RBI Master Circular- Income Recognition, Asset Classification, Provisioning and Other Related Matters - UCBs

RBI/2021-22/117
DOR.No.STR.REC.64/21.04.048/2021-22

November 1, 2021

The Chief Executive Officers
All Primary (Urban) Co-operative Banks

Madam / Dear Sir,

Master Circular- Income Recognition, Asset Classification, Provisioning and Other Related Matters - UCBs

Please refer to our Master Circular DCBR.BPD. (PCB) MC No.12/09.14.000/2015-16 dated July 1, 2015 on the captioned subject. The enclosed Master Circular consolidates and updates all the instructions / guidelines on the subject issued up to October 31, 2021 as listed in the Annex 9.

Yours faithfully

(Manoranjan Mishra)
Chief General Manager

Encl: As above

Master Circular
Income Recognition, Asset Classification, Provisioning and Other Related Matters

1. General

1.1 In order to reflect a bank's actual financial health in its balance sheet and as per the recommendations made by the Committee on Financial System (Chairman Shri M. Narasimham), the Reserve Bank has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks.

1.2 Broadly, the policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria, which would ensure a uniform and consistent application of the norms. The provisioning should generally be made on the basis of the classification of assets into different categories.

1.3 The requirements of the State Co-operative Societies Acts and / or rules made thereunder or other statutory enactments may continue to be followed, if they are more stringent than those prescribed hereby.

1.4 With the introduction of prudential norms, the Health Code based system for classification of advances has ceased to be a subject of supervisory interest. As such, all related reporting requirements, etc. also ceased to be a supervisory requirement, but could be continued in the banks entirely at their discretion and the management policy, if felt necessary.

2. Non-performing Assets (NPA)

2.1 Classification of Assets as Non-Performing

2.1.1 An asset becomes non-performing when it ceases to generate income for the bank.

2.1.2 With a view to moving towards international best practices and to ensure greater transparency, '90 days' overdue¹ norms for identification of NPAs have been made applicable from the year ended March 31, 2004. As such, with effect from March 31, 2004, a non-performing asset is 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', in respect 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) In the case of direct agricultural advances as listed in Annex 1, the overdue norm specified at para 2.1.3 would be applicable. In respect of agricultural loans, other than those specified in Annex 1, identification of NPAs would be done on the same basis as non-agricultural advances.

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

(vi) In addition, an account may also be classified as NPA in terms of certain specific provisions of this Master Circular, including inter alia paragraphs 2.2.7 and clarifications provided under the frequently asked questions (FAQs) in Annex-4.

2.1.3 Agricultural Advance

(i) With effect from September 30, 2004, the following norms are applicable to all direct agricultural advances (Annex 1):

a) A loan granted for short duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons.

b) A loan granted for long duration crops will be treated as NPA, if the installment of principal or interest thereon remains overdue for one crop season.

(ii) For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not "long duration" crops would be treated as "short duration" crops.

(iii) The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers' Committee in each state.

(iv) Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him. In respect of agricultural loans, other than those specified in the Annex 1 identification of NPAs would be done on the same basis as non-agricultural advances, which, at present, is the 90 days delinquency norm.

(v) Banks should ensure that while granting loans and advances, realistic repayment schedules are fixed on the basis of cash flows / fluidity with the borrowers.

2.1.4 Identification of Assets as NPAs should be done on an ongoing basis

(i) The system should ensure that identification of NPAs is done on an on-going basis and accounts are classified as NPA immediately, as soon as they turn into NPA as per the guidelines contained in this circular, without waiting till the end of quarter/financial year. Banks should also make provisions for NPAs as at the end of each calendar quarter i.e. as at the end of March / June / September / December, so that the income and expenditure account for the respective quarters as well as the P&L account and balance sheet for the year end reflects the provision made for NPAs.

(ii) UCBs having total assets of ₹2000 crore or above as on March 31, 2020 were required to implement system-based asset classification³ with effect from June 30, 2021.

