NON-PERFORMING ASSETS | FREE JAIIB STUDY MATERIAL 

NON-PERFORMING ASSETS | FREE JAIIB STUDY MATERIAL 

In 1991, RBI issued the prudent guidelines on the Recommendation of the Narasimham committee which was implemented in 1992. These guidelines covered the aspects of income recognition, asset classification, and provisioning.

• RBI prescribed the Prudential norms in relation to accounting, capital adequacy, and exposure.

• The accounting prudential norms include recognition of income, classification of assets and their provisioning.

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CLASSIFICATION AS NPA: 

There are different criteria of NPA classification described for different assets. When it gets fulfilled, the asset will get classified as NPA:

TERM LOANS – In case interest or installment of the principal amount or both remain overdue > 90 days, the term loan gets classified as NPA

JAIIB SYLLABUS PRIORITY 

CC/OVERDRAFT – In the case where:

• cash credit account or the overdraft account remains out of order or;
• the limit of the CC account or the overdraft account does not get reviewed within 180 days from the due renewal date,

it must be classified as NPA.

Where out of order means an account

1. Whose balance is more than the limit that has been sanctioned or the drawing power limit continuously or;
2. There is no credit in the mentioned accounts continuously for 90 days or the credits in the account have been less than the interest that was being debited or;
3. The stock statements for this account have not been received for > or = 3 months.

BILLS – In case a bill continue to be overdue for > 90 days from the due date of payment, it shall be classified as NPA

AGRICULTURAL ACCOUNTS –

1. In case of loans which have been granted for the crops of short duration whose installment of principal amount or the interest remains overdue > 2 crop seasons beyond the due date 
2. In case of loans which has been granted for crops of long duration whose installment of principal amount or the interest remains overdue > 1 crop season beyond the due date 

are required to be classified as NPA. It must be noted that decision about duration of crops will be taken by State Level Bankers’ Committee (SLBC)

LOAN AGAINST FD –

• Advances given against National Saving Certificates which are eligible for surrender, term deposits, Kisan Vikas Patra, life Insurance policies should not be treated as a NPAs in case sufficient margin is available.
• Although the advances which are given against the gold ornaments, government securities and other securities do not come under this exemption.

LOAN GUARANTEED – Loans which are guaranteed by the central government should not be treated as NPA fourth asset classification and provisioning until the time the guarantee gets repudiated by the government when invoked.

CONSORTIUM ADVANCES – The accounts which fall under consortium advances, the classification should be based on the record of recoveries by the individual member banks.

ASSET CLASSIFICATION: Some of the things which should be considered while classified the assets are given below:

• The classification of assets should be borrower-wise, not facility-wise.

• The classification of assets are:

• Standard Assets,

• Sub-standard Assets,

• Doubtful Assets,

• Loss Assets.

All mentioned assets except standard are NPAs.

When an account becomes non-performing, it is categorised as a substandard asset.

• Substandard asset: It is an account which has remained NPA upto 12 months, is categorised as substandard asset.
• Doubtful Assets: An asset will be classified as doubtful, if it remains substandard or NPA > 12 months.

• Loss Assets: An asset is classified as loss (it has not been wholly written off) when it gets identified with the bank or its internal or external auditors or at the time of RBI inspection.

• Classification of an account as doubtful or loss before the 12 months have expired:
• Loss Asset: In case a secured account, the realizable value of its security has fallen below 10% of the outstanding amount in the account, it should immediately be classified as a loss asset without any wait.

• Doubtful asset: In case of a secured account, the realizable value of whose security = 10% or more but < 50% of amount outstanding, it is required that it should be classified as doubtful immediately irrespective of the fact for which it has remained, NPA.

PROVISIONING NORMS

Provisions required to be made as per the following norms:

Provisions are made on all types of assets whether: Standard, Sub-standard, Doubtful or loss assets.

STANDARD ASSETS:

‘Contingent Provisions against Standard Assets’: The provisions made on standard assets as shown as contingent provisions against standard assets in schedule 5 of the balance sheet under ‘other liabilities and provisions’.

SUB-STANDARD ASSETS:

UNSECURED EXPOSURE Exposure means the loans where the realizable value of security is not less than 10%, ab-initio, of the outstanding amount, which has been assessed by the bank or approved valuers or inspecting officers of Reserve Bank.

DOUBTFUL ASSETS:

NO PROVISION: In case the loan has been guaranteed by CGFT, ECGC or CGFLHS, no provision is made on the guaranteed portion.

The loans which have been advanced against deposit slips, life insurance policies, kisan Vikas Patra or national Savings certificates, the provision shall be made on the basis of their asset classification.

OVERALL PROVISIONS: Provision coverage ratio should not be < 70% including the rates of floating provisions.

Provisioning coverage ratio: The provisioning ratio is the ratio to cover gross non performing assets.

PROVISION ON STANDARD ACCOUNT – These provisions are presented in schedule 5 of the balance sheet as a part of ‘other liabilities’.

Provisions which are made on the standard assets are made on the Global balances and the provisions which are made for the non performing assets are created on Gross balances.

As depicted in the table above, the provisions of doubtful accounts are made separately on their secured portion and for the unsecured portions off the balances in the account.

In case the accounts have been categorised as standard and sub-standard, the provision on the balance outstanding in those accounts are made without bifurcating the balance into secured or unsecured portion.

Floating provisions: Any floating provisions can either be treated as a part of Tier-II capital or can be deducted from gross non performing assets.

UPGRADATION OF NON-PERFORMING ASSETS:

In case the arrears in respect of interest and principal amount has been paid by the borrower for the loans which have been classified as NPAs, those accounts can be classified as standard immediately.