INCOME RECOGNITION AND ASSET CLASSIFICATION NORMS – AT A GLANCE
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Credit Facility
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Basis for treating a Credit Facility as NPA
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Remarks
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Term Loans |
· Interest or instalment remains overdue for a period of more than 90 days from end of the quarter Agricultural Advances: In respect of advances granted for agricultural purposes where interest and/ or instalment of principal remains overdue for a period of more than two crop seasons for short duration crops and one crop season for long duration crops, the advance should be treated as NPA |
Overdue: An amount due to the bank under any credit facility is ‘Overdue’ if it is not paid on the due date fixed by the bank |
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Cash Credits & Overdrafts |
· The account remains continuously “out of order” for a period of more than 90 days i.e. Outstanding balance remains continuously in excess of the sanctioned limit/ drawing power or there are no credits continuously for a period of 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period |
Banks may not classify an account merely due to existence of some deficiencies, ––which are of temporary nature such as non–availability of adequate drawing power, balance outstanding exceeding the limit, non–submission of stock statements and non–renewal of the limits on the due date, etc However, outstanding in an account based on stock statements older than three months would be deemed irregular. Such account will become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days even though the unit may be working or the borrower’s financial position is satisfactory. Further, an account where the regular/ ad–hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad–hoc sanction respectively, will be treated as NPA |
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Bills Purchased & Discounted |
The bills purchased/ discounted remains overdue for a period of more than 90 days |
Overdue interest should not be charged and taken to income account in respect of overdue bills unless it is realised |
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Other Accounts |
Any amount to be received in respect of that facility remains overdue for a period of more than 90 days |
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Government guaranteed advances |
State Government guaranteed advance would attract asset classification and provisioning norms, if interest and/ or principal or any other amount due to the bank remains overdue for more than 90 days |
Credit facilities backed by guarantee of Central Government though overdue may be treated as NPA only when the government repudiates its guarantee when invoked. However, income shall not be recognised if the interest or installment has remained overdue or the account has remained continuously out of order or the bills or any other facility has remained overdue for a period of more than 90 days |
Notes:
- For Copy of Master Circular on Prudential Norms on Income recognition, Asset Classification and Provisioning pertaining to the Advances Portfolio issued by Reserve Bank of India vide DBOD.No.BP.BC. 17 /21.04.048/2009-10 dated July 1, 2009 refer to www.notifics.rbi.org.in
- Once an account has been classified as NPA, all the facilities granted to the borrower will be treated as NPA except in respect of Primary Agricultural Credit Societies (PACS)/ Farmers Service Societies (FSS). Also, in respect of additional facilities sanctioned as per package finalised by BIFR and/ or term lending institutions, provision may be made after a period of one year from the date of disbursement in respect of additional facilities sanctioned under the rehabilitation package. The original facilities granted would however continue to be classified as sub–standard/ doubtful, as the case may be.
3. Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and Life policies need not be treated as NPA. However income on such advances can be recognized subject to availability of margin. Advances against gold ornaments, government securities and all other securities are not covered by this exemption
4. Till the time the account is identified as NPA, income is recognised irrespective of whether realised or not. Where an account is identified as NPA during the year, unrealised income should not be recognised for the year. Also, interest accrued and credited to income account in the previous year should be reversed or provided for if the same is not realised
5. If the accounts of the borrowers have been regularised before the balance sheet date by repayment of overdue amounts, the same should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors about the manner of regularisation of the account to eliminate doubts on their performing status
6. RBI had issued series of circulars on restructuring of advances during the year 2008-09 .Despite this there were lot of areas where there was lack of clarity on some aspects of restructuring The Master Circular issued by RBI on 1st July 2009 has separate Part B only on restructuring. Classification of various categories of restructured advances should be done as per Para 9.1 to 18 of this chapter.
7. Part C of the Master Circular dated 1st July 2009 deals with Prudential Norms in on Income Recognition, Asset Classification, Provisioning, and Capital Adequacy in respect of Agricultural Debt Waiver and Debt Relief Scheme, 2008
8. In absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries of NPAs, banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Thus in case of recoveries in NPAs, auditor should verify that appropriation between interest and/or principal is done as per its consistent accounting policy of the Bank.
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