(iii) UCBs having total assets of ₹1000 crore or above but less than ₹2000 crore as on March 31, 2020 and having self-assessed themselves as being under Level III or Level IV in terms of the circular DoS.CO/CSITE/BC.4083/31.01.052/2019-20 dated December 31, 2019 on Comprehensive Cyber Security Framework for UCBs were required to implement system-based asset classification with effect from September 30, 2021.

(iv) UCBs which meet the above criteria as at the end of the financial year 2020-2021 or subsequent financial years shall implement system-based asset classification within a period of six months from the end of the financial year concerned. For smooth implementation of the system, such UCBs may conduct pilot/parallel run and evaluate the results for accuracy/integrity of the asset classification in compliance with the applicable RBI instructions so as to ensure that they are ready for implementation of the system-based asset classification from the appointed date.

(v) UCBs not meeting the above criteria are also encouraged to voluntarily implement the system-based asset classification in their own interest.

2.1.5 Charging of Interest at monthly rests

(i) Banks should charge interest at monthly rests in the context of adoption of 90 days norm for recognition of loan impairment w.e.f. from the year ended March 31, 2004 and consequential need for close monitoring of borrowers' accounts.

(ii) The charging / compounding of interest on agricultural advances would be linked to crop seasons and the instructions regarding charging of interest on monthly rests shall not be applicable to agricultural advances.

(iii) Banks should take into consideration due date/s fixed on the basis of fluidity with borrowers and harvesting / marketing season while charging interest and compound the same if the loan / installment becomes overdue in respect of short duration crops and allied agricultural activities.

2.1.6 Reporting of Large Exposures to Central Repository of Information on Large Credits (CRILC) - UCBs

(i) Primary (Urban) Co-operative Banks (UCBs) having total assets of ₹500 crore and shall report credit information, including classification of an account as Special Mention Account (SMA), on all borrowers having aggregate exposures of ₹5 crore and above with them to Central Repository of Information on Large Credits (CRILC) maintained by the Reserve Bank. Aggregate exposure shall include all fund-based and non-fund based exposure, including investment exposure on the borrower.

(ii) Special Mention Account (SMA)

Special Mention Account (SMA) is an account which is exhibiting signs of incipient stress resulting in the borrower defaulting in timely servicing of her debt obligations, though the account has not yet been classified as NPA. As early recognition of such accounts enables banks to initiate timely remedial actions to prevent their potential slippages into NPAs, UCBs having total assets of ₹500 crore and above shall classify loans/advances accounts as SMA, as under:

In case of revolving credit facilities like cash credit, the SMA sub-categories will be as follows:

(iii) UCBs having total assets of ₹500 crore and above are required to submit CRILC Report on quarterly basis with effect from December 31, 2019. Detailed operating instructions have been issued vide circular DoS.OSMOS.No.4633/33.05.018/2019-20 dated January 16, 2020 on ‘Reporting of Large Exposures to Central Repository of Information on Large Credits (CRILC) – UCBs’ by the Department of Supervision, Reserve Bank of India.

(iv) UCBs should take utmost care about data accuracy and integrity while submitting the information /data on large credit to RBI, failing which penal action as per the provisions of the Banking Regulation Act, 1949 may be taken.

2.2 Treatment of Accounts as NPAs

2.2.1 Record of Recovery

(i) The treatment of an asset as NPA should be based on the record of recovery. Banks should not treat an advance as NPA merely due to existence of some deficiencies which are temporary in nature such as non-availability of adequate drawing power, balance outstanding exceeding the limit, non-submission of stock statements and the non-renewal of the limits on the due date, etc. Where there is a threat of loss, or the recoverability of the advances is in doubt, the asset should be treated as NPA.

(ii) A credit facility should be treated as NPA as per norms given in paragraph 2.1 above. However, where the accounts of the borrowers have been regularised by repayment of entire overdue amounts through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the accounts need not be treated as NPAs. In such cases, it should, however, be ensured that the accounts remain in order subsequently and a solitary credit entry made in an account on or before the balance sheet date which extinguishes the overdue amount of interest or installment of principal is not reckoned as the sole criteria for treatment of the account as a standard asset.

2.2.2 Treatment of NPAs - Borrower-wise and not Facility-wise

(i) In respect of a borrower having more than one facility with a bank, all the facilities granted by the bank will have to be treated as NPA and not the particular facility or part thereof which has become irregular/NPA.

