1330The Chartered AccountantMarch 2006
ii) In respect o NPAs, ees,commission and similarincome that have accruedshould cease to accrue inthe current period andshould be reversed orprovided or with respectto past periods, i uncol-lected.iii) The nance charge com-ponent o nance in-come [as dened in ‘AS19 – Leases’ issued by theCouncil o the Instituteo Chartered Accoun-tants o India (ICAI)] onthe leased asset which hasaccrued and was creditedto income account beorethe asset became non-perorming and remainunrealised, should be re- versed or provided or inthe current accountingperiod.
Appropriation o recovery in NPAs
i) Interest realised on NPAsmay be taken to incomeaccount provided thecredits in the accounts to- wards interest are not outo resh/additional creditacilities sanctioned tothe borrower concerned.ii) In the absence o a clearagreement between thebank and the borroweror the purpose o appro-priation o recoveries inNPAs banks should adoptan accounting principleand exercise the right o appropriation o recover-ies in a uniorm and con-sistent manner. Thus, asper the consistent policy o the bank recovery may be appropriated towardsinterest or principal.iii) As per income recogni-tion norms, bank cannotrecognise income unlessrealised. However, bank can debit interest to NPAaccount provided it iscredited to interest sus-pense account.
Having identied assetsas NPA, banks are required toclassiy them urther into ––a) Sub-standard Assetsb) Doubtul Assetsc) Loss Assetsi)
A sub-standard asset isone, which has remainedNPA or a period o less than or equal to 12months.ii)
An asset is classiedas doubtul i it has re-mained in the sub-stan-dard category or a periodo 12 months.iii)
A loss asset is one whereloss has been identiedby the bank or internalor external auditors orthe RBI inspection butthe amount has not been written o wholly. Inother words, such an as-set is considered uncol-lectible and o such little value that its continuanceas a bankable asset is not warranted although theremay be some salvage orrecovery value.
In respect o accounts wherethere are potential threats orrecovery on account o ero-sion in the value o security ornon-availability o security andexistence o other actors suchas rauds committed by bor-rowers, it will not be prudentthat such accounts should gothrough various stages o assetclassication. In cases o suchserious credit impairment theasset should be straightaway classied as doubtul or lossasset as appropriate.i) Erosion in the value o se-curity can be reckonedas signicant when therealisable value o the se-curity is less than 50 percent o the value assessedby the bank or acceptedby RBI at the time o lastinspection, as the casemay be. Such NPAs may be straightaway classiedunder doubtul category and provisioning shouldbe made as applicable todoubtul assets.ii) I the realisable value o the security, as assessedby the bank/approved valuers/RBI is less than10 per cent o the out-standing in the borrowalaccounts, the existence o security should be ignoredand the asset should bestraightaway classied asloss asset. It may be either written o or ully pro- vided or by the bank.
Asset Classification– SomeClarifications:
(i) Asset Classifcation to be borrower-wise and not acility-wise
All the acilities granted by a bank to a borrower and in- vestment in all the securities is-sued by the borrower will haveto be treated as NPA/NPI andnot the particular acility/in- vestment or part thereo whichhas become irregular.
(ii) Advances under consortiumarrangements
Asset classication o ac-counts under consortium shouldbe based on the record o recov-ery o the individual memberbanks and other aspects havinga bearing on the recoverabil-ity o the advances. Where theremittances by the borrowerunder consortium lending ar-rangements are pooled withone bank and/or where thebank receiving remittances isnot parting with the share o other member banks, the ac-count will be treated as not ser- viced in the books o the othermember banks and thereore,be treated as NPA. I the banksparticipating in the consortium
A loss as-set is onewhere losshas been
by the bankor internalor externalauditorsor the RBIinspectionbut theamount hasnot beenwritten offwholly.