6/23/2018

Prudential Norms on Income

Recognition ,Asset Classification &
Provisioning of Advances
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Agenda
Discussion on Master Circular (MC) issued by RBI
on IRAC Norms covering
a) Income recognition
b) Asset Classification
c) Provisioning

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Introduction

In order to ensure consistency and transparency in the
published accounts of the banks - RBI has introduced the system
of NPA classification w.e.f 31/03/1993.

Master Circular (MC) issued by RBI every year, however last

MC issued on 1st July, 2015 is relevant.

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Primary responsibility of making proper NPA classifications &

provisioning is of the bank management & statutory auditors.

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Introduction

Primary business of banks - Acceptance for the purpose of
lending.

Acceptance:

Term deposits

Recurring deposits
Interest expenses

Savings deposit

Current deposits....
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Lending:

Term loans Interest Income

Cash credits....

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Advances

Non Performing Asset

Performing asset (PA)
(NPA)

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As asset including
leased asset becomes
Other than NPA non performing when it
ceases to generate
income for the bank.

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Non Performing Asset (NPA)

A NPA is a loan or an advance where:
Facility Event
1. Term Loan Interest and/or instalment remain over due for a period > 90 days
2. OD/CC The account remains out of order.
3. Bill Remain overdue for a period of more than 90 days
4. Short Principal or interest remain overdue for two crop seasons
duration crops
5. Long Principal or interest remain overdue for one crop season
duration crops
6. Securitisation The amount of liquidity facility remains o/s for more than 90 days
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7. Derivative Overdue receivable representing +ve mark to market value of
transaction derivative contract, remain unpaid for a period of 90 days from the
specified due date.
8. Credit cards If the minimum amount due as shown in the statement is not paid
within 90 days from the due date as given in the statement.
(para 4.2.21.ii)

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Non Performing Asset (NPA)

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

Out of order:
Following a/cs to be treated as out of order:
1. o/s bal remains continuously in excess of the sanctioned limit or DP
for 90 days. (OR)
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2. No credits continuously for 90 days as on the date of BS (OR)
3. Credits are not enough to cover the interest debited during the
same period.

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Non Performing Asset (NPA)

In case of interest payments an a/c become NPA if the interest due and charged
during any quarter is not serviced fully within 90 days from the end of the quarter.

Case study:
A term loan was granted on 01.01.2018 of Rs. 10 lakhs. Interest is
payable monthly and principal on quarterly basis. Interest charged
during first 3 months (Jan to March 18) is Rs. 30,000/- remain unpaid as
on 30.06.2018.

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What is the date of NPA?

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Non Performing Asset (NPA)

Accounts with temporary deficiencies:
Deficiency Date of NPA
1. Non DP computed from stock statements older than 3 months would be
submission of deemed as irregular.
stock
statements. NPA = Irregular > 90 days.

Effectively 3 months and 90 days.

2. Non renewal Limits to be regularised not later than 3 months form the due date.
of limits. / non
submission of NPA = Irregular > 90 days.
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statements Effectively 3 months and 90 days.

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Non Performing Asset (NPA)

Potential threats for recovery on a/c of:

Erosion in the value of security

Non availability of security

Existence of fraud

Straightaway classify such a/cs as NPA (doubtful / loss)

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Income Recognition

The policy followed by the bank on IRAC should be objective
& based on record of recovery.

Advances:

Performing assets - On Accrual basis.

Non performing assets - On cash basis (On actual receipt).

Exceptions:
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Interest on advances against TDR, NSCs, IVPs, KVPs, Life policies,
to be recognized on accrual basis if adequate margin is available.

Eg: Loan given Rs. 1 lakhs against deposit of Rs. 2 Lakhs. Here margin
is Rs. 1 lakhs (2 lakhs less 1 lakhs). Income can be recognised upto
margin of Rs. 1 lakhs on accrual basis.

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Reversal of Income Recognised

If any advance becomes NPA entire interest accrued and credited
to income A/c. in past periods should be reversed if the same is not
realised.
(This will apply to govt. guaranteed accounts also)

Case study:

An agricultural loan was granted during 2010 of Rs. 10 lakhs. The
borrower has not paid the interest amount since the inception of loan.
Bank has not classified the asset as NPA since the place was
12 considered as draught. Total income accrued till March 2018 is Rs. 5
lakhs (O/s bal 15 lakhs). Interest accrued for the FY 2017-18 and for the
FY 2016-17 is Rs. 1 lakhs each.

FY 2017-18 is not considered as draught and the asset is still classified
as PA. How much interest income to be reversed by the Bank?

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Reversal of Income Recognised

If any advance becomes NPA:
1. entire interest accrued and credited to income A/c in past
periods should be reversed if the same is not realised.
(This will apply to govt. guaranteed accounts also) and

2. Stop further application of interest.

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Appropriation of recoveries in NPAs

Interest realisied on NPAs may be taken to income a/c provided
credits in the accounts towards interest are not out of fresh or
additional credit facilities sanctioned to the borrower.

In the absence of a clear agreement between Bank and the borrower

for the purpose of recoveries in NPAs (ie towards interest or principal)
banks should adopt an accounting principle and exercise the right of
appropriation of recoveries in uniform manner.

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General industry practice:
1. Towards charges
2. Towards interest
3. Towards principal

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Fresh Identification of NPA’s – How ?

Check if all accounts of the borrower are tagged under a single
customer ID

Position of the branch as of the last quarter / month as available.

List of SMA/SWL accounts reported to higher authorities.

For crop loans to confirm if the area of the branch is covered under
any natural calamity.

Care / caution to be taken for ever greening in the accounts such
as.
15 •Cash deposit shown without actual cash receipt
•Cheque purchase shown at the year end but returned in the next
year.
•Transfer from sister concerns accounts.
•Recoveries from new limits sanctioned.

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Case Study
A term loan is granted & EMIs are payable at the start of every
month on 1st day of the month. What will be the date of
becoming NPA (sub-standard) in the following cases.

Term loan amount Rs 90 lacs & EMI due on 1st Oct,2017 is not
received till 31.3.18.

Term loan amount Rs 90 lacs & EMI due on 1st Nov,2017 is not
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received till 31.3.18.

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Case Study
A borrower has been sanctioned following limits :-
a) Term Loan Rs 1000 lacs
b) Working capital (CC) Rs 500 Lacs
c) Bill discounting under LC Rs 200 lacs

What will be the classification of all the above a/cs in the

following cases (assuming other accounts are being operated
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1) Term loan has been classified as sub-standard due to non-
payment of dues as on 31.3.18.
2) Bill discounting under LC has been classified as NPA as on
31.3.18

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Case Study

CC limit of Rs 200 lacs was sanctioned & disbursed on 10/4/17.

What will be the classification as on 31.3.18 in each of the
following cases where stock statements are not received
regularly?

a) Last stock statement on record is of Aug-17

b) Last stock statement on record is of Nov-17
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Case Study
Car loan of Rs 20 lacs was sanctioned & disbursed on 1.5.16.
However during the current year, the hypothecated car met
with an accident & salvage value is estimated to be around 5 %
of loan outstanding. Further, insurance claim is expected to be
rejected as insurance premium was not paid & policy stood
expired on date of accident. Further as on 31.3.18, 5 EMIs were
due.

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What is the date of NPA?

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