(ii) However, in respect of consortium advances or financing under multiple banking arrangements, each bank may classify the borrowal accounts according to its own record of recovery and other aspects having a bearing on the recoverability of the advances. Each bank shall follow the principle at (i) above for NPA classification of a borrower.

2.2.3 Agricultural Advances - Default in repayment due to Natural Calamities

(i) Where natural calamities impair the repaying capacity of agricultural borrowers, as a relief measure, banks may decide on their own to :

(a) convert the short-term production loan into a term loan or re-schedule the repayment period, and

(b) sanction fresh short-term loans

(ii) In such cases of conversion or re-schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as non-performing asset (NPA). The asset classification of these loans would, therefore, be governed by the revised terms and conditions and these would be treated as NPA under the extant norms applicable for classifying agricultural advances as NPAs.

2.2.4 Housing Loan to Staff

In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first month onwards. Such loans / advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates.

2.2.5 Credit facilities Guaranteed by Central / State Government

(i) The credit facilities backed by guarantee of the Central Government though overdue should not be treated as NPA.

(ii) This exemption from classification of government guaranteed advances as NPA is not for the purpose of recognition of income.

(iii) From the year ended March 31, 2006, State Government guaranteed advance and investment in State Government guaranteed securities 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, irrespective of the fact whether the guarantee have been invoked or not.

2.2.6 Project Financing

'Project Loan' would mean any term loan which has been extended for the purpose of setting up of an economic venture. Banks must fix a Date of Commencement of Commercial Operations (DCCO) for all project loans at the time of sanction of the loan / financial closure (in the case of multiple banking or consortium arrangements).

For the purpose of Income Recognition and Asset Classification norms, all project loans may be divided into the following two categories; (i) Project Loans for infrastructure sector (ii) Project Loans for non-infrastructure sector. Detailed guidelines are given in Annex 8.

In the case of bank finance given for industrial projects where moratorium is available for payment of interest, payment of interest becomes due only after the moratorium or gestation period is over. Therefore, such amounts of interest do not become overdue and hence NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected.

2.2.7 Prudential Guidelines on Restructuring of Advances

The prudential guidelines on restructuring of advances are detailed as under:

(a) Asset Classification Norms

2.2.7.1 Restructuring of advances could take place in the following stages:

1. before commencement of commercial production / operation;

2. after commencement of commercial production / operation but before the asset has been classified as 'sub-standard';

3. after commencement of commercial production / operation and the asset has been classified as 'sub-standard' or 'doubtful'.

2.2.7.2 The accounts classified as 'standard assets' should be immediately re-classified as 'sub-standard assets' upon restructuring.

2.2.7.3 The non performing assets, upon restructuring, would slip into further lower asset classification category as per extant asset classification norms with reference to the pre-restructuring repayment schedule.

2.2.7.4 All restructured accounts which have been classified as non-performing assets upon restructuring, would be eligible for upgradation to the 'standard' category after observation of 'satisfactory performance' during the 'specified period' (Annex 5).

2.2.7.5 In case, however, satisfactory performance during the specified period is not evidenced, the asset classification of the restructured account would be governed as per the applicable prudential norms with reference to the pre-restructuring payment schedule.

2.2.7.6 Any additional finance may be treated as 'standard asset', up to a period of one year after the first interest / principal payment, whichever is earlier, falls due under the approved restructuring package. However, in the case of accounts where the pre-restructuring facilities were classified as 'sub-standard' and 'doubtful', interest income on the additional finance should be recognised only on cash basis. If the restructured asset does not qualify for upgradation at the end of the above specified one year period, the additional finance shall be placed in the same asset classification category as the restructured debt.

2.2.7.7 In respect of loan accounts which enjoy special regulatory treatment as per para 2.2.7.25, upon restructuring, such non-performing assets would continue to have the same asset classification as prior to restructuring. In case satisfactory performance of the account is not evidenced during the 'specified period', it would slip into further lower asset classification categories as per extant asset classification norms with reference to the pre-restructuring repayment schedule.

