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INTRODUCTION
Banking sector reforms in India has progressed promptly on aspects
like interest rate deregulation, reduction in statutory reserve requirements,
prudential norms for interest rates, asset classification, income recognition
and provisioning.
But it could not match the pace with which it was expected to do. The
accomplishment of these norms at the execution stages without restructuring
the banking sector as such is creating havoc.
This research paper deals with the problem of having non-performing
assets, the reasons for mounting of non-performing assets and the practices
present in other countries for dealing with non-performing assets.
uring pre-nationali!ation period and after independence, the banking
sector remained in private hands "arge industries who had their control in the
management of the banks were utili!ing ma#or portion of financial resources of
the banking system and as a result low priority was accorded to priority
sectors.
$overnment of India nationali!ed the banks to make them as an
instrument of economic and social change and the mandate given to the
banks was to expand their networks in rural areas and to give loans to priority
sectors such as small scale industries, self-employed groups, agriculture and
schemes involving women.
To a certain extent the banking sector has achieved this mandate. "ead
Bank %cheme enabled the banking system to expand its network in a planned
way and make available banking series to the large number of population and
touch every strata of society by extending credit to their productive endeavors.
This is evident from the fact that population per office of commercial
bank has come down from &&,''' in the year ()&) to ((,''' in *''+.
%imilarly, share of advances of public sector banks to priority sector increased
form (+.&, in ()&) to ++, of the net bank credit.
The number of deposit accounts of the banking system increased from
over - crores in ()&) to over -' crores. Borrowed accounts increased from
*..' lakhs to over *.&/ crores.
DEFINITION:-
0 loan or lease that is not meeting its stated principal and interest
payments. Banks usually classify as nonperforming assets any commercial
loans which are more than )' days overdue and any consumer loans which
are more than (/' days overdue. 1ore generally, an asset which is not
producing income.
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TY B.B.I NPA
NON PERFORMING ASSET
0ction for enforcement of security interest can be initiated only if the
secured asset is classified as 2on 3erforming 0sset.
2on 3erforming 0sset means an asset or account of borrower, which
has been classified by a bank or financial institution as sub-standard,
doubtful or loss asset, in accordance with the directions or guidelines
relating to asset classification issued by 4BI.
0n amount due under any credit facility is treated as 5past due5 when it
has not been paid within -' days from the due date. ue to the
improvement in the payment and settlement systems, recovery climate, up
gradation of technology in the banking system, etc.
It was decided to dispense with 6past due6 concept, with effect from
1arch -(, *''(. 0ccordingly, as from that date, a 2on performing asset
72308 shell be an advance where
i. Interest and 9or installment of principal remain overdue for a period of
more than (/' days in respect of a Term "oan,
ii. The account remains 6out of order6 for a period of more than (/' days,
in respect of an overdraft9 cash :redit7;9::8,
iii. The bill remains overdue for a period of more than (/' days in the
case of bills purchased and discounted,
iv. Interest and9 or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purpose, and
v. 0ny amount to be received remains overdue for a period of more than
(/' days in respect of other accounts.
<ith a view to moving towards international best practices and to ensure
greater transparency, it has been decided to adopt the 6)' days overdue6 norm
for identification of 2aps, form the year ending 1arch -(, *''+. 0ccordingly,
with effect form 1arch -(, *''+, a non-performing asset 72308 shell be a loan
or an advance where=
i. Interest and 9or installment of principal remain overdue for a period of
more than )' days in respect of a Term "oan,
ii. The account remains 6out of order6 for a period of more than )' days, in
respect of an overdraft9 cash :redit7;9::8,
iii. The bill remains overdue for a period of more than )' days in the case
of bills purchased and discounted,
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TY B.B.I NPA
iv. %easons but for a period not exceeding two half years in the case of an
advance granted for agricultural purpose, and
v. 0ny amount to be received remains overdue for a period of more than
)' days in respect of other accounts.
OUT OF ORDER
0n account should be treated as 6out of order6 if the outstanding
balance remains continuously in excess of the sanctioned limit9 drawing
power. In case where the outstanding balance in the principal operating
account is less than the sanctioned limit9 drawing power.
But there are no credits continuously for six months as on the date of
balance sheet or credits are not enough to cover the interest debited during
the same period, these account should be treated as 6out of order6.
OVERDUE
0ny amount due to the bank under any credit facility is 6overdue6 if it is
not paid on the due date fixed by the bank.
Classification of Assets as Non-Pefo!in"
0n asset becomes non-performing when it ceases to generate
Income for the bank. >arlier an asset was considered as nonperforming
0sset 72308 based on the concept of 63ast ue6. 0 ?non
3erforming asset@ 72308 was defined as credit in respect of which
Interest and9 or installment of principal has remained ?past due@ for
0 specific period of time. The specific period was reduced in a
3hased manner as underA
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Bear ended 1arch, -( %pecific period
------------------------------ ---------------------
())- + quarters
())+ - quarters
()). * quarters
0n amount is considered as past due, when it remains outstanding for
-' days beyond the due date. Cowever, with effect from 1arch -(, *''( the
?past due@ concept has been dispensed with and the period is reckoned from
the due date of payment.
<ith a view to moving towards international best practices and to
ensure greater transparency, 6)' days6 overdueD norms for identification of
230s have been made applicable from the year ended 1arch -(, *''+. 0s
such, save and except certain relaxations mentioned at 3ara *.(.- and *.(.+
below, with affect from 1arch -(, *''+, a non-performing asset shall be a
loan or an advance whereA
7I8 Interest and9or installment of principal remain overdue for a period of
more than )' days in respect of a Term "oan.
7ii8 The account remains 6;ut of order6E for a period of more than )'
days, in respect of an ;verdraft9 :ash :redit
7;9::8.
7iii8 The bill remains overdue for a period of more than )' days in the
case of bills purchased and discounted,
7iv8 In the case of direct agricultural advances as listed in 0nnex (, the
overdue norm specified at 3ara *.(.. would be applicable. In respect of
agricultural loans, other than those specified in 0nnex (, identification
of 230s would be done on the same basis as non-agricultural
advances.
7v8 0ny amount to be received remains overdue for a period of more
than )' days in respect of other accounts. 0ny amount due to the bank
under any credit facility, if not paid by the due date fixed by the bank
becomes overdue.
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F0n account should be treated as 6out of order6 if the
outstanding balance remains continuously in excess of the sanctioned
limit9drawing power. In cases where the outstanding balance in the
principal operating account is less than the sanctioned limit9drawing
power, but there are no credits continuously for )' days or credits are
not enough to cover the interest debited during the same period, these
accounts should be treated as 6out of order6G.
Hnit banks i.e. banks having a single branch9 C; with deposits
unto 4s. ('' crore and banks having multiple branches within a single
district with deposits upto 4s. ('' crore have been permitted to classify
loan accounts as 230s based on (/' days delinquency norm instead
of the extant )' days norm.
This relaxation will be in force for three financial years i.e.
financial years ended9 ending 1arch -(, *''., *''& and *''I.
The details of the changes and the consequent impact on the
existing instructions with regard to asset classification and income
recognition in respect of these banks are given in the 0nnex ..
The deposit base of 4s. ('' crore for the above will be
determined on the basis of average of the fortnightly 2et emand and
Time "iabilities in the financial year concerned. Jor the above category
of banks, an account would be classified as 2on 3erforming 0sset if
theA
7I8 Interest and9or installment of principal remain overdue for a period of
more than (/' days in respect of a Term "oan.
7ii8 The account remains 6;ut of order6 for a period of more than (/'
days, in respect of an ;verdraft9:ash :redit 7;9::8.
7iii8 The bill remains overdue for a period of more than (/' days, in the
case of bills purchased and discounted.
7iv8 0ny amount to be received remains overdue for a period of more
than (/' days in respect of other accounts.
The relaxations are given for the explicit purpose of enabling the H:Bs
concerned to transit to the )' day 230 norm in the year *''I-*''/ by
building up adequate provisions and strengthening their appraisal,
disbursement and post disbursement procedures.
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0ll H:Bs other than those referred to at 3ara *.(.- shall classify their
loan accounts as 230 as per )' day norm as hitherto. Cowever, $old loans
and small loans up to 4s. ( lakh will be governed by the )'-day norm with
effect from the year ending 1arch -(, *''I. Till then, they will be governed by
the (/'-day norm as thereto.
A"ic#lt#al A$%ance
7i8 <ith effect from %eptember -', *''+ the following revised norms
are applicable to all direct agricultural advances 7as listed in the 0nnex
a8 0 loan granted for short duration crops will be treated
as 230, if the installment of principal or interest thereon
remains overdue for two crop seasons.
b8 0 loan granted for long duration crops will be treated as
230, if the installment of principal or interest thereon
remains overdue for one crop season.
