income recognition, asset classification, and provisioning s dwivedi

ACA-TM-37 (v2.2-20-Nov-10)

INCOME RECOGNITION, ASSET CLASSIFICATION, AND PROVISIONING

S Dwivedi

http://www.cab.org.in/default.aspx

ACA-TM-37 (v2.2-20-Nov-10)

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ALL BANKS IRRESPECTIVE OF SIZE OF BRANCH

“ONE SIZE FITS ALL”

PRINCIPLE

NORMS ARE WITH 90 DAYS DELINQUENCY


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IRAC NORMS & PROVISIONINGWHY?

In line with international best practices.As per Narsimham committee

recommendations.In a phased mannerGreater consistency and transparency in

published books of accounts of banks.To improve intrinsic health of banks


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DEFINATION OF NON PERFORMING ASSET [ NPA ] and

IMPORTANT TERMINOLOGIES

NPA :

An Asset becomes Non Performing when it ceases to generate income

OVERDUE :

Any amount due under any credit facility if not paid by the due date fixed by the bank becomes overdue

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 or if there are no credits for specified number of days or credits are not enough to cover the interest debited during the same period


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NPA : ADVANCESTerm Loans Interest and or installment of principal remain overdue for more

than 90 days

Overdraft / Cash Credit The account remains Out of Order for a period of more than 90 days

Bank Guarantee In case Bank Guarantee is invoked and the amount remains unpaid for 90 days

Letter of Credit In case Letter of Credit is devolved and the amount remains unpaid for more than 90 days

Bills The bill remains overdue for a period of more than 90 days

Agriculture Advance Short duration loans - Installment or interest remains overdue for two crop seasons

Long duration loans – Installment or interest remains overdue for one crop season

Gold Loans, Loans against Deposits, KVPs, NSCs, IVPs.

Interest and or installment of principal remain overdue for 90 days

Any Other Amount Any other amount to be received remains overdue for a period of more than 90 days


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Term Loan Account of XYZ

Date Particulars Debit Credit Balance

2010 Dec. 1 To Loan 5000.00 5000.00

Dec. 31 To Interest 50.00 5050.00

Dec. 31 By 1st Installment 500.00 4550.00

2010 Jan. 31 To Interest 46.00 4596.00

2010 Feb. 28 To Interest 46.00 4642.00

2010 Mar. 31 To Interest 46.00 4688.00

NPA : TERM LOAN ACCOUNTS

Account Status NPA

Interest or Instalment is overdue for 90 daysIF

In the above example Borrower has not paid the interest which was charged on Dec. 31 2010 amounting to Rs. 50.00 and the same was overdue for 90 days hence this account shall be categorised as NPA as on 31st March 2011.Thus all accounts disbursed after 1st Jan of the financial year can never be NPA.


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AGRICULTURAL ADVANCES

SHORT DURATION LONG DURATION

NPA IF

Installment or Interest remains overdue for

two crop seasons

NPA IF

Installment or Interest remains overdue for one crop seasons

Where natural calamity has impaired the repaying capacity and the crop loan is converted into Term Loan or Term Loan is rescheduled, Term Loan or fresh short term loan may be treated as current dues

and need not be classified as NPA.


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WHAT IS SHORT TERM CROP AND LONG DURATION CROP?

• “LONG DURATION CROP MEANS CROP WITH CROP SEASON LONGER THAN ONE YEAR AND CROPS WHICH ARE NOT LONG DURATION CROPS WOULD BE TREATED AS SHORT DURATION CROP”.


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AGRICULTURAL REVISED NORMS….

• REVISED NORMS ARE APPLICABLE TO DIRECT AGRICULTURAL ADVANCES AND NOT ALLIED AGRI. ACTIVITIES LIKE DAIRY, POULTRY, FISHERY, PIGGERY, ETC.