2.2.7.8 In case a restructured asset, which is a standard asset on restructuring, is subjected to restructuring on a subsequent occasion, it should be classified as substandard. If the restructured asset is a sub-standard or a doubtful asset and is subjected to restructuring, on a subsequent occasion, its asset classification will be reckoned from the date when it became NPA on the first occasion. However, such advances restructured on second or more occasion may be allowed to be upgraded to standard category after one year from the date of first payment of interest or repayment of principal whichever falls due earlier in terms of the current restructuring package subject to satisfactory performance.

(b) Income Recognition Norms

2.2.7.9 Subject to provisions of paragraphs 2.2.7.6 and 2.2.7.22 interest income in respect of restructured accounts classified as 'standard assets' will be recognized on accrual basis and that in respect of the account classified as 'non performing assets' will be recognized on cash basis.

(c) Provisioning Norms

2.2.7.10 Normal Provisions

Banks will hold provision against the restructured advances on the basis of classification of assets into prescribed categories as detailed in paragraph 3 below.

2.2.7.11 Provision for Diminution in the Fair Value of restructured Advances

The erosion in the fair value of the advance should be computed as the difference between the fair value of the loan before and after restructuring. Fair value of the loan before restructuring will be computed as the present value of cash flows representing the interest at the existing rate charged on the advance before restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring". Fair value of the loan after restructuring will be computed as the present value of cash flows representing the interest at the rate charged on the advance on restructuring and the principal, discounted at a rate equal to the bank's BPLR as on the date of restructuring plus the appropriate term premium and credit risk premium for the borrower category on the date of restructuring".

2.2.7.12 It may please be noted that the above formula moderates the swing in the diminution of present value of loans with the interest rate cycle and will have to be followed consistently in future.

2.2.7.13 Further, it is reiterated that the provisions required as above arise due to the action of the banks resulting in change in contractual terms of the loan upon restructuring which are in the nature of financial concessions. These provisions are distinct from the provisions which are linked to the asset classification of the account classified as NPA and reflect the impairment due to deterioration in the credit quality of the loan. Thus, the two types of the provisions are not substitute for each other.

2.2.7.14 It is also re-emphasised that the guidelines on restructuring of advances by RBI are aimed at providing an opportunity to banks and borrowers to preserve the economic value of the units and should not be looked at as a means to evergreen the advances.

2.2.7.15 In their published annual Balance Sheets, banks shall make disclosures as per Annex-6

2.2.7.16 In the case of working capital facilities, the diminution in the fair value of the cash credit / overdraft component may be computed as indicated in para 2.2.7.11 above, reckoning the higher of the outstanding amount or the limit sanctioned as the principal amount and taking the tenor of the advance as one year. The term premium in the discount factor would be as applicable for one year. The fair value of the term loan components (Working Capital Term Loan and Funded Interest Term Loan) would be computed as per actual cash flows and taking the term premium in the discount factor as applicable for the maturity of the respective term loan components.

2.2.7.17 In the event any security is taken in lieu of the diminution in the fair value of the advance, it should be valued at Re.1 This will ensure that the effect of charging off the economic sacrifice to the Profit & Loss account is not negated.

2.2.7.18 The diminution in the fair value may be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account, so as to capture the changes in the fair value on account of changes in BPLR, term premium and the credit category of the borrower. Consequently, banks may provide for the shortfall in provision or reverse the amount of excess provision held in the distinct account.

2.2.7.19 If due to lack of expertise / appropriate infrastructure, a bank finds it difficult to ensure computation of diminution in the fair value of advances extended by small branches, as an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank(s) are less than rupees one crore.

2.2.7.20 The total provisions required against an account (normal provisions plus provisions in lieu of diminution in the fair value of the advance) are capped at 100% of the outstanding debt amount.

(d) Prudential Norms for Conversion of Unpaid Interest into 'Funded Interest Term Loan' (FITL)

2.2.7.21 Asset Classification Norms

The FITL created by conversion of unpaid interest will be classified in the same asset classification category in which the restructured advance has been classified. Further movement in the asset classification of FITL would also be determined based on the subsequent asset classification of the restructured advance.