7ii8 Jor the purpose of these guidelines, 5long duration5 crops would be
crops with crop season longer than one year and crops, which are not
5long duration5 crops would be treated as 5short duration5 crops.
7iii8 The crop season for each crop, which means the period up to
harvesting of the crops rose, would be as determined by the %tate
"evel Bankers6 :ommittee in each state.
7iv8 epending upon the duration of crops raised by an agriculturist, the
above 230 norms would also be made applicable to agricultural term
loans availed of by him. In respect of agricultural loans, other than
those specified in the 0nnex ( and term loans given to non-
agriculturists, identification of 230s would be done on the same basis
as non-agricultural an advance which, at present, is the )' days
delinquency norm.
7v8 Banks should ensure that while granting loans and advances,
realistic repayment schedules are fixed on the basis of cash flows 9
fluidity with the borrowers.
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I$entification of assets as NPAs s&o#l$ 'e $one on an on"oin" 'asis
The system should ensure that identification of 230s is done on an on-
going basis and doubts in asset classification due to any reason are settled
through specified internal channels within one month from the date on which
the account would have been classified as 230 as per prescribed norms.
Banks should also make provisions for 230s as at the end of each
calendar quarter i.e. as at the end of 1arch9 Kune9 %eptember9 ecember, so
that the income and expenditure account for the respective quarters as well
as the 3L" account and balance sheet for the year end reflects the provision
made for 230s.
C&a"in" of inteest at !ont&l( ests
I8 Banks should charge interest at monthly rests in the context of
adoption of )' days norm for recognition of loan impairment w.e.f. from
the year ended 1arch -(, *''+ and consequential need for close
monitoring of borrowers6 accounts. Cowever, the date of classification
of an advance as 230 as stated in proceeding pares, should not be
changed on account of charging of interest at monthly basis.
7ii8 The existing practice of charging9compounding of interest on
agricultural advances would be linked to crop seasons and the
instructions regarding charging of interest on monthly rests shall not be
applicable to agricultural advances.
7iii8 <hile compounding interest at monthly rests effective from
0pril (, *''- banks should ensure that in respect of advances where
administered interest rates are applicable, they should re-align the
rates suitably keeping in view the minimum lending rate charged by the
bank 7in view of the freedom given to them for fixing lending rates8 so
that they comply with the same. In all other cases also, banks should
ensure that the effective rate does not go up merely on account of the
switchover to the system of charging interest on monthly rests.
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NPA MANAGEMENT
I>2TIJI:0TI;2 ;J 3;T>2TI0" 230 9 %T4>%%>
0%%>T%
)* Rec+onin" of NPA :
0 230 account to be identified based on its status 9 position of
the accounts erosion in security as on the date of balance sheet of the bank.
2evertheless, the date of a 230 account would be the actual date on which
the slippage occurred. If an account is regulari!ed before the balance sheet
date by repayment of overdue amount through genuine sources 7not by
sanctioning of additional facilities or transfer of funds between accounts8, the
account need not be treated as 230.
It has, however, to be ensured that in the account remains in
order subsequently and a solitary or few credits made in the account on or
before the balance sheet date which extinguishes the overdue amount of
interest or installment of principal is not reckoned as the sole criterion for
treating the asset as standards one.
,* I$entification an$ !onitoin" of -otential NPA . stesse$
assets:
Indention of potential 230 account as its incipient stage of
sickness and initiating immediate corrective measures is the
most important step for preventing an asset from becoming
230. The guidelines issued by :redit 1onitoring :ell 7:1:8
:0, C; should be followed in this regard.
/* Constit#tion -f NPA Pe%ention Cell at t&e ROs*
It has been decided to constitute a 230 3revention cell at
the 4;s to monitor the %tandard-B accounts and to ensure the
prevention of their slippage to 230. The cell headed by 4egional
1anager would comprise 4egional 1anager, y. 4egional
1anager and :redit ;fficer. It will conduct its meeting every
fortnight.
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ITS FUNCTION 0I11 2E AS UNDER:
To examine the information received from branches relating to
%tandard ?B@ 7based on &' days norms8, 230 accounts and
identify the accounts for restructuring. The entire process should
be completed within a time frame of -' days.
To review the performance of the existing restructured accounts
including BIJ4 and :4 cases.
The cell will send information on fortnightly basis to :1:, :0
Cead ;ffice.
4egional 1anager to cell for the explanation from the Branch
1anagers whose performance in recovery is far from
satisfactory.
3* Re%ie4 an$ e-otin" of -otential NPA . Stesse$ assets
Jollowing steps be taken for review and reporting of
potential 230 9 %tressed 0ssetsA
Ste--): 0nalysis of reason of deterioration of health, signs of sickness,
problem character of the 0Mc.
Ste--,: :lose interaction with the borrower, visit to the unit, close and
frequent monitoring of the account, drawing the attention of the
borrower to the irregularity 9 deterioration in he asset quality 9 signs of
weakness in the account.
Ste--/A 0dvice the borrower to correct the irregularity immediately in a
time bound manner and obtain his categorical assurance.
Ste--3A :orrective measures for prevention of slippagesA
4eview the account and consider sanction of need based
working capital limits on merits, if the present limits are
inadequate.
Identify %tressed 0ssets accounts and consider restructuring 9
realignment 9 re-schedulement on merits.
>arly warning signal, if any, to be watched and addressed to.
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Nerification of 7i8 the documents for its correctness,
enforceability, 7ii8 correctness of 4; 7iii8 insurance covers 7iv8
value9marketability of prime9collateral security eye.
Nerification of existence of primary 9 collateral security of the
borrower.
Ste--5A 4eport to the next higher authority, the details on the above
aspects and suggesting specific corrective measures in time.
Ste--6: Implement the corrective action and report to higher authority.
5* Maintainin" t&e Assets 7#alit( :
3ost sanction monitoring, supervision, and follow up
Jollowing measures should be put in place.
8i9 Te!s an$ con$ition of t&e sanction:
Terms and condition of sanction have to be strictly
complied with
8ii9 Veification:
Nerification of end use of the funds, stocks and assets by
Bank officials or through duly appointed concurrent auditors as
per norms for effective monitoring of the accounts.
8iii9 1e"al Fo!alities:
Jormalities like obtaining 9 execution of documents 9
search certificates, registration of charges, timely revival of the
documents, completion of equitable mortgage formalities etc. as
per norms are the most important steps.
8i%9 Stoc+ State!ents:
Branches should obtain stock statements at monthly
intervals regularly. 0s per 4BI guidelines, the outstanding
in the 09: based on the drawing powers calculated from
stock statements older than - months would be deemed
as irregular and if such irregular drawings are permitted
for )' days continuously, the 09: will be 230.
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8%9 Stoc+ a#$it:
%tock audit is to be conducted every year in every 230
account with outstanding limit of 4s ( crore and above.
Cowever, wherever current assets are depleted or unit is
closed, the stipulation may be exempted.
6* Mana"e!ent of NPA:
The 41s personally verify and ensure that all accounts,
especially high value advances are properly classified into
standard, %ub-std. oubtful or loss categories strictly as per
prudential norms. It will be their responsibility to finali!e and
eliminate delay or postponed of identification of 230.
In case of doubts due to any reason, 41s may seek
guidance from C; and settle the matter within one month from
the date on which the account would have been classified as
230 as per norms.
It may be noted that if 4BI observes any divergences in
asset classification, especially in high value accounts due to
willful non-compliance of 4BI guidelines by any official
responsible for classification then 4BI may initiate deterrent
action including imposition of monetary penalty.
:* A--o-iation of eco%e( in NPAs:
a8 2on decreed accountsA
In case of 230 accounts in all categories i.e. %ub standard,
oubtful and "oss appropriated first against outstanding in the
account and the surplus available, if any, is to be taken to
interest 9 income. The same norm will be applicable to the
compromised accounts also.
b8 ecreed accountsA
In case of decreed accounts where there is no compromise
settlement amount recovered should be appropriated as per the
decretal terms. Cowever, if there is no specific term as regards
appropriation of recovery in the decrial terms, the recovery
should be appropriated first towards 3rincipal and the balance
towards interest.
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c8 0ppropriation of >:$: claim amount in 230 0ccountsA
0s per the existing procedure, Bank is expected to keep the
claim amount received from the >:$: in a separate
memorandum account and pursue recovery efforts against the
concerned >xporter borrower for the full amount of dues
inclusive of the claim amount settled.
