Income Recognition, Asset Classification and

Provisioning Norms
Policy

Income Recognition to be objective
Be based on recovery
Classification of assets to be based on objective criteria
Provisioning to be made on the basis of asset category
Security/Net worth are no considerations for
classification of assets
Health Code System ceased to be of supervisory interest
and no reporting is required.


NPA
An asset becomes Non Performing when it ceases to generate
income.
NPA was initially based on Past due concept meaning instalment
and or interest has not been repaid for 30 days beyond due date, for
specific period of time. The concept has been dispensed w.e.f.
March 31, 2001.
w.e.f Specific period
31.03.1993 4 quarters
31.03.1994 3 quarters
31.03.1995 2 quarters
31.03.2004 90 days (Exemption: Gold
/small loans upto Rs.1 lakh)

NPA contd.
Interest and or instalment is overdue for 90/180 days
An account is out of order for 90/180 days in OD/CC
Bills (Purchased/Discounted) Overdue for 90/180 days
Interest / instalment is overdue for two Harvest seasons, not
exceeding two half years in case of Agricultural Loans
Any amount overdue for 90/180 days
Overdue- Any amount due to the bank under any credit facility but
has not been repaid on due date
Out of Order means outstanding balance is more than sanctioned
limit / drawing power, or there are no credits for 90/180 days or
credits are not sufficient enough to cover the interest.
Crop Loans- Overdue for two crop seasons in short duration crops
and one crop season in case of long duration crop.

Exemptions
As advised vide Circular UBD(PCB)Cir
No.1/09.140.00/05-06 dated July 4,2005 the following
categories of UCBs to classify Loan Accounts as NPAs
based on 180 days norms instead of the extant 90 day
norm.
(i) Unit banks i.e banks having a single branch/HO with
deposits upto Rs.100 crore
(ii) Banks having multiple branches within a single district
with deposits upto Rs.100 crore
The deposit base of Rs.100 crore will be determined on
the basis of average of the fortnightly Net Demand and
Time Liabilities in the financial year concerned.
This norm is for three years commencing March 31,2005
to March 31, 2007.Not to be applied for the loans
classified as on March 31, 2004.
Operational Aspects
Identification of NPAs to be done on an on-going basis.
Provisions for NPAs to be made on quarterly basis.
NPAs are not be evergreened to upgrade the classification.
NPAs to be classified borrower-wise and not facility wise.
Exceptions are multiple/consortium banking arrangements.
Temporary abberations do not qualify for NPA status.
Interest to be charged at Monthly rests (April 1, 2003).
Effective interest rates not to go up because of monthly interest
debits.
Monthly interest application is not applicable to agricultural
advances. Compounding of interest to be synchronised with harvest
/ marketing seasons in case of crop loans / allied agricultural
activities.
NPA reporting in prescribed pro-forma to RO by May 30 every year.
NPAs - Special circumstances
Calamity effected borrowers of agricultural loans need concessional
treatment.
Banks to consider re-schedulement of loans.
Banks may sanction fresh loans
Both the loans be treated as current dues and not be classified as
NPAs.
Staff housing loans Interest and instalment shall be repaid
separately.
Central Government Guaranteed Loans- Not to be treated as NPAs
but the income should not be recognised.
State Government Guaranteed Loans- If the guarantee is invoked,
NPA norms to apply.
NPAs - Special circumstances
Project Loans- Interest falls due after moratorium or gestation.

Upgradation of NPAs- only after one year of satisfactory
performance.

Re-structioning/Re-scheduling norms- applicable only for
standard/sub-standard assets. Not applicable to Trader related
facilities.

Term Deposit/NSCs/KVPs/Life Policies loans not to be treated as
NPAs.

Gold loans for agricultural purposes- Interest rates to be charged at
yearly intervals and repayment to coincide with harvesting of crops.
NPAs v/s Repayment schedule
Unscientific repayment schedule leads to higher incidence of NPAs.
Therefore, the repayment schedule should :

Be realisitic

Have adequate gestation period

Synchronise with harvest/marketing/income generation of borrowers

Have adequate length
Investment income




NPA norms are also applicable to investments (Non-SLR).