2.2.7.22 Income Recognition Norms

(i) The income, if any, generated may be recognised on accrual basis, if FITL is classified as 'standard', and on cash basis in the cases where the same has been classified as a non-performing asset.

(ii) The unrealised income represented by FITL should have a corresponding credit in an account styled as "Sundry Liabilities Account (Interest Capitalization)".

(iii) Only on repayment in case of FITL, the amount received will be recognized in the P&L Account, while simultaneously reducing the balance in the "Sundry Liabilities Account (Interest Capitalisation)".

(e) Special Regulatory Treatment for Asset Classification

2.2.7.23 The special regulatory treatment for asset classification, in modification to the provisions in this regard stipulated in para 2.2.7.1 to 2.2.7.8, will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated in para 2.2.7.28 below. Such treatment is not extended to the following categories of advances:

(i) Consumer and personal advances including advances to individuals against the securities of shares / bonds / debentures, etc.

(ii) Advances to traders

2.2.7.24 The asset classification of the above two categories of accounts as well as that of other accounts which do not comply with the conditions enumerated in para 2.2.7.28, will be governed by the prudential norms in this regard described in para 2.2.7.1 to 2.2.7.8 above.

(f) Elements of Special Regulatory Framework

2.2.7.25 The special regulatory treatment has the following two components:

(i) Incentive for quick implementation of the restructuring package.

(ii) Retention of the asset classification of the restructured account in the pre restructuring asset classification category

2.2.7.26 Incentive for Quick Implementation of the Restructuring Package

During the pendency of the application for restructuring of the advance with the bank, the usual asset classification norms would continue to apply. The process of reclassification of an asset should not stop merely because the application is under consideration. However, as an incentive for quick implementation of the package, if the approved package is implemented by the bank within 90 days from the date of receipt of application by the bank, the asset classification status may be restored to the position which existed when the restructuring application was received by the bank.

2.2.7.27 Asset Classification Benefits

Subject to the compliance with the undernoted conditions in addition to the adherence to the prudential framework laid down in para 2.2.7.1 to 2.2.7.8:

(i) In modification to para 2.2.7.2, an existing 'standard asset' will not be downgraded to the sub-standard category upon restructuring.

(ii) In modification to para 2.2.7.3, during the specified period, the asset classification of the sub-standard / doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period.

2.2.7.28 However, these benefits will be available subject to compliance with the following conditions:

i) The dues to the bank are 'fully secured' as defined in Annex 5. The condition of being fully secured by tangible security will not be applicable in the following cases :

(a) SSI borrowers, where the outstanding is up to ₹25 lakh.

(b) infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.

(c) WCTL created by conversion of the irregular portion of principal dues over the drawing power, subject to the condition that provisions are made against the unsecured portion of the WCTL, as under :

• Standard Assets : 20%

• Substandard Assets : 20% during the first year and to be increased by 20% every year thereafter until the specified period (one year after the first payment is due under the terms of restructuring)

• If the account is not eligible for upgradation after the specified period, the unsecured portion will attract provision of 100%.

ii) The unit becomes viable in 10 years, if it is engaged in infrastructure activities, and in 7 years in the case of other units.

iii) The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. The Board of Directors of the banks should prescribe the maximum period not exceeding 15 years for restructured advances keeping in view the safety and soundness of advances.

iv) Promoters' sacrifice and additional funds brought by them should be a minimum of 15% of banks' sacrifice.

v) Personal guarantee is offered by the promoter except when the unit is affected by external factors pertaining to the economy and industry.

vi) The restructuring under consideration is not a 'repeated restructuring' as defined in para (iv) of Annex 5.

(g) Disclosures

2.2.7.29 Banks should disclose in their published annual Balance Sheets, under 'Notes on Accounts', information relating to number and amount of advances restructured and the amount of diminution in the fair value of the restructured advances in Annex 6.

(h) Illustrations

2.2.7.30 A few illustrations on the asset classification of restructured accounts are given in Annex 7.

2.2.7.31 Resolution of Covid-19 related stress implemented under the following circulars shall be subject to the specific requirements, including the prudential requirements, specified therein:

Please refer to the attached file for details.