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MASTER CIRCU1AR
ON
INCOME RECOGNITION; ASSET C1ASSIFICATION;
PROVISIONING < OT=ER RE1ATED MATTERS
GENERA1
In order to reflect a bank6s actual financial health in its balance sheet
and as per the recommendations made by the :ommittee on Jinancial
%ystem 7:hairman %hri 1. 2arasimham8, the 4eserve Bank has introduced,
in a phased manner, prudential norms for income recognition, asset
classification and provisioning for the advances portfolio of the primary
7urban8 co-operative banks.
Broadly, the policy of income recognition should be ob#ective and
based on record of recovery rather than on any sub#ective considerations.
"ikewise, the classification of assets of banks has to be done on the basis of
ob#ective criteria, which would ensure a uniform and consistent application of
the norms.
0vailability of security or net worth of the borrower9 guarantor should
not be taken into account for the purpose of treating an advance as
nonperforming asset or otherwise. The provisioning should be made on the
basis of the classification of assets into different categories.
The requirements of the %tate :o-operative %ocieties 0cts and 9 or
rules made thereunder or other statutory enactments may continue to be
followed, if they are more stringent than those prescribed hereby.
<ith the introduction of prudential norms, the Cealth :ode based
system for classification of advances has ceased to be a sub#ect of
supervisory interest. 0s such, all related reporting requirements, etc. also
ceased to be a supervisory requirement, but could be continued in the banks
entirely at their discretion and the management policy, if felt necessary.
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TREATMENT OF ACCOUNTS AS NPAS
Reco$ of Reco%e(
7i8The treatment of an asset as 230 should be based on the record of
recovery. Banks should not treat an advance as 230 merely due to
existence of some deficiencies which are of temporary in nature such
as non-availability of adequate drawing power, balance outstanding
exceeding the limit.
2o submission of stock statements and the non-renewal of the
limits on the due date, etc. <here there is a threat of loss, or the
recoverability of the advances is in doubt, the asset should be treated
as 230.
7ii8 0 credit facility should be treated as 230 as per norms given in
paragraph *.( above. Cowever, where the accounts of the borrowers
have been regulari!ed by repayment of overdue amounts through
genuine sources 7not by sanction of additional facilities or transfer of
funds between accounts8= the accounts need not be treated as 230s.
In such cases, it should, however, be ensured that the accounts
remain in order subsequently and a solitary credit entry made in an
account on or before the balance sheet date which extinguishes the
overdue amount of interest or installment of principal is not reckoned
as the sole criteria for treatment the account as a standard asset.
Teat!ent of NPAs > 2oo4e-4ise an$ not Facilit(-4ise
7I8 In respect of a borrower having more than one facility with a bank,
all the facilities granted by the bank will have to be treated as 230 and
not the particular facility or part thereof which has become irregular.
7ii8 Cowever, in respect of consortium advances or financing under
multiple banking arrangements, each bank may classify the borrower
accounts according to its own record of recovery and other aspects
having a bearing on the recoverability of the advances.
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A"ic#lt#al A$%ances > Defa#lt in e-a(!ent $#e to nat#al
Cala!ities
7I8 <here natural calamities impair the repaying capacity of agricultural
borrowers, primary 7urban8 co-operative banks, as a relief measure
may decide on their own toA
7a8 convert the short-term production loan into a term loan
or re-schedule the repayment period, and
7b8 sanction fresh short-term loans
7ii8 In such cases of conversion or re-schedulement, the term loan as
well as fresh short-term loan may be treated as current dues and need
not be classified as non performing asset 72308. The asset
classification of these loans would, therefore, be governed by the
revised terms and conditions and these would be treated as 230 under
the extant norms applicable for classifying agricultural advances as
230s.
=o#sin" 1oan to Staff
In the case of housing loan or similar advances granted to staff
members where interest is payable after recovery of principal, interest need
not be considered as overdue from the first quarter onwards.
%uch loans9 advances should be classified as 230 only when there is
a default in repayment of installment of principal or payment of interest on the
respective due dates.
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CREDIT FACI1ITIES GUARANTEED 2? CENTRA1
.STATE GOVERNMENT
7I8 The credit facilities backed by guarantee of the :entral $overnment
though overdue should not be treated as 230.
7ii8 This exemption from classification of government guaranteed
advances as 230 is not for the purpose of recognition of income.
7iii8 Jrom the year ended 1arch -(, *''&, %tate $overnment
guaranteed advance and investment in %tate $overnment guaranteed
securities would attract asset classification and provisioning norms, if
interest and9or principal or any other amount due to the bank remains
overdue for more than )' days irrespective of the fact whether the
guarantee have been invoked or not.
Po@ect Financin"
Therefore, such amounts of interest do not become overdue and hence
230, with reference to the date of debit of interest. They become overdue
after due date for payment of interest, if uncollected.
7i8 <here a unit commences commercial production, but the level and
volume of production reached immediately after the date of completion
of the pro#ect is not adequate to generate the required cash flow to
service the loan, it may be necessary to re-fix the repayment schedule.
In such cases, the Board of irectors of the bank may lay down broad
parameters for guidance of the staff for taking a view whether the unit
has stabili!ed commercial production and there is a need for
rescheduling of the loan to treat such advance as 230 or not. In
framing these parameters, the following points may be kept in viewA
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7a8 In order to arrive at a decision as to whether the
unit9pro#ect has achieved regular commercial production, the
main guiding factor would be whether the unit has achieved
cash break-even in order to service the loan.
7b8 If in the opinion of the bank, the bottleneck in
achieving regular commercial production is of a
temporary nature not indicative of any long-term
impairment of the unit6s economic viability and it is likely
to achieve cash break even if some time is allowed, the
bank may reschedule the loan and treat the asset as
standard.
7c8 Cowever, the lead time would normally not exceed
one year from the schedule of commencement of
commercial production as indicated in the terms of
sanction.
7ii8 In respect of credit facilities sanctioned under consortium
arrangements, the decision as to whether the borrowing unit has
achieved regular commercial production and there is a need for
rescheduling may be taken by the lead institution or lead bank and
other participating institutions9banks may follow the same.
7iii8 8A9 TREATMENT OF RESTRUCTURED ACCOUNTS
7i8 4estructuring9rescheduling9re negotiation of the
terms of loan agreement in respect of standard and
substandard accounts can take place at three stages, vi!.
7a8 before commencement of commercial production, 7b8
after commencement of commercial production but
before the asset has been classified as sub-standard,
and 7c8 after commencement of commercial production
and the asset has been classified as sub-standard.
7ii8 In each of the foregoing three stages, the
rescheduling, etc. of principal and9or of interest could take
place with or without sacrifice.
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829 TREATMENT OF RESTRUCTURED STANDARD
ACCOUNTS
7i8 0 rescheduling of the installments of principal
alone, at any of the stages at 7a8 and 7b8 above
would not cause a standard asset to be classified
in the substandard category provided the
loan9credit facility is fully secured.
7ii8 0 rescheduling of interest element at any of the
aforesaid two stages would not cause an asset to
be down-graded to sub-standard category sub#ect
to the condition that the amount of sacrifice, if any,
in the element of interest, is either written off or
provision is made to the extent of the sacrifice
involved.
8C9 TREATMENT OF RESTRUCTURED SU2-
STANDARD ACCOUNTS
7I8 0 rescheduling of the installment of principal
alone would render a sub-standard asset eligible to be
continued in the sub-standard category for the specified
period, provided the loan9credit facility is fully secured.
7ii8 0 rescheduling of interest element would render
a substandard asset eligible to be continued to be
classified in substandard category for the specified period
sub#ect to the condition that the amount of sacrifice, if
any, in the element of interest, is either written off or
provision is made to the extend the sacrifice involved.
7iii8 The substandard accounts which have been
sub#ected to structuring, etc. whether in respect of
principal installment or interest amount, would be eligible
to be upgraded to the standard category only after the
specified period, i.e. one year term the date when the first
payment of interest or principal, whichever is earlier, falls
due, sub#ect to satisfactory performance during the
period.
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7iv8 In case, however, the satisfactory performance
during the one ear period is not evidenced, the asset
classification of the structured account would be
governed as per the applicable prudential norms with
reference to the pre-restructuring payment schedule.
8D9 APP1ICA2I1IT?
7I8 The foregoing norms for restructuring, etc.
would be applicable to standard and sub-standard assets
only. 0ll other prudential guidelines relating to income
recognition, asset classification and provisioning would
remain unaltered.
7ii8 The aforesaid instructions would be applicable
to all types of credit facilities, including working capital
limit extended to industrial units, provided they are fully
covered by tangible securities.
7iii8 These guidelines are not applicable to credit
facilities extended to traders.
7iv8 <hile assessing the extent of security
available to the credit facilities, collateral security would
also be reckoned, provided such collateral is a tangible
security properly charged to the ankh and is not in the
intangible form like guarantee, etc.
