NON PERFORMING ASSETS

The prudent guidelines were first issued by RBI in the year 1991 implemented wef 01.04.1992 on recommendations of Narasimham committee covering, income recognition, asset classification and provisioning. Prudential norms prescribed by RBI include norms relating to Accounting, Exposure, and Capital Adequacy. Prudential accounting norms are income recognition, asset classification and provisioning.

Term Loan	If Interest and/ or instalment of principal remain overdue for aperiod of more than 90 days
CC/ Credit/overdraft	if the account remains 'out of order or the limit is not renewed/reviewed within180 days from the due date of renewal. Out of order means an account where (i) the balance is continuously more than the sanctioned limit or drawing power OR (ii) where as on the date of Balance Sheet, there is no credit in the account continuously for 90 days or credit is less than interest debited OR (iii) where stock statement not received for 3 months or more. if the bill remains overdue for a period of more than 90 days from due date .
Bills
Agricultural accounts	(I) if loan has been granted for short duration crop: interest and/or instalment of principal remains overdue for two crop seasons beyond the due date. (ii) if loan has been granted for long duration crop: interest and/or instalment of principal remains overdue for one crop season beyond due date. 1.  Decision about crop duration to be taken by SLBC.
Loan against FD, NSC, KVP, LIP	Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies not treated as NPAs provided sufficient margin is available. Advances against gold
	ornaments, govt securities and all other securities are not covered by this exemption
Loan guaranteed by Government	Loan guaranteed by Central Govt not treated as NPA for asset classification and provisioning till the Government repudiates its guarantee when invoked. Treated as NPA for income recognition. Advances guaranteed by the State Government classified as NPA as in other
Consortium advances	cases classification of accounts under consortium should be based on the record Asset of recovery of the individual member banks.

·        DISTRESSED ASSETS:

Ø     Identify incipient stress by creating a sub-category viz., Special mention accounts (SMA) before a loan Account turns into an NPA.

Ø     Early formation of lender’s committee with timeline to agree a plan of resolution.

Ø     Incentives for lenders to agree collectively and quickly to plan.

Ø     Improvement in current restructuring process.

Ø     More expensive future borrowing for borrowers who do not co-operate with lenders.

Ø     More liberal regulatory treatment of asset sales.

SPECIAL MENTION ACCOUNTS:

SMA SUB CATEGORY	BASIS FOR CLASSIFICATION
SMA- 0	Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress.
SMA- 1	Principal or interest payment overdue between 31 – 60 days.
SMA- 2	Principal or interest payment overdue between 61 – 90 days

SMA-0: IDENTIFIED AREAS

·                  Delay of 90 days or more in

·                                    Submission of stock statement/ other statements such as QOS, HOS and ABS.

·                                    Credit monitoring or financial statements or

·                                    Non renewal of facilities based on audited financials.

·                  Actual sales/operating profits falling short of projections accepted by 40% or more.

·                  A single event of non co-operation /prevention from conduct of stock audits.

·                  Reduction of Drawing Power (DP) by 20% or more after a stock audit.

·                  Evidence of diversion of funds for unapproved purpose.

·                  Drop in internal risk rating by 2 or more notches in a single review.

·                  Return of 3 or more cheques (or electronic debit instructions ) issued by borrowers in 30 days, on grounds of non availability of balance / DP.

·                  Return of 3 or more bills/cheques discounted or sent under collection.

·                  Devolvement of Deferred Payment Guarantee (DPG) installments or LCs or invocation of BGs and its non payment within 30 days.

·                  Third request for extension of time either for creation or perfection of securities or for compliance with any other terms and conditions of sanction.

·                  Increase in frequency of overdrafts in current accounts.

·                  The borrower reporting stress in the business and financials.

Promoter(s) pledging/ selling their shares in the borrower Company due to financial stress.

