JAIIB | PRUDENTIAL NORMS ON NPA

JAIIB | PRUDENTIAL NORMS ON NPA

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GENERAL

To bring consistency with international practices, RBI had introduced the Prudential norms for income recognition, asset classification, and provisioning for the advances given by banks and to bring transparency in the provisioning practices. And these norms have also been recommended by the committee on the financial institutions that was chaired by Shri. M. Narasimham.

This policy on recognition of advances should be objective rather than based on subjective considerations. In the same way, there should be objective criteria classification of banks assets to ensure a uniform and consistent application of the norms. 

Thus, with the introduction of Prudential norms, the classification of advances is no more a supervisory interest.

DEFINITIONS UNDER PRUDENTIAL NORMS

NON-PERFORMING ASSETS (NPA)

An asset is said to be non-performing when it stops generating income for the bank. 

NPA has been defined as a facility of credit on whose interest or installment of principal has been long due or for a specified time period. Long due refers to those credit facilities that have been in default or in arrears, which means to say, principal & interest payments are missed or late.

The specified period was reduced in a phased manner as under:

TYPES OF NPAs

Below are some of the categories of non-performing assets which are given below:

• Term Loans
• Overdraft & cask credit facility (out of order > 90 days);
• Agricultural advances whose interest & principal amount payment remains overdue;
• Expected payment for any other account type is overdue > 90 days.

NPA CLASSIFICATION

NPAs are based on the time length of overdue & probability of repayment that can either be classified as a substandard asset, doubtful asset, or loss asset. 

• SUBSTANDARD ASSET: The asset that is classified as an NPA < 12 months.
• DOUBTFUL ASSET: The asset that has been (non-performing) NPA > 12 months.
• LOSS ASSETS: The loans with losses that need to be fully written off & are identified by the bank, auditor, or inspector.

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• PAST DUE: A credit facility is said to be past due when it has not been paid within 30 days from the due date. 

Although with the improvements in the system of payment & settlement systems, recovery climate, technology up-gradation in the banking system, etc., it had been decided to dispense (let go of) with the concept of ‘past due’ (effect from March 31, 2001) & the same has been again replaced with ‘90 days overdue’ norm for identification of NPAs to fall in line with the international best practices & to ensure greater transparency from the year ending 31-03-2004.

• NPA: From that date onwards, a Non-performing Asset (NPA) is taken to be an advance (including interest and/or installment of principal) that remain overdue for:
• TERM LOAN: amount including interest and the principal amount is overdue > 90 days, 
• OVERDRAFT/CASH CREDIT (OD/CC): remain out of order > 90 days
• BILL purchased & discounted: remains overdue > 90 days 
• An advance granted for agricultural purposes: interest and/or principal amount remains overdue 2 to 2.5 harvest seasons
• Any other account remains overdue >180 days.
• OUT OF ORDER: An account is said to be ‘out of order’ if the balance outstanding in the account remains continuously > the drawing power or sanctioned limit.

In cases, as on Balance Sheet or credits date, were in principle operating account balance outstanding < limit sanctioned or drawing power (DP), but there have been no credits continuously > 6 months which are not enough to cover the interest that has been debited during the same period.

• OVERDUE: A credit facility is said to be overdue if the amount outstanding in respect of it does not get paid on the fixed due date.

INCOME RECOGNITION: 

Following is the policy in respect of recognizing the income. As per the new norms, the concept of income recognition has been set to bring objectivity to the policy.

RECOGNITION NORM FOR NPA: 

Interest on NPA: Though on the international level, the NPA income is only recognized when it is actually received & not on an accrual basis. As such, the banks are also recommended to not charge or boon interest income on accounts that stand as ‘NPA’.

Provided that if there is adequate margin in the accounts/advances against term deposits, NSCs, IVPs, KVPs, and Life policies, then interest on them may be allowed to be recognized as income on the due date.

Fees and commissions: The same when earned on account of re-negotiations or rescheduling of outstanding debts by the banks are to be recognized on an accrual basis over a re-negotiated or rescheduled extension of the credit period.

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Interest in Govt. Guaranteed Advances: In cases where the advances that are guaranteed by the government turn NPAs, then interest on such advances should only be recognized as income when it is actually realized.

REVERSAL OF INCOME

Income:

In the case or whenever any advance (including bills purchased & discounted) turns NPA as at the year-end then the interest accrued & credited to income account in the corresponding previous year it became NPA, is required to be reversed or provided for if the same has not been realized. This is applicable to the advances that are guaranteed by govt. also.

Charges:

On the accounts that have become NPA, the fees & commission or other similar incomes that accrue or have accrued on these accounts should stop accruing in the current period & should be reversed or provided for the past periods, if remain uncollected.

Leased Assets:

The finance charge in the form of net lease rentals earned on the leased asset that has accrued & credited to the income a/c (recognized) before the leased asset turns NPA, then the remaining unrealized income should be reversed or provided for in the current accounting period.

Net Lease Rentals:

It is the finance charge that is taken to the credit of the Profit & Loss Account & would be worked out as Gross Lease Rentals that gets adjusted by statutory depreciation and lease equalization amount.

Disclosure Requirement:

According to the Guidance Note on Accounting for Leases that have been issued by the Institute of Chartered Accountants of India, a separate account of the Lease Equalisation Account should be opened by the banks with a corresponding debit or credit to the Lease Adjustment Account, as the case may be. 

Further, this account i.e Lease Equalisation Account is required to be transferred every year to the P&L Account, and its disclosure is required to be done separately as a ‘deduction from/addition to the gross value of lease rentals’ under the head ‘Gross Income’.

APPROPRIATION OF RECOVERY IN NPAs

Interest that has been realized on NPAs may be recognized as income & taken to the income account, provided that the interest credits in the accounts are out of the account holders’ income & not out of fresh/ additional credit facilities that have been sanctioned to the borrower concerned.

If there is no clear agreement b/w the bank & the borrower, then for the purpose of appropriation of the amount that is recovered for NPAs (i.e. towards principal as well as interest due), banks need to adopt an accounting principle & exercise their right of appropriation of the amount received as recoveries in a uniform & consistent manner as per the adopted principal.

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