7e8 $eneral all standard and sub-standard
accounts sub#ected to structuring, etc. would be eligible
for fresh financing of funding requirements, as per normal
policy parameters and eligibility criteria.
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TY B.B.I NPA
ASSET C1ASSIFICATION
C1ASSIFICATION
The primary 7urban8 co-operative banks should classify their assets
into the following broad groups, vi!.
7I8 %tandard 0ssets
7ii8 %ub-standard 0ssets
7iii8 oubtful 0ssets
7iv8 "oss 0ssets
DEFINITIONS
Stan$a$ Assets
%tandard 0sset is one which does not disclose any problems and
which does not carry more than normal risk attached to the business. %uch an
asset should not be an 230.
S#'-stan$a$ Assets
7i8 <ith effect from 1arch -(, *''. an asset would be classified as
sub-standard if it remained 230 for a period less than or equal to (*
months. In such cases, the current net worth of the borrowers9
guarantors or the current market value of the security charged is not
enough to ensure recovery of the dues to the banks in full. In other
words, such assets will have well defined credit weaknesses that
#eopardi!e the liquidation of the debt and are characteri!ed by the
distinct possibility that the banks will sustain some loss, if deficiencies
are not corrected.
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TY B.B.I NPA
7ii8 0n asset where the terms of the loan agreement regarding interest
and principal have been re-negotiated or rescheduled after
commencement of production, should be classified as substandard and
should remain in such category for at least (* months of satisfactory
performance under the re-negotiated or rescheduled terms. In other
words, the classification of an asset should not be upgraded merely as
a result of rescheduling, unless there is satisfactory compliance of this
condition.
Do#'tf#l Assets
<ith effect from 1arch -(, *''., an asset is required to be classified
as doubtful, if it has remained 230 for more than (* months. 0s in the case of
sub-standard assets, rescheduling does not entitle the bank to upgrade the
quality of an advance automatically.
0 loan classified as doubtful has all the weaknesses inherent as that
classified as sub-standard, with the added characteristic that the weaknesses
make collection or liquidation in full, on the basis of currently known facts,
conditions and values, highly questionable and improbable.
NoteA :onsequent to change in asset classification norms w.e.f. 1arch -(,
*''. banks are permitted to phase the consequent additional provisioning
over a five year period commencing from the year ended 1arch -(, *''.,
with a minimum of (' , of the required provision in each of the first two years
and the balance in equal installments over the subsequent three years.
1oss Assets
0 loss asset is one where loss has been identified by the bank or
internal or external auditors or by the :o-operation epartment or by the
4eserve Bank of India inspection but the amount has not been written off,
wholly or partly. In other words, such an asset is considered un-collectible and
of such little value that its continuance as a bankable asset is not warranted
although there may be some salvage or recovery value.
52
TY B.B.I NPA
Ce$it !onitoin"
FOeeping a constant watch on the conduct and performanceG of the
borrower for the purpose of ensuring regular returns and safely of banks funds
is termed as ?credit monitoring@.
CREDIT MONITORING MEC=ANISM ::
Traditionally, monitoring of advances is being done at
various levels starting from the desk officer at the branch to the
corporate level, through various systems, broadly outlined as
underA
:onduct and operations in the account
%tatements of stocks 9 book debts and audit thereof.
Inspection 9 verification of assets charged
Jinancial Jollow up reports 7JJ48
Puarterly 4eview sheets 7P4%
1onthly control returns 71(-1)8 and 1*
-- 9 <-- 4eturns
:redit 4ating and 3eriodical 4eview 9 4enewals
STEPS IN CREDIT MONITORING:
)* Detection:
There should be early detection of signals that indicate
determination in the quality of an account. These are picked up
from all possible sources vi!.
:onduct of account
:ompliance of terms and conditions of sanction
Business performance
1arket reports.
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TY B.B.I NPA
Po'e A
;btaining regular and comprehensive information on a
Bank@s borrower s the step towards effective monitoring system.
<e need to probe and evaluate the conduct of a borrower@s
account, asses the compliance with loan covenants, understand
the signals supplied by a borrower@s financial and market
position, watch the condition of the security provided, and
grasp 9 signals are #ust the symptoms and the causes of these
symptoms need to be identified. The causes can beA
Incorrect business decisions
Bad intentions
0dverse market conditions
Hnplanned expansions
Action A
The main action plan of credit monitoring is to be able to
act quickly and early. %ome of the actions which can be
taken areA
%tipulating higher margin on primary security
0sking for more collateral
Influencing business decisions of the borrower
Infusion of fresh funds
Induction of more banks into the consortium
:alling in the loans
>xit from the account.
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TY B.B.I NPA
DIFFICU1T? 0IT= T=E NON-PERFORMING ASSETS:
)* ;wners do not receive a market return on their capital. In the worst
case, if the bank fails, owners lose their assets. In modern times, this
may affect a broad pool of shareholders.
,* epositors do not receive a market return on savings. In the worst
case if the bank fails, depositors lose their assets or uninsured
balance. Banks also redistribute losses to other borrowers by charging
higher interest rates. "ower deposit rates and higher lending rates
repress savings and financial markets, which hampers economic
growth.
/* 2on performing loans epitomi!e bad investment. They misallocate
credit from good pro#ects, which do not receive funding, to failed
pro#ects. Bad investment ends up in misallocation of capital and, by
extension, labour and natural resources. The economy performs below
its production potential.
3* 2on performing loans may spill over the banking system and
spillover effect can canali!e through illiquidity or bank insolvency=
7a8 <hen many borrowers fail to pay interest, banks may
experience liquidity shortages. These shortages can #am
payments across the country,
7b8 Illiquidity constraints bank in paying depositors e.g. cashing
their paychecks. Banking panic follows. 0 run on banks by
depositors as part of the national money stock become
inoperative. The money stock contracts and economic
contraction follows.
7c8 Hndercapitali!ed banks exceeds the banks capital base.
"ending by banks has been highly politici!ed. It is common knowledge
that loans are given to various industrial houses not on commercial
considerations and viability of pro#ect but on political considerations= some
politician would ask the bank to extend the loan to a particular corporate and
the bank would oblige.
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TY B.B.I NPA
In normal circumstances banks, before extending any loan, would
make a thorough study of the actual need of the party concerned, the
prospects of the business in which it is engaged, its track record, the quality of
management and so on. %ince this is not looked into, many of the loans
become 230s.
The loans for the weaker sections of the society and the waiving of the
loans to farmers are another dimension of the politici!ation of bank lending.
1ost of the depositor@s money has been frittered away by the banks at
the instance of politicians, while the same depositors are being made to pay
through taxes to cover the losses of the bank.
:omparative %tudy with ;ther :ountries.
I* C=INA:
8a9 Ca#ses:
7i8 The %tate ;wned >nterprises 7%;>@s8 believe that there the
government will bail them out in case of trouble and so they continue to
take high risks and have not really strived to achieve profitability and to
improve operational efficiency.
7ii8 3olitical and social implications of restructuring big %;>@s force the
government to keep them afloat,
7iii8 Banks are reluctant to lend to the private enterprises because while
an 230 of an %;> is financially undesirable, an 230 of a private
enterprise is both financially and politically undesirable,
7iv8 :ourts are not reliable enforcement vehicles.
8'9 Meas#es:
7i8 4educing risk by strengthening banks, raising disclosure standards
and spearheading reforms of the %;>@s by reducing their level of debt,
52
TY B.B.I NPA
7ii8 "aws were passed allowing the creation of asset management
companies, foreign equity participation in securiti!ation and asset
backed securiti!ation,
7iii8 The government which bore the financial loss of debt ?discounting@.
ebt9equity swaps were allowed in case a growth opportunity existed,
7iv8 Incentives like tax breaks, exemption from administration fees and
clear cut asset evaluation norms were implemented.
II* AOREA:
8a9 Ca#ses:
7i8 3rotracted periods of interest rate control and selective credit
allocations gave rise to an inefficient distribution of funds,
7ii8 "ack of 1onitoring Banks relied on collaterals and guarantees in
the allocation of credit, and little attention was paid to earnings
performance and cash flows,
8'9 Meas#es:
7i8 The speedy containment of systemic risk and the domestic credit
crunch problem with the in#ection of large public funds for bank
recapitali!ation,
7ii8 :orporate 4estructuring Nehicles 7:4Ns8 and ebt9>quity %waps
were used to facilitate the resolution of bad loans,
7iii8 :reation of the Oorea 0sset 1anagement :orporation 7O01:;8
and a 230 fund to fund to finance the purchase of 230s,
7iv8 %trengthening of 3rovision norms and loan classification standards
based on forward-looking criteria 7like future cash flows8 were
implemented=
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TY B.B.I NPA
III* BAPAN:
8a9 Ca#ses:
7i8 Investments was made real estate at high prices during the boom.
