be discount-ed to the present value at arate appropriate to the risk
If arrearsof interestand prin-cipal arepaid by theborrowerin the caseof loanaccounts
classified as NPAs,the accountshould nolonger betreated asnon-per-formingand maybe classified as ‘standard’accounts.