Income not to be recognised, if it is in arrears for 90 days.
Classification

Standard Assets


Sub-standard Assets


Doubtful Assets


Loss Assets

Standard Assets



It is an asset with normal business risks. The borrower has been
repaying the interest/instalment on or before due dates. Accounts
are in order.
Sub-standard Asset




A facility had become NPA and had been so for 18
months(31/3/2001) and for 12 months and 18 months (31.3.2005)
for exempted class of UCBs.
Doubtful asset



An asset remained as NPA for more than 12 months and 18 months
in case of exempted class of UCBs.
Doubtful asset are further graded into three categories
Doubtful- I- upto one year
Doubtful II- one to three years
Doubtful III- above three years
Tangibility of the security is an important consideration to retain an
asset in doubtful category rather than the tenure of NPA.
All doubtful assets with the underlying securities having less than
50% of original value need to be considered for classification as
Loss assets.
Loss Assets



It is an asset which has no salvage value, recoveries are not
possible, the value of the security has been eroded.

All instances of frauds need to be classified as Loss assets.

An asset need not wait or graduate from sub-standard through
doubtful category to reach Loss assets. All NPAs which require full
provisioning need to be classified as Loss assets
Identification of NPAs


Banks to have appropriate internal systems.
Banks not to postpone the identification.
To have proper validation systems.
All instances of doubts need to get clarified within one month
through internal channels.
Banks depending on the size need to classify high value accounts
for the expeditious identification of NPAs.
All instances of deviations attract deterrent action by RBI
Income recognition
Be based on recovery.
Interest not to be charged to NPAs and taken to income account.
Interest on loans against NSC/KVP/Life policies may be booked on
accrual basis provided there is adequate margin.
Interest not to be booked in Government Guaranteed advances on
accrual basis.
Income on UTI units /equity of AIFIs to be booked on cash basis.
Income from bonds/securities of Government/PSUs/AIFIs may be
booked on accrual basis provided there are no arrears.
Income not to be booked if it is by sanctioning other loans.
Banks to reverse interest if not received
NPAs application of interest



Not to debit interest in NPA accounts to book income
Interest debited in NPA account should be shown separately.
Interest accrued to be shown as
Interest Receivable account on the asset side
Overdue interest Reserve account on the liability side.
OIR is not a reserve

Provisioning Norms
Loss assets- need to be written off in the ordinary course. If not
possible, 100% provisioning need to be made.
Doubtful assets-
D1- 20% of security + 100% of unsecured portion
D2- 30% of security + 100% of unsecured portion
D3- 50% of security + 100% of unsecured portion
For Non-exempted UCBs
D3- 60% w.e.f 31/3/2005
D3-75% w.e.f.31/3/2006
D3-100% w.e.f 31/3/2007
Sub-standard Assets
10% of outstanding amount
No allowance for DICGC or ECGC cover
Provisioning Norms. contd

Standard assets-
0.25% of outstanding amount for exempted category
0.40% for banks (unit banks or banks with branches in one district
with deposits more than Rs.100 crore and banks with branches in
other districts.
To be maintained as contingent provisions against standard assets
To be segregated from BDDR.
Eligible for Tier II capital upto 1.25% of risk weighted assets.

Provisioning Norms. Contd.
State Government Guaranteed Advances attract normal provisioning
norms w.e.f. 1/4/2000 to be phased upto 31/3/2003 with a minimum
provisioning of 25% each year.
Fixed deposits/NSC/KVP/Life Policies loans do not require
provisioning.
Loans secured by gold/government securities /other securities
attract provisioning norms.
Loans under the cover of DICGC/ECGC need to be provided for
balances in excess of the amount of the guarantee.
Tangibility of security



Security value of less than 10% of the outstanding amount need to
be ignored.
Devolved LC / guarantee need to be provided for.
Current assets to be valued by the statutory audit.
Stock audit need to be done annually.
Immovable property to be valued once in three years.