The recession caused prices to crash and turned a lot of these loans
bad,
7ii8 "egal mechanisms to dispose bad loans were time consuming and
expensive and 230s remained on the balance sheet, 7iii8 >xpansionary
fiscal policy measures administered to stimulate the economy
supported industrial sectors like construction and real estate, which
may further exacerbated the problem,
7iv8 <eak corporate governance coupled with a no-bankruptcy
doctrine, 7v8 Inadequate accounting systems.
8'9 Meas#es:
7i8 0mendment of foreign exchange control law 7l))I8 and the threat of
suspension of banking business in case of failure to satisfy the capital
adequacy ratio prescribed,
7ii8 0ccounting standards Q 1a#or business groups established a
private standard-setting vehicle for Kapanese accounting standards
7*''(8 in line with international standards,
7iii8 $overnment %upport - The government@s committed public funds
to deal with banking sector weakness.
52
TY B.B.I NPA
III* PAAISTAN:
8a9 Ca#ses:
7i8 :ulture of 5!ero equity5 pro#ects where there was minimal due
diligence was done by banks in giving loans coupled with collusive
lending and poor corporate
governance,
7ii8 3oor entrepreneurship,
7iii8 :hronic over-capacity9lack of competitive advantage,
7iv8 irected lending where the senior management of the public
sector banks gave loans to political heavy weights9 military
commanders.
8'9 Meas#es:
7i8 The top management of the banks was changed and appointment
of independent directors in the board of directors,
7ii8 aggressive settlements were done by banks with their defaulting
borrowers at values well below the actual debt outstanding and9or the
amount awarded through the court process..... i.e., large haircuts9 write
offs,
7iii8 setting up of :orporate and Industrial 4estructuring :orporation
7:I4:8 to take over the non-performing loan portfolios of nationali!ed
banks on certain agreed terms and conditions and issue government
guaranteed bonds earning market rates of return
7iv8 The Banking :ompanies 74ecovery of "oans, 0dvances, :redits
and Jinances8 0ct, ())I was introduced in Jebruary ())I. %pecial
banking courts have been established under this 0ct to facilitate the
recovery of non-performing loans and advances from defaulted
52
TY B.B.I NPA
PREVENTION
Ce$it Dis'#sal No!s
The bank will ensure that the company 9 borrower have achieved
financial closure before disbursement to term loans.
2o branch shall disburse funds or open letters of credit or issue any
guarantee in respect of any borrower unless all terms and conditions
as per sanction terms are complied with. Branch, before disbursing
funds under JB" or open "etters of :redit or issue any guarantee
under 2JB" shall keep a certificate on record that all terms and
conditions are complied with and that all required documentation is
completed in respect of sanction at branch level. In cases of sanctions
by 4egional manager 9 $eneral 1anager 7$u#arat8 9 $eneral manager
7:redit8.
<herever disbursements under JB" or opening 9 9issuance of "etters
of credit 9 guarantee is necessary before full compliance to all terms
and conditions, the permission of original sanctioning authority should
be obtained giving #ustification for the same. In the case of sanctions by
1anaging :ommittee 9 Board of irectors, such permission shall be
obtained from :hairman and 1g irector 9 >xecutive irector.
Post Dis'#se!ent Monitoin"
Inspection of plant and machinery, land and building and other fixed
assets should be done periodically should be rectified immediately.
3roper execution of documentation including timely registration o
charge with 4;: should be ensured in accordance with the guide lined
given in manual of instructions
:onduct of the unit should be examined through monthly 1onitoring
%tatement for any symptoms of weakness in the health of the account,
and the same should be rectified to set right the account.
The bank shall carry out dynamic financial analysis by scrutini!ing the
audited accounts for previous years so as to ascertain the trend of
growth in production, sales, profitability and improvement 9 impairment
52
TY B.B.I NPA
in all important financial parameters in order to know the overall health
of the borrower account.
The Bank will follow a policy of appraising financial positions of a
borrower 7for sanction of new limits 9 enhancement of existing limits
and for renewal 9 9review8 based on the audited financial statements of
the borrower for previous financial year whoever available.
Jurther, the bank will follow a system of introducing
disincentives to borrowers who fail to submit audited accounts in time
by levying interest rate applicable to next lower credit rating than the
one assigned to the borrower beyond six months from closure of a
financial year for which audited accounts are not submitted.
<here appraisal of financial health of a borrower 7for sanction of new
limits 9 enhancement of existing limits and for renewal 9 review8 has
been based on unaudited financial statements of the borrower for
previous financial year, the Bank shall review the he financial appraisal
based on audited financial statements immediately on receipt.
In case of adverse variations more than (', or any significant
deterioration in the financial health indicated by the 0udit 4eport, a
note shall be put up to the sanctioning authority for information and
necessary direction within a month.
52
TY B.B.I NPA
GUIDE1INES FOR C1ASSIFICATION OF ASSETS
2asic Consi$eations
7i8 Broadly speaking, classification of assets into above categories
should be done taking into account the degree of well defined credit
weaknesses and extent of dependence on collateral security for
reali!ation of dues.
7ii8 In respect of accounts where there are potential threats to recovery
on account of erosion in the value of security and existence of other
factors such as, frauds committed by borrowers, it will not be prudent
for the banks to classify them first as sub-standard and then as
doubtful after expiry of (* months from the date the account has
become 230. %uch accounts should be straight away classified as
doubtful asset or loss asset, as appropriate, irrespective of the period
for which it has remained as 230.
A$%ances Gante$ #n$e Re&a'ilitation Pac+a"es A--o%e$
'( 2IFR.Te! 1en$in" Instit#tions
7i8 Banks are not permitted to upgrade the classification of any
advance in respect of which the terms have been re-negotiated
unless the package of re-negotiated terms has worked
satisfactorily for a period of one year. <hile the existing credit
facilities sanctioned to a unit under rehabilitation packages
approved by BIJ49term lending institutions will continue to be
classified as sub-standard or doubtful as the case may be in
respect of additional facilities sanctioned under the rehabilitation
packages the income recognition and asset classification norms
will become applicable after a period of one year from the date
of disbursement.
7ii8 0 similar relaxation is made in respect of %%I units which are
identified as sick by banks themselves and where rehabilitation
52
TY B.B.I NPA
packages9nursing programmers have been drawn by the banks
themselves or under consortium arrangements.
Intenal S(ste! fo Classification of Assets as NPA
7i8 Banks should establish appropriate internal systems to eliminate the
tendency to delay or postpone the identification of 230s, especially in
respect of high value accounts. The banks may fix a minimum cut-off
point to decide what would constitute a high value account depending
upon their respective business levels. The cut-off point should be valid
for the entire accounting year.
7ii8 4esponsibility and validation levels for ensuring proper asset
classification may be fixed by the bank.
7iii8 The system should ensure that doubts in asset classification due to
any reason are settled through specified internal channels within one
month from the date on which the account would have been classified
as 230 as per extant guidelines.
7iv8 4BI would continue to identify the divergences arising due to non-
compliance, for fixing accountability. <here there is willful non-
compliance by the official responsible for classification and is well
documented, 4BI would initiate deterrent action including imposition of
monetary penalties.
52
TY B.B.I NPA
INCOME RECOGNITION
Inco!e Reco"nition > Polic(
The policy of income recognition has to be ob#ective and based on the
record of recovery. Income from non-performing assets 72308 is not
recogni!ed on accrual basis but is booked as income only when it is actually
received. Therefore, banks should not take to income account interest on non-
performing assets on accrual basis.
Cowever, interest on advances against term deposits, 2%:s, IN3s,
ON3s and "ife policies may be taken to income account on the due date,
provided adequate margin is available in the accounts.

Jees and commissions earned by the banks as a result of
renegotiations or rescheduling of outstanding debts should be recogni!ed on
an accrual basis over the period of time covered by the re-negotiated or
rescheduled extension of credit.
If $overnment guaranteed advances become 6overdue6 and thereby
230, the interest on such advances should not be taken to income account
unless the interest has been reali!ed.
Re%esal of Inco!e on Acco#nts 2eco!in" NPAs
If any advance including bills purchased and discounted becomes 230
as at the close of any year, interest accrued and credited to income account in
the corresponding previous year, should be reversed or provided for if the
same is not reali!ed This will apply to $overnment guaranteed accounts also.
If interest income from assets in respect of a borrower becomes
sub#ect to non-accrual, fees, commission and similar income with respect to
same borrower that have been accrued should ceased to accrue in the
52
TY B.B.I NPA
current period and should be reversed or provided for with respect to past
periods, if uncollected.