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AGRI ADVANCE- NPA STATUS

CROP LOAN GRANTED IN JUNE 2008REPAYMENT DUE DATE 31Mar 2009AMOUNT NOT PAID ON DUE DATE STATUS OF A/C ON 31 MAR. 09: STANDARDSTATUS OF A/C ON 31 MAR. 10: STANDARDSTATUS OF A/C ON 31 MAR .11 SUB-STND DATE OF NPA WILL BE 31 JAN 2011


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Illustration :NPA Agri.


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Illustration :NPA Agri…


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Illustration :NPA Agri..


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NPA : OVERDRAFT AND CASH CREDIT LIMITS

Account Status NPA

Overdrawn beyond sanctioned limitIF

LimitSanctioned

Balance between 01.01.09 to 31.03.09

Status

Rs. 30.00 lacs Rs. 31.00 lacsOut of Order and hence NPA on the 90th day I.e. 31.03.09 / Continuously overdrawn beyond sanctioned limit from 1.1.09 to 31.3.09 i.e. 90 days


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Account Status NPA

Overdrawn beyond Drawing PowerIF

Limit Rs. 30.00 lacs

Drawing Power

Balance between 01.01.09 to 31.03.09

Rs. 27.00 lacs

Rs. 28.00 lacs

Out of Order and hence NPA on the 90th day i.e. 31.03.09 / Continuously overdrawn beyond Drawing Power from 1.1.09 to 31.3.09 i.e. 90 days


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Account Status NPA

Insufficient Credits in to the AccountIF

Limit Rs. 30.00 lac Status/Explanation

Balance as on 31.12.09 Rs. 29.00 lac Well within the limit of Rs. 30.00 lacs

Interest debited for Dec. 09

Rs. 35000.00 During the entire stretch of 90 days between 01.01.10 and 31.03.09 credits are insufficient to cover the interest debited and hence it is NPA

Total credits between 01.01.10 and 31.03.10

Rs. 26000.00


ACA-TM-37 (v2.2-20-Nov-10)

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Account Status NPA

No Credits in to the AccountIF

Limit Rs. 30.00 lac Status/Explanation

Balance as on 31.12.09

Rs. 29.00 lac Well within the limit of Rs. 30.00 lacs

Interest debited for Dec. 09

Rs. 35000.00 During the entire stretch of 90 days between 01.01.10 and 31.03.10 there are no credits and hence it is NPA

Total credits between 01.01.10 and 31.03.10

Rs. NIL


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Account Status NPA

Non renewal of OD/CC account for 180 daysIF

Limit Date of Agreement

Date of Expiry OD should have been renewed by

at least

Rs. 30.00 lacs 01.10.08 30.09.09 31.03.10

OD facility was availed on 01.10.08 Secured by mortgage of Property worth Rs. 100 lacs.Limit was valid upto 30.09.09The operations were good with no irregularityBut the limit was not renewed

The account should be treated as NPA as the limit was not renewed within180 days


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Account Status NPA

Drawing power is fixed on the basis of old stock statements

IF

Stock statement submitted for

DP for subsequent month fixed on the

basis of stock statement of

Drawings allowed on the basis of stock statement of

Status / Explanation

March 2010 March 10 March 10 Standard Asset / within limit/DP

Not Submitted for April 10 March 10 March 10 Standard Asset / within limit/DP

Not Submitted for May 10 March 10 March 10 Standard Asset / within limit/DP

Not Submitted for June 10 March 10 March 10 Standard Asset / within limit/DP

Not Submitted for July 10 Sept. 10

March 10 March 10 Drawings allowed from 1st May on Stock statement of Mar. 10 would be treated as irregular w.e.f from 1st July. If such irregularity allowed for 90 days A/c. would become NPA w.e.f 30th Sept


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If BG/LC is devolved and Balance in OD along with balance of devolved LC is more than the

sanctioned limit of Rs. 30.00 lacs

Period OD Limit Sanctione

d

OD Balance

BG/LC Limit

Sanctioned

BG/LC devolved liability

Total Liability

Explanation

01.01.07 to 19.01.07

30.00 21.00 20.00 10.00 31.00 OD A/c. out of order

20.01.07 to 28.02.07

30.00 23.00 20.00 20.00 43.00 OD A/c. out of order

01.03.07 to 30.03.07

30.00 26.00 20.00 10.00 36.00 OD A/c. out of order

31.03.07 30.00 29.00 20.00 10.00 39.00 OD A/c. out of order


Account Status NPA OR STANDARD ?

