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MD SOHRAB

MD SOHRAB (Querist)
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14 August 2012 Please provide me latest NPA prvision applicable for nov-2012 IPCC EXAM

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16 August 2012 as per rbi circular dated 01-07-2012 latest norms for provisions of NPA for nationalised as well as cooperative banks are as under:

PROVISIONING NORMS FOR NATIONALISED BANKS :

5.1 General

5.1.1 The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines.

5.1.2 In conformity with the prudential norms, provisions should be made on the nonperforming assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against substandard assets, doubtful assets and loss assets as below:

5.2 Loss assets

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

5.3 Doubtful assets

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

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
remained in ‘doubtful’ category
Provision requirement (%)

Up to one year
25

One to three years
40

More than three years
100

Note: Valuation of Security for provisioning purposes

With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation. Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors.

5.4 Substandard assets

(i) A general provision of 15 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available.

(ii) 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 per cent instead of the aforesaid prescription of 25 per cent. To avail of this benefit of lower provisioning, the banks 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. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. 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.

(iii) In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks' balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards :

a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured.

b) However, banks may treat 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, as tangible securities subject to the condition that banks' right to receive annuities and toll collection rights is legally enforceable and irrevocable.

c) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in "Notes to Accounts". This would differentiate such loans from other entirely unsecured loans.

5.5 Standard assets

(i) The provisioning requirements for all types of standard assets stands as below. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis:

direct advances to agricultural and Small and Micro Enterprises (SMEs) sectors at 0.25 per cent;

advances to Commercial Real Estate (CRE) Sector at 1.00 per cent;

housing loans extended at teaser rates and restructured advances as as indicated in Para 5.9.13 and 5.9.14 respectively

all other loans and advances not included in (a) (b) and (c) above at 0.40 per cent

(ii) The provisions on standard assets should not be reckoned for arriving at net NPAs.

(iii) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

(iv) It is clarified that the Medium Enterprises will attract 0.40% standard asset provisioning. The definition of the terms Micro Enterprises, Small Enterprises, and Medium Enterprises shall be in terms of Master Circular RPCD.SME&NFS.BC.No. 9/06.02.31/2011-12 dated July 1, 2011 on Lending to Micro, Small & Medium Enterprises (MSME) Sector.

(v) While the provisions on individual portfolios are required to be calculated at the rates applicable to them, the excess or shortfall in the provisioning, vis-a-vis the position as on any previous date, should be determined on an aggregate basis. If the provisions required to be held on an aggregate basis are less than the provisions held as on November 15, 2008, the provisions rendered surplus should not be reversed to Profit and Loss account; but should continue to be maintained at the level existed as on November 15, 2008. In case of shortfall determined on aggregate basis, the balance should be provided for by debit to Profit and Loss account.

5.6 Prudential norms on creation and utilisation of floating provisions

5.6.1 Principle for creation of floating provisions by banks

The bank's board of directors should lay down approved policy regarding the level to which the floating provisions can be created. The bank should hold floating provisions for ‘advances’ and ‘investments’ separately and the guidelines prescribed will be applicable to floating provisions held for both ‘advances’ & ‘investment’ portfolios.

5.6.2 Principle for utilisation of floating provisions by banks

The floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of nonperforming assets or for making regulatory provisions for standard assets. The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board’s approval and with prior permission of RBI. The boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary.

To facilitate banks' Boards to evolve suitable policies in this regard, it is clarified that the extra-ordinary circumstances refer to losses which do not arise in the normal course of business and are exceptional and non-recurring in nature. These extra-ordinary circumstances could broadly fall under three categories viz. General, Market and Credit. Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category. Market category would include events such as a general melt down in the markets, which affects the entire financial system. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance.

In terms of the Agricultural Debt Waiver and Debt Relief Scheme, 2008, lending institutions shall neither claim from the Central Government, nor recover from the farmer, interest in excess of the principal amount, unapplied interest, penal interest, legal charges, inspection charges and miscellaneous charges, etc. All such interest / charges will be borne by the lending institutions. In view of the extraordinary circumstances in which the banks are required to bear such interest / charges, banks are allowed, as a one time measure, to utilise, at their discretion, the Floating Provisions held for 'advances' portfolio, only to the extent of meeting the interest / charges referred to above.