Banks undertaking equipment leasing should follow prudential
accounting standards. "ease rentals comprise two elements Q a finance
charge 7i.e. interest charge8 and a charge towards recovery of the cost of the
asset. The interest component alone should be taken to income account.
%uch income taken to income account, before the asset became 230,
and remained unreali!ed should be reversed or provided for in the current
accounting period.
2oo+in" of Inco!e on In%est!ents in S&aes < 2on$s
0s a prudent practice and in order to bring about uniform accounting
practice among banks for booking of income on *' units of HTI and equity of
0ll India Jinancial Institutions, such income should be booked on cash basis
and not on accrual basis.
Cowever, in respect of income from $overnment securities9bonds of
public sector undertakings and 0ll India Jinancial Institutions, where interest
rates on the instruments are predetermined, income may be booked on
accrual basis, provided interest is serviced regularly and is not in arrears.
Patial Reco%e( of NPAs
Interest reali!ed on 230s may be taken to income account provided
the credits in the accounts towards interest are not out of fresh9additional
credit facilities sanctioned to the borrower concerned.
Inteest A--lication
In case of 230s where interest has not been received for )' days or
more, as a prudential norm, there is no use in debiting the said account by
interest accrued in subsequent quarters and taking this accrued interest
amount as income of the bank as the said interest is not being received. It is
simultaneously desirable to show such accrued interest separately or park in
a separate account so that interest receivable on such 230 account is
52
TY B.B.I NPA
computed and shown as such, though not accounted as income of the bank
for the period.
The interest accrued in respect of performing assets may be taken to
income account as the interest is reasonably expected to be received.
Cowever, if interest is not actually received for any reason in these cases and
the account is to be treated as an 230 at the close of the subsequent year as
per the guidelines, then the amount of interest so taken to income in the
corresponding previous year should be reversed or should be provided for in
full.
<ith a view to ensuring uniformity in accounting the accrued interest in
respect of both the performing and non-performing assets, the following
guidelines may be adopted notwithstanding the existing provisions in the
respective %tate :o-operative %ocieties 0ctA
7i8 Interest accrued in respect of non-performing advances should not
be debited to borrower accounts but shown separately under 6Interest
4eceivable 0ccount6 on the 63roperty and 0ssets6 side of the balance
sheet and corresponding amount shown under 6;verdue Interest
4eserve 0ccount6 on the 6:apital and "iabilities6 side of the balance
sheet.
7ii8 In respect of borrower accounts, which are treated as performing
assets, accrued interest can alternatively be debited to the borrower
account and credited to Interest account and taken to income account.
In case the accrued interest in respect of the borrower account is not
actually reali!ed and the account has become 230 as at the close of
subsequent year, interest accrued and credited to income account in
the corresponding previous year, should be reversed or provided for.
7iii8 The illustrative accounting entries to be passed in respect of
accrued interest on both the performing and non-performing advances
are indicated in the 0nnex -.
In the above context, it may be clarified that overdue interest reserve is
not created out of the real or earned income received by the bank and as
such, the amounts held in the ;verdue Interest 4eserve 0ccount can not be
regarded as 6reserve6 or a part of the owned funds of the banks. It will also be
observed that the Balance %heet format prescribed under the Third %chedule
to the Banking 4egulation 0ct, ()+) 70s 0pplicable to :o-operative %ocieties8
specifically requires the banks to show 6;verdue Interest 4eserve6 as a
distinct item on the 6:apital and "iabilities6 side vide item / thereof.
52
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PROVISIONING NORMS
No!s fo Po%isionin" on 1oans < A$%ances
In conformity with the prudential norms, provisions should be made on
the non-performing assets on the basis of classification of assets into
prescribed categories as detailed in paragraph - above.
Taking into account the time lag between an account becoming
doubtful of recovery, its recognition as such, the reali!ation of the security and
the erosion over time in the value of security charged to the bank, the banks
should make provision against loss assets, doubtful assets and substandard
assets as belowA
8i9 1oss Assets
7a8 The entire assets should be written off after obtaining
necessary approval from the competent authority and as
per the provisions of the :o- operative %ocieties
0ct94ules. If the assets are permitted to remain in the
books for any reason, ('' per cent of the outstanding
should be provided for.
7b8 In respect of an asset identified as a loss asset, full
provision at ('' per cent should be made if the expected
salvage value of the security is negligible.
8ii9 Do#'tf#l Assets
7a8 ('' per cent of the extent to which the advance is not
covered by the reali!able value of the security to which
the bank has a valid recourse should be made and the
reali!able value is estimated on a realistic basis.
52
TY B.B.I NPA
7b8 In regard to the secured portion, provision may be
made on the following basis, at the rates ranging from *'
per cent to ('' per cent of the secured portion depending
upon the period for which the asset has remained
doubtfulA
8iii9 S#'-stan$a$ Assets
0 general provision of (' per cent on total outstanding
should be made without making any allowance for
I:$:9>:$: guarantee cover and securities available.
8i%9 Po%ision on Stan$a$ Assets
7a8 Jrom the year ended 1arch -(, *''', the banks
should make a general provision of a minimum of '.*.
per cent on standard assets.
7b8 Cowever, unit banks and banks having multiple
branches within a single district with deposit of 4s (''
crore and above and all other H:Bs operating in more
than one district will be sub#ected to higher provisioning
norms on standard asset as underA
i. The general provisioning requirement for
?standard advances@ shall be '.+' per cent from
the present level of '.*. percent. Cowever, direct
advances to agricultural and %1> sectors which
are standard assets, would attract a uniform
provisioning requirement of '.*. per cent of the
funded outstanding on a portfolio basis, as hitherto
ii. Jor personal loans, loans and advances
qualifying as capital market exposures and
commercial real estate loans provisioning
requirement would be (.' ,.
52
TY B.B.I NPA
7c8 The provisions towards Fstandard assetsG need not be
netted from gross advances but shown separately as
5:ontingent 3rovision against %tandard 0ssets5 under
5;ther Junds and 4eserves5 Ritem.* 7viii8 of :apital and
"iabilitiesS in the Balance %heet.
7d8 In case banks are already maintaining excess
provision than what is required9prescribed by %tatutory
0uditor94BI Inspection for impaired credits under Bad and
oubtful ebt 4eserve, additional provision required for
%tandard 0ssets may be segregated from Bad and
oubtful ebt 4eserve and the same may be parked
under the head 5:ontingent 3rovisions against %tandard
0ssets5 with the approval of their Board of irectors.
%hortfall if any, on this account may be made good in the
normal course.
7e8 The above contingent provision will be eligible for
inclusion in Tier II capital.
8%9 =i"&e -o%isions
There is no ob#ection if the banks create bad and doubtful
debts reserve beyond the specified limits on their own or if
provided in the respective %tate :o-operative %ocieties 0cts.
52
TY B.B.I NPA
PROVISIONING FOR RETIREMENT 2ENEFITS
3rimary 7urban8 co-operative banks may have retirement benefit
schemes for their staff, vi!. 3rovident Jund, $ratuity and 3ension. It is
necessary that such liabilities are estimated on actuarial basis and full
provision should be made every year for the purpose in their 3rofit and "oss
0ccount.
3rovisioning 2orms for sale of financial assets to %ecuriti!ation
:ompanies 7%:89 4econstruction :ompanies 74:8
7a8 If the sale to %:94: is at a price below the net book
value72BN8 7i.e. book value less the provision held8, the short
fall should be written off 9 debited to 3L" 09c of that year, sub#ect
to the provisions of the co-operative societies
acts9rules9administrative guidelines in regard to write-off of
debts.
7b8 If the sale is for a value higher than the 2BN, the excess
provision will not be reserved but will be utili!ed to meet the
shortfall9 loss on account of sale of other assets to %:94:.
G#i$elines fo Po%isions in S-ecific Cases
7i8 %tate $overnment guaranteed advances Jrom the year ended
1arch -(, *''&= %tate $overnment guaranteed advance and
investment in %tate $overnment
guaranteed securities would attract extant provisioning norms, if
interest and9or principal or any other amount due to the bank remains
overdue for more than )' days irrespective of the fact whether the
guarantee have been invoked or not.
7ii8 0dvances granted under rehabilitation packages approved by
BIJ49term lending institutions
52
TY B.B.I NPA
7a8 The existing credit facilities sanctioned to a unit under
rehabilitation package approved by BIJ49term lending
institutions should continue to be classified as sub-standard or
doubtful asset as the case may be.
7b8 Cowever, the additional facilities sanctioned as per package
finali!ed by BIJ4 and9or term lending institutions, the income
recognition and asset classification norms will become
applicable after a period of one year from the date of
disbursement.
