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Provisioning Norms For Non Performing Assets

Padmanabhan Krishnasankar (Student) (181 Points)

03 July 2008

I would like to know the provisioning norms for NPAs.

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Bhawna (Charterd Accountant) (274 Points)
Replied 03 July 2008

NON PERFORMING ASSET (NPA)

What is a NPA……

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date

With a view to moving towards international best practices and to ensure greater transparency, it has been decided to adopt the '90 days overdue' norm for identification of NPAs, form the year ending March 31, 2004. Accordingly, with effect form March 31, 2004, a non-performing asset (NPA) shall be a loan or an advance where;

i. interest and /or installment of principal remain overdue for a period of more than 90 days in respect of a Term Loan,

ii. the account remains 'out of order' for a period of more than 90 days, inrespect of an overdraft/ cash Credit(OD/CC),

iii. the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,

iv. interest and/ or installment of principal remains overdue for two harvest seasons but for a period not exceeding two half years in the case of an advance granted for agricultural purpose, and

v. any amount to be received remains overdue for a period of more than 90 days in respect of other accounts

'Out of order'

An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/ drawing power. In case where the outstanding balance in the principal operating account is less than the sanctioned limit/ drawing power, but there are no credits continuously for six months as on the date of balance sheet or credits are not enough to cover the interest debited during the same period, these account should be treated as 'out of order'.

Overdue

Any amount due to the bank under any credit facility is 'overdue' if it is not paid on the due date fixed by the bank.

Classification & Provisioning for NPAs:

S.No.	Categories	Days past due	Provisioning requirements
1	Sub standard		10%
2	Doubtful	i)Upto 1 yr	100% of unsecured + 20% of secured portion
		ii)1 to 3 yr	100% of unsecured + 30% of secured portion
		iii)more than 3 yrs	100% of unsecured + 50% of secured portion
3	Loss		100%

Note:

Implementation of the instructions requiring classification of substandard account into doubtful category after 12 months and 100 % provisioning for secured portion of doubtful assets of over 3 years would be deferred by three years. As such the banks should build up adequate provisions over this period to facilitate smooth transition.

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Manav Sagar (Articled asssisstant) (26 Points)
Replied 29 October 2009

if the secured doubtful asset are for more than 3 years than what is the amount of provision to be made is it 100% or 50% & secondly is there any need to make provision for secured portion of doubtful asset secured by ECGC/DIGC cover