FOR COOPERATIVE BANKS :
Provisioning Norms

5.1 Norms for Provisioning on Loans & Advances

5.1.1 In conformity with the prudential norms, provisions should be made on the non-performing assets on the basis of classification of assets into prescribed categories as detailed in paragraph 3 above.

5.1.2 Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against loss assets, doubtful assets and sub-standard assets as below :

(i) Loss Assets

(a) The entire assets should be written off after obtaining necessary approval from the competent authority and as per the provisions of the Co-operative Societies Act / Rules. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided for.

(b) In respect of an asset identified as a loss asset, full provision at 100 per cent should be made if the expected salvage value of the security is negligible.

(ii) Doubtful Assets

(a) Provision should be for 100 per cent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse should be made and the realisable value is estimated on a realistic basis.

(b) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for which the asset has remained doubtful:

Tier I Bank

Period for which the advance has remained in 'doubtful' category
Provision Requirement

Up to one year
20 per cent

One to three years
30 per cent

More than three years (D-III)

(i)
outstanding stock of NPAs as on March 31, 2010
-
60 per cent with effect from March 31, 2011

-
75 per cent with effect from March 31, 2012

-
100 per cent with effect from March 31, 2013

(ii)
advances classified as 'doubtful for more than three years' on or after April 1, 2010
-
100 percent

Tier II Bank

Period for which the advance has remained in 'doubtful' category
Provision Requirement

Up to one year
20 percent

One to three years
30 percent

More than three years (D-III)
100 percent

Illustration for Tier-I bank is given at Annex 4

(iii) Sub-standard Assets

A general provision of 10 per cent on total outstanding should be made without making any allowance for DICGC / ECGC guarantee cover and securities available.

(iv) Provision on Standard Assets

(a) From the year ended March 31, 2000, the banks should make a general provision of a minimum of 0.25 per cent on standard assets.

(b) However, Tier II banks (as defined in Circular dated May 6, 2009) will be subjected to higher provisioning norms on standard assets as under :

The general provisioning requirement for all types of 'standard advances' shall be 0.40 per cent. However, direct advances to agricultural and SME sectors which are standard assets, would attract a uniform provisioning requirement of 0.25 per cent of the funded outstanding on a portfolio basis, as hitherto.

Further, with effect from Dec 8, 2009, all UCBs (Both Tier I & Tier II) are required to make a provision of 1.00 percent in respect of advances to Commercial Real Estate Sector classified as 'standard assets'.

The standard asset provisioning requirements for all UCBs are summarized as under :

Category of Standard Asset
Rate of Provisioning

Tier II
Tier I

Direct advances to Agriculture and SME sectors
0.25 %
0.25%

Commercial Real Estate (CRE) sector
1.00 %
1.00 %

All other loans and advances not included in (a) and (b) above
0.40%
0.25%

(c) The provisions towards "standard assets" need not be netted from gross advances but shown separately as "Contingent Provision against Standard Assets" under "Other Funds and Reserves" {item.2 (viii) of Capital and Liabilities} in the Balance Sheet.

(d) If due to changes in the regulatory requirements on provisions to be maintained by banks, the provisions held by banks exceed what is required to be held by banks, such excess provisions should not be reversed. In future, if by applying the revised provisioning norms, any provisions are required over and above the level of provisions currently held for the standard category assets ; these should be duly provided for.

(e) In case banks are already maintaining excess provision than what is required / prescribed by Statutory Auditor / RBI Inspection for impaired credits under Bad and Doubtful Debt Reserve, additional provision required for Standard Assets may be segregated from Bad and Doubtful Debt Reserve and the same may be parked under the head "Contingent Provisions against Standard Assets" with the approval of their Board of Directors. Shortfall if any, on this account may be made good in the normal course.

(f) The above contingent provision will be eligible for inclusion in Tier II capital.