7c8 In respect of additional credit facilities granted to %%I units
which are identified as sick and where rehabilitation
packages9nursing programmers have been drawn by the banks
themselves or under consortium arrangements, no provision
need be made for a period of one year.
7iii8 0dvances against fixed9term deposit, 2%:s eligible for surrender,
IN3s, ON3s, and life policies are exempted from provisioning
requirements.
7iv8 0dvances against gold ornaments, government securities and all
other kinds of securities are not exempted from provisioning
requirements.
7v8 0dvances covered by >:$:9I:$: guarantee
7a8 In the case of advances guaranteed by I:$:9>:$:,
provision should be made only for the balance in excess of the
amount guaranteed by these :orporations.
7b8 In case the banks are following more stringent method of
provisioning in respect of advances covered by the guarantees
of I:$:9 >:$:, as compared to the method given above,
they may have the option to continue to follow the same
procedure.
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TY B.B.I NPA
DIVERSION IN ASSET C1ASSIFICATION AND
PROVISIONING
7i8 Banks should ensure scrupulous compliance with the instructions for
recognition of credit impairment and view aberrations by dealing
officials seriously.
7ii8 Banks should establish appropriate internal systems to eliminate the
tendency to delay or postpone the identification of 230s, especially in
respect of high value accounts. Banks should fix a minimum cut off
point to decide what would constitute a high value account depending
upon their respective levels. The cut off point should be valid for the
entire year.
7iii8 The responsibility and validation levels for ensuring proper asset
classification may be fixed by the banks.
7iv8 <here there is willful non-compliance by the officials responsible
for classification and is well documented, 4BI would initiate deterrent
action including imposition of monetary penalties.
52
TY B.B.I NPA
T&e E!e"ence of NPA in In$ian 2an+in" <
Financial Instit#tions an$ its Di!ensions
2on-performing 0sset 72308 has emerged since over a decade as an
alarming threat to the banking industry in our country sending distressing
signals on the sustainability and endurability of the affected banks. The
positive results of the chain of measures effected under banking reforms by
the $overnment of India and 4BI in terms of the two 2arasimhan :ommittee
4eports in this contemporary period have been neutralised by the ill effects of
this surging threat.
espite various correctional steps administered to solve and end this
problem, concrete results are eluding. It is a sweeping and all pervasive virus
confronted universally on banking and financial institutions. The severity of the
problem is however acutely suffered by 2ationalised Banks, followed by the
%BI group, and the all India Jinancial Institutions.
0s at -(.'-.*''( the aggregate gross 230 of all scheduled commercial
banks amounted to 4s.&-,//- :rore. Table 2o.I gives the figures of gross and
net 230 for the last four years.
It shows an increase of 4s.(-,'&/ :rore or more than *., in the last
financial year, indicating that fresh accretion to 230 is more than the
recoveries that were effected, thus signifying a losing battle in containing this
menace.
Table 2o. I
230 %tatistics -0ll %cheduled
:ommercial
Banks ..................................
70mount in :rores8 Bear
Total
0dvances
$ross
230
2et
0dvances
2et
230
,-age of
$ross
230 to
total
advances
,-age of
2et
230 to net
advances
())I-)/ -.*&)I .'/(. -*..** *.I-+ (+.+ I.-
())/-)) -))+)& ./I** -&I'(* *I/)* (+.I I.&
()))-*''' +I.((- &'+'/ +++*)* -'*(( (*.I &./
*'''-*''( ../I&& &-//- .*&-*) -*&-* ((.+ &.*
The apparent reduction of gross 230 from (+.+, to ((.+, between
())/ and *''( provides little comfort, since this accomplishment is on
account of credit growth, which was higher than the growth of $ross 230 and
not through appreciable recovery of 230.
52
TY B.B.I NPA
There is neither reduction nor even containment of the threat. The
gross 230 and net 230 for 3%Bs as at -(.'-.*''( are (*.-), and &.I+, are
higher than the figures for %:Bs at ((.+,and &.*,. :omparative figures for
3%Bs, %BI $roup and 2ationalised Banks are as under.
Table -* A 230 of
3%BsTTTTTTTTTTTTTTTTTTTTTTT
70mount in :rores8 Bear
Total
0dvances
$ross
230
2et
230
,-age of
$ross
230 to
total
advances
,-age of
2et
230 to
net
advances
())&-)I *++*(+ +-.II *'*/. (I./ , ).* ,
())I-)/ */+)I( +..&- *(*-* (&.' , /.* ,
())/-)) -*.-*/ .(I(' *+*(( (..) , /.( ,
()))-*''' -/''II .-'-- *&(// (+.'' , I.),
*'''-*''( ++*(-+ .+II- *I)&I (*.-) , &.I+,
Table --A 230 of %tate Bank
$roupTTTTTTTTTTTTTTT..
70mount in :rores8 Bear
Total
0dvances
$ross
230
2et
230
,-age of
$ross
230 to
total
advances
,-age of
2et
230 to
net
advances
())I-)/ ((--&' (..** &/*) (+..I, &.)/ ,
((/).) (/&+( II&+
(..&I
,
I.I+ ,
()))-*''' (*)*.- ()II- I+(( (+.'/ , &.II ,
*'''-*''( (.'-)' *'./& /(*. (*.I- , &.*& ,
Table -+A 230 of 2ationalised
BanksTTTTTTTTTTTTTTTT.
70mount in :rores8 Bear
Total
0dvances
$ross
230
2et
230
,-age of
$ross
230 to
total
advances
,-age of
2et
230 to
net
advances
())I-)/ (&&*** -'(-' (+++( (&.// /.)(
())/-)) (//)*& --'&) (.I.) (&.'* /.-.
()))-*''' **+/(/ --.*( (I-)) (-.)) I./'
*'''-*''( *&+*-I -+&') (&')& (*.() I.'(
Jurther it is revealed that commercial banks in general suffer a tendency
to understate their 230 figures. There is the practice of 6ever-greening6 of
advances, through subtle techniques.
52
TY B.B.I NPA
0s per report appearing in a national daily the banking industry has under-
estimated its non-performing assets 7230s8 by whopping 4s. -,/&*.(' :rore
as on 1arch ())I. The industry is also estimated to have under-provided to
the extent of 4s (,+(*.*) :rore.
The worst 5offender5 is the public sector banking industry. 2ineteen
nationalised banks along with the %tate Bank of India and its seven associate
banks have underestimated their 230s by 4s -,'*).*) :rore. %uch deception
of 230 statistics is executed through the following ways.
Jailure to identify an 230 as per stipulated guidelinesA There were
instances of Usub-standard6 assets being classified as Ustandard6=
<rong classification of an 230A classifying a Uloss6 asset as a Udoubtful6
or Usub-standard6 asset= classifying a Udoubtful6 asset as a Usub-
standard6 asset.
:lassifying an account of a credit customer as Usubstandard6 and other
accounts of the same credit customer as Ustandard6, throwing
prudential norms to the winds.
>ssentially arising from the wrong classification of 230s, there was a
variation in the level of loan loss provisioning actually held by the bank and
the level required to be made. This practice can be logically explained as a
desperate attempt on the part of the bankers, whenever adequate current
earnings were not available to meet provisioning obligations.
riven to desperation and impelled by the desire not to accept defeat,
they have chosen to mislead and claim compliance with the provisioning
norms, without actually providing. This only shows that the problem has
swelled to graver dimensions.
The international rating agency %tandard L 3oor 7% L 38 conveys the
gloomiest picture, while estimating 230s of the Indian banking sector
between -., to I', of its total outstanding credit. 1uch of this, up to -., of
the total banking assets, as per the rating agency would be accounted as 230
if rescheduling and restructuring of loans to make them good assets in the
book are not taken into account.
Cowever 4BI has contested this dismal assessment. But the fact remains
that the infection if left unchecked will eventually lead to what has been
forecast by the rating agency. This invests an urgency to tackle this virus as a
fire fighting exercise.
Jinancial institutions have not far lagged behind. 230s of ten leading
institutions have reported a rise of ((./) per cent, or 4s (,)*) :rore, to 4s
(/,(+& :rore during the year ended 1arch *''' from 4s (&,*(I :rore last
year.
The 230 statistics of the three leading Jinancial Institutions for the last
two years are given in Table-. IBI tops the list by notching up bad loans
worth 4s I&&. :rore by 1arch *'''. In fact, its 230s have gone up by 4s
(,(/. :rore from 4s &,+)' :rore in the previous year.
52
TY B.B.I NPA
IJ:I followed with 230s of 4s +,('- :rore, but it reported fall of 4s (-+
:rore from the previous year6s level of 4s +,*-I :rore. I:I:I6s 230s went up
to 4s -,).) :rore from 4s -,&*- :rore in the previous year.