ASSET CLASSIFICATION

1.              Asset Classification to be borrower-wise and not facility-wise

2.              Assets classified into Standard, Sub standard, Doubtful, Loss. Except standard all others are NPAs.

3.              When an account becomes NPA it is called Sub standard asset.

4.              An account remains sub standard up to 12 months from the date of becoming NPA

5.                      Doubtful Assets : An asset is to be classified as doubtful, if it has remained NPA or sub standard for a period exceeding 12 months.

6.              Loss Assets : A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

7.              When an account is classified as Doubtful or Loss without waiting for 12 months: If in an account which was secured in the beginning, the realizable value of tangible security falls below 10% of the outstanding, it should be.classified loss asset without waiting for 12 months

8.              If the realizable value of security is 10% or above but below 50% of the outstanding, it should be classified as doubtful irrespective of the period for which it has remained, NPA.

PROVISIONING NORMS

1. Provisioning is made on all types of assets i.e. Standard, Sub standard, Doubtful and loss assets. 2, Standard Assets :

a.            Direct advance to agriculture or Micro and Small Enterprise (Not medium): 0.25% of outstanding;

Commercial Real Estate: 1% of outstanding and CRE – Housing – 0.75%

b.            Housing Loans with teaser interest rates: 2% of outstanding; All others: 0.4% of outstandinj.

c.             The provisions on Standard Assets is shown as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions Others' in Schedule 5 of the balance sheet.

3. Sub Standard Assets:

a.            Secured sub standard: 15% of outstanding balance without considering securities available.

b.            Unsecured sub standard: if the loan was unsecured from the beginning: 25% of outstanding balance.

c.             If unsecured sub standard for infrastructure: 20% of outstanding balance.

d.            Unsecured exposure means exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank's inspecting officers, is not more than 10 percent, ab-initio, of the outstanding exposure.

4. Doubtful Assets:

1.              Unsecured portion:100 %

2.              Secured ortion: 20% to 100% depending on the period for which account is doubtful

Age of Doubtful Asset	Provision as % of secured portion
_ Doubtful up to 1 year D1	25% of RVS (Realisable value of security)

Doubtful for more than 1 year to 3 years; D2	40% of RVS
Doubtful for more than 3 years; D3	100% of RVS

5.    Loss Assets: 100% of the outstanding amount.

6.    If loan is guaranteed by ECGC, CGFT or CGFLHS, provision not on guaranteed portion

7.    Provision on advance against FD, NSC, LIP, KVP as per their asset classification.

8.    Overall provisions: Provisioning coverage ratio, including floating provisions, should not be less than 70 per cent. Banks should achieve this norm not later than end-September 2010.

9.    Provisioning coverage ratio is the ratio of provisioning to gross NPAs.

10. Provision on Standard account to be kept as part of Other Liabilities in Schedule-5 of bank's balance sheet

11. Provision on Standard accounts to be done on Global balance and for NPA accounts on Gross Balance

12. For Doubtful accounts, provision to be done separately for secured portion and unsecured portion of total balance in the account.

13.   In case of standard and sub standard assets, provision is on outstanding balance without bifurcating the balance into secured or unsecured.

14.   Floating provisions can be deducted from Gross NPAs or treated as part of Tier Il capital but not both

PROVISIONS PERCENTAGE

Standard - General accounts – 0.40 % Direct Agriculture & SME – 0.25 %  Commercial Real Estate – 1.00% Commercial Real Estate – Residential                                            Housing-0.75% Teaser Home Loans (provision will be 0.4% after one year of increase in interest rate) 2.00% New restructured a/c w.e.f  01.06.2013 : 5% Individual home loans upto 75 Lac-0.25%
Sub-standard Secured Sub-standard Unsecured Sub-standard unsecured (infrastructure accounts)	15% 25% 20%
Doubtful - up to 12 months Doubtful - more than 12 months but up to 3 years Doubtful - more than 3 years (secured/unsecured):	25% 40% 100%
Loss account	100%
Provisioning coverage ratio is to be calculated w.r.t. gross NPAs as on Sept 2010 (ratio of provisions / gross NPAs). Excess amount (over and above account-wise provision) to be kept in Cyclical Provision Buffer Account -70%	70%

Important issues relating to provisions : Provision on Standard account to be kept as part of other Liabilities in Schedule-5 of bank's balance sheet (it will be part of tier 2 capital fund for CAR purpose) Provision on Standard accounts to be done on Global Balance and for NPA accounts on Gross Balance For Doubtful accounts provision to be done Separately for secured portion and unsecured portion of total balance in the account.For sub-standard accounts, provision to be done by treating the account secured sub-standard or unsecured sub-standard without bifurcating the balance into secured or unsecured.