(v) Higher Provisions

There is no objection if the banks create bad and doubtful debts reserve beyond the specified limits on their own or if provided in the respective State Co-operative Societies Acts.

5.2 Provisioning for Retirement Benefits

Banks may have retirement benefit schemes for their staff, viz. Provident Fund, Gratuity and Pension. It is necessary that such liabilities are estimated on actuarial basis and full provision should be made every year for the purpose in their Profit and Loss Account.

However, consequent upon the enhancement in gratuity limits following the amendment to Payment of Gratuity Act 1972, it has been decided that UCBs may take the following course of action in the matter:

a. The expenditure, due to enhancement of ceiling of gratuity, if not fully charged to the Profit and Loss Account during the financial year 2010-11, be deferred over a period of five years beginning with the financial year ended March 31, 2011 subject to charging to the Profit and Loss Account a minimum of 1/5th of the total amount involved every year.

b. Such deferment of expenditure due to enhancement of gratuity, will not be permitted in respect of amounts payable to the retired / separated employees.

c.The expenditure so deferred, may be disclosed suitably in the Annual Financial Statements.

d. In view of the exceptional nature of the event, the deferred expenditure would not be reduced from Tier-I capital of UCBs.

5.3 Provisioning Norms for sale of financial assets to Securitisation Companies (SC) / Reconstruction Companies (RC)

(a) If the sale to SC / RC is at a price below the net book value (NBV) (i.e. book value less the provision held), the short fall should be written off / debited to P&L A/c of that year, subject to the provisions of the co-operative societies acts / rules / administrative guidelines in regard to write-off of debts.

(b) If the sale is for a value higher than the NBV, the excess provision will not be reserved but will be utilised to meet the shortfall / loss on account of sale of other assets to SC / RC.

5.4 Guidelines for Provisions in Specific Cases

(i) State Government guaranteed Advances

From the year ended March 31, 2006, State Government guaranteed advance and investment in State Government guaranteed securities would attract extant provisioning norms, if interest and / or principal or any other amount due to the bank remains overdue for more than 90 days irrespective of the fact whether the guarantee have been invoked or not.

(ii) Advances granted under Rehabilitation Packages approved by BIFR / Term Lending Institutions

(a) The existing credit facilities sanctioned to a unit under rehabilitation package approved by BIFR / term lending institutions, should continue to be classified as sub-standard or doubtful asset as the case may be.

(b) However, the additional facilities sanctioned as per package finalised by BIFR and / or term lending institutions, the income recognition and asset classification norms will become applicable after a period of one year from the date of disbursement.

(c) In respect of additional credit facilities granted to SSI units which are identified as sick 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.

(iii) Advances against fixed / term deposit, NSCs eligible for surrender, IVPs, KVPs, and life policies are exempted from provisioning requirements.

(iv) Advances against gold ornaments, government securities and all other kinds of securities are not exempted from provisioning requirements.

(v) Advances covered by ECGC Guarantee

(a) In the case of advances guaranteed by ECGC, provision should be made only for the balance in excess of the amount guaranteed by the Corporation. 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 the Corporation and then provision made as illustrated hereunder :

Example

Outstanding Balance
`4 lakhs

ECGC Cover
50 per cent

Period for which the advance has remained doubtful
More than 3 years

Value of security held (excludes worth of borrower / guarantor)
`1.50 lakhs

Provision required to be made

Outstanding balance
`4.00 lakhs

Less : Value of security held
`1.50 lakhs

Unrealised balance
`2.50 lakhs

Less : ECGC Cover (50% of unrealisable balance)
`1.25 lakhs

Net unsecured balance
`1.25 lakhs

Provision for unsecured portion of advance
`1.25 lakhs (@ 100 per cent of unsecured portion)

Provision for secured portion of advance (as on March 31 2005)
`0.90 lakhs (@ 60 per cent of secured portion of `1.50 lakh).

Total provision required to be made
`2.15 lakhs (as on March 31, 2005).

(b) In case the banks are following more stringent method of provisioning in respect of advances covered by the guarantees of ECGC, as compared to the method given above, they may have the option to continue to follow the same procedure.