NON PERFORMING ASSET


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CLASSIFICATION OF ASSET

STANDARD Asset which does not disclose any problems and which does not carry more than normal risk attached to business and continues to generate income.

SUB-STANDARD If an Asset remains NPA for a period of 12 months

RESCHEDULED/RENEGOTIATED A/cs.

Rescheduled/Renegotiated terms of Project it remains in this category with satisfactory performance

DOUBTFUL ASSET

If an Asset remains NPA for more than 12 months

LOSS ASSET Where loss has been identified by the bank or Internal / External Auditors or by the Cooperative Department or by RBI inspection but the amount has not been written off.

Category of Assets

Definitions


ACA-TM-37 (v2.2-20-Nov-10)

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EROSION IN THE VALUE OF SECURITY

An NPA need not go through the various stages of classification in cases of serious credit impairment.

If the realisable value of the security is <50% such NPAs may be classified as DOUBTFUL directly.

If the realisable value of security is <10%, then the account should be straight way classified as LOSS ASSET.


ACA-TM-37 (v2.2-20-Nov-10)

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REPAYMENT WITH MORATORIUM PERIOD

Where moratorium period is available for payment of interest, payment of intt. becomes ‘due’ only after the moratorium is over.

So non-payment of intt.during moratorium does not make account NPA.


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PROVISIONING NORMS - BANKS

STANDARD ASSETS

Type of Bank Personal Loans & Commercial

Real Estate Loans

Agri. Direct Loans & SME

Loans

All other Standard

Loans

All Banks 1.00 % 0.25 % 0.40 %


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SUB - STANDARD ASSETS

Entity Provision

All Banks 15 % (w.e.f. FYending March 2012) on Total Outstanding without any allowance for DICGC / ECGC Guarantee cover and Securities available


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DOUBTFUL ASSETSAll Entities

Period for which the advance has remained in Doubtful category

Secured Portion Unsecured Portion

Up to One Year 25 Per Cent (wef FY ending March 2012)

100 Per Cent

One to Three Years 40 Per Cent 100 Per Cent

More than 3 years

ii) Advances classified as Doubtful for more than Three years on or after April 1, 2006

100 Per Cent 100 Percent


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LOSS ASSETS

Entity Provision

All Banks 100 % on Total Outstanding


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Income Recognition

• Income Recognition Policy- Based on objective criteria and on the record of recovery- Income from NPAs is not recognized on accrual basis but only when actually received- Banks should not charge and take to Income account interest on any NPA


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Income Recognition • Income Recognition Policy

-Fees / Commissions earned due to renegotiations/rescheduling to be recognized on accrual basis - Interest on Govt. guaranteed advances not to be taken unless interest realized - Accrued interest on investments may be taken to P&L A/c till maturity. However, it is to be provided for fully, if interest is not realized on due date / date of maturity


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Income Recognition

• Reversal of Income - If any account becomes NPA, the entire interest accrued and credited to income account in the past periods should be reversed if the same is not realised. Applies to Government guaranteed accounts also - Fees, commission and similar income that have accrued should cease to accrue and past dues if uncollected to be reversed


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Income Recognition

• Appropriation of recovery in NPA- Interest realized on NPAs may be taken to income account provided credits are not out of fresh / additional credit facilities

- In the absence of a clear agreement banks to exercise right of appropriation of recoveries in a uniform and consistent manner


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Income Recognition

• Interest application

- Reversal of interest already charged but not collected by debiting Profit and Loss A/c and stop further application of interest

- Banks may continue to record accrued interest in a Memorandum Account


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income recognition, asset classification, and provisioning s dwivedi

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