Sub-standard unsecured account means an account where at the time of sanction no security obtained or security value was 10% or less.

Gross NPAs: It is the principal dues of NPAs plus Funded Interest Term Loan where the corresponding contra credit is parked in sundry account (Interest Capitalization – Restructured

Accounts), in respect of NPAs

NET NPAs: Net NPAs is the amount of Gross NPAs minus

Provisions held in the case of NPA Accounts as per asset classification (including additional provisions for NPAs at higher than prescribed rates)

·       DICGC/ ECGC claims received and held pending adjustment

·       Part payment received and kept in Suspense A/c or any other similar accounts

·       Balance in Sundry Accounts (Interest Capitalization – Restructured Accounts), in respect of NPAs

• Floating provisions : Provisions in lieu of diminution in the fair value of restructured accounts classified as NPAs

·       Provisions in lieu of diminution in the fair value of restructured accounts classified as standard assets

PRUDENTIAL NORMS FOR AGRICULTURAL  ADVANCES

With effect from September 30, 2004 the following revised norms will be applicable to all direct agricultural advances. as per RBI circular dated June 24, 2004:

·                 Loan for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons.

·     A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season ( "long duration" crops would be crops with crop season longer than one year and crops, which are not "tong duration" crops, would be treated as "short duration" crops).

Agricultural term loans : 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.

Farm loans where recovery is not based on crop production : In respect of agricultural loans, other than those specified and term loans given to non-agriculturists, identification of NPAs would be done on the same basis as non agricultural advances which, at present, is the 90 days delinquency norm.

DICGCIECGC cover & Sub-standard

A general provision of 10% of total outstanding and while calculating provisions, DICGC/ECGC cover is not to be deducted from the outstanding balance.

Loan against Liquidity Securities

Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and LIC policies are exempted from provision requirements, provided outstanding is covered by value of security.

Appropriation of recovered amount

From the year 1996-97 (as per RBI clarffication issued during Dec 1996), recovery received in NPAs (other than suit filed and decreed accounts), is to be appropriated first towards interest and thereafter towards (1) arrears of instalment for current/previous year for term loan and (ii) principal irregularity in other accounts.

TREATMENT TO SPECIFIC CATEGORY OF  ACCOUNTS

Loans against readily encashable securities: Advances against term deposits, NSCs eligible for surrender, Indira Vikas Patras, Kisan Vikas Patras and LIC policies, need not be treated as NPAs and no provision is required to be made in respect of such advances although interest thereon has not been paid for any two quarters. Interest on such advances may also be taken to income account on due date provided adequate margin is available in the account.

Consortium advances

Each bank can classify the borrowal account according to its own record of recovery and other aspects having a bearing on the recoverability of the advances, as in the case of multiple banking.

Rehabilitation cases

As regards the advances granted under rehabilitation packages finalised by BIFR and/or term lending institutions, banks should not make any provision on the additional facility for a period of one year from date of disbursement. However, for original advance, provision be made according to the classification viz substandard or doubtful, as the case may be.

NPA accounts and security/means of the borrower/guarantors

a)* Availability of security or net worth of borrower/guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, as income recognition is based on record of recovery.

b)       The net means of the borrowers and guarantors are not to be included as security for the purpose of calculating shortfall in doubtful category.

c)       Pari-passu / second charge on all block assets should be treated as security.

d)       Surplus security available in one facility of an account be considered in another facility of the same borrower where there is a shortfall.