Table .
230 %tatistics of the
three 1a#or Term
"ending Institutions as
at -(.'-.*''(. 70mount
in :rores8 2ame of JI
Total "oans
-(.-.*'''
Total "oans
-(.-.*''(
230
-(.-.*'''
230-, age
-(.-.*'''
230
-(.-.*''(
230-, age
-(.-.*''(
IBI .I')) .&+II I&&. (-.+ /-&- (-.)
I:I:I .*-+( .I.'I -).) 'I.& *I/* '..*
IJ:I ()/+( (/I(. +('- *'.I -/)I *'./
E!e"ence of NPA as an Ala!in" T&eat to Nationalise$
2an+s
230 is a brought forward legacy accumulated over the past three
decades, when prudent norms of banking were forsaken basking by the halo
of security provided by government ownership. It is not wrong to have
pursued social goals, but this does not #ustify relegating banking goals and
fiscal discipline to the background.
But despite this extravagance the malaise remained invisible to the
public eyes due to the practice of not following transparent accounting
standards, but keeping the balance sheets opaque. This artificially conveyed
picture of 6all is well6 with 3%Bs suddenly came to an end when the lid was
open with the introduction of the prudential norms of banking in the year ())*-
)-, bringing total transparency in disclosure norms and 6cleansing6 the
balance sheets of commercial banks for the first time in the country.
=o4 R2I Desci'es t&is Ne4 De%elo-!ent in its 0e'
Site
In the peak crisis period in early 2ineties, when the first %eries of
Banking 4eforms were introduced, the working position of the %tate-owned
52
TY B.B.I NPA
banks exhibited the severest strain. :ommenting on this situation the 4eserve
Bank of India in its web-site has pointed out as underA
5Till the adoption of prudential norms relating to income recognition,
asset classification, provisioning and capital adequacy, twenty-six out of
twenty-seven public sector banks were reporting profits 7H:; Bank was
incurring losses from ()/)-)'8.
In the first post-reform year, i.e., ())*-)-, the profitability of the 3%Bs
as a group turned negative with as many as twelve nationalised banks
reporting net losses. By 1arch ())&, the outer time limit prescribed for
attaining capital adequacy of / per cent, eight public sector banks were still
short of the prescribed.5
:onsequently 3%Bs in the post reform period came to be classified
under three categories as -
Cealthy banks 7those that are currently showing profits and hold no
accumulated losses in their balance sheet8
Banks showing currently profits, but still continuing to have
accumulated losses of prior years carried forward in their balance
sheets
Banks which are still in the red, i.e. showing losses in the past and in
the present.
52
TY B.B.I NPA
C1ARIFICATION ON CERTAIN FRE7UENT1?
ASAED 7UESTIONS
0&et&e a 4o+in" ca-ital acco#nt 4ill 'eco!e an NPA if t&e stoc+
state!ents ae not s#'!itte$ e"#lal(C
0&at s&o#l$ 'e t&e -eio$ fo 4&ic& t&e stoc+ state!ents can 'e in
aeas 'efoe t&e acco#nt is teate$ as an NPAC
Banks should ensure that drawings in the working capital accounts are
covered by the adequacy of current assets, since current assets are first
appropriated in times of istress.
:onsidering the practical difficulties of large borrowers, stock
statements relied upon by the banks for determining drawing power should
not be older than three
months. The outstanding in the account based on drawing power calculated
from stock statements older than three months would be deemed as irregular.
0 working capital
borrower account will become 230 if such irregular drawings are permitted in
the account for a continuous period of )' days 7with effect from 1arch -(,
*''+8.
0&et&e an acco#nt 4ill 'eco!e an NPA if t&e e%ie4.ene4al of
e"#la.a$-&oc ce$it li!its ae not $one 4&en $#eC
0&at s&o#l$ 'e -eio$icit( of e%ie4.ene4al to $eci$e t&e -esent
stat#s of an acco#ntC
4egular and ad-hoc credit limits need to be reviewed9regulari!ed not
later than three months from the due date9date of ad-hoc sanction. In case of
constraints such as non-availability of financial statements and other data
from the borrowers, the branch should furnish evidence to show that
renewal9review of credit limits is already on and would be completed soon.
In any case, delay beyond six months is not considered desirable as a
general discipline. Cence, an account where the regular9ad-hoc credit limits
have not been reviewed or have not been renewed within (/' days from the
52
TY B.B.I NPA
due date9date of ad-hoc sanction will be treated as 230, which period will be
reduced to )' days with effect from 1arch -(, *''+.
0&et&e it 4ill 'e in o$e to teat a 'oo4e acco#nt as Dstan$a$D; if it
&as 'een ie"#la fo a !a@o -at of t&e (ea; '#t &as 'een e"#laiEe$
nea t&e 'alance s&eet
$ateC
The asset classification of borrower accounts where a solitary or a few
credits are recorded before the balance sheet date should be handled with
care and without scope
for sub#ectivity. <here the account indicates inherent weakness on the basis
of the data available, the account should be deemed as a 230. In other
genuine cases, the banks must furnish satisfactory evidence to the %tatutory
0uditors9Inspecting ;fficers about the manner of regulari!ation of the account
to eliminate doubts on their performing status.
Classification of NPAs 4&ee t&ee is a t&eat to eco%e( =o4 s&o#l$
t&e inst#ctions on classification of NPAs stai"&ta4a( as $o#'tf#l o a
loss asset 'e inte-ete$ an$ 4&at can 'e te!e$ as a Dsi"nificant ce$it
i!-ai!entDC
0n 230 need not go through the various stages of classification in
case of serious credit impairment and such assets should be straightway
classified as a doubtful9loss asset as appropriate.
>rosion in the value of security can be reckoned as significant when
the reali!able value of the security is less than .' per cent of the value
assessed by the bank or accepted by 4BI at the time of last inspection, as the
case may be. %uch 230s may be straightaway classified under doubtful
category and provisioning should be made as applicable to doubtful assets.
:lassification of credit facilities under consortium In certain cases of
consortium accounts, though the record of recovery in the account with a
member bank may suggest that the account is a 230, the banks submit that,
at times, the borrower has deposited adequate funds with the consortium
leader9member of the consortium and the bank6s share is due for receipt.
In s#c& cases; 4ill it 'e in o$e fo t&e !e!'e 'an+ to classif( t&e
acco#nt as Dstan$a$D in its 'oo+sC
52
TY B.B.I NPA
0sset classification of accounts under consortium should be based on
the record of recovery of the individual member banks and other aspects
having a bearing on the recoverability of the advances. <here the remittances
by the borrower under consortium lending arrangements are pooled with one
bank and9or where the bank receiving remittances is not parting with the
share of other member banks, the account will be treated as not serviced in
the books of the other member banks, and therefore, be treated as 230.
The banks participating in the consortium should, therefore, arrange to
get their share of recovery transferred from the lead bank or get an express
consent from the lead bank for the transfer of their share of recovery, to
ensure proper asset classification in their respective books.
A--o-iation of eco%eies 0&at is t&e -actice to 'e a$o-te$ '( 'an+s
e"a$in" a--o-iation of eco%eies in NPA acco#ntsC
In the absence of a clear agreement between the bank and the
borrower for the purpose, banks should adopt an accounting principle and
exercise the right of appropriation of recoveries in a uniform and consistent
manner.
0ctivities allied to agriculture ;ur existing guidelines stipulate that
advances granted for agricultural purposes may be treated as 230 if interest
and9or installments towards repayment of principal remains unpaid for two
harvest seasons but for a period not exceeding two half years.
0&et&e t&e sa!e no! can 'e eFten$e$ to floic#lt#e an$ allie$
a"ic#lt#e acti%ities li+e -o#lt(; ani!al &#s'an$(; etc*C
0s indicated in 3ara *.(.-, the norms for classifying direct agricultural
advances 7listed in 0nnex (8, as 230s have since been revised w.e.f.
%eptember -', *''+.
;verdoes in other credit facilities There are instances where banks
park the dues from a borrower in respect of devolved letters of credit and
invoked guarantees in a separate account, irrespective of whether the
borrower6s credit facilities are regular or not.
=o4 to $ete!ine 4&en t&e acco#nt in 4&ic& s#c& $#es is -a+e$
&as 'eco!e an NPAC
52
TY B.B.I NPA
0 number of banks adopt the practice of parking the dues of the
borrower in respect of devolved letters of credit and invoked guarantees in a
separate account which is not a regular sanctioned facility. 0s a result these
are not reflected in the principal operating account of the borrower.
This renders application of the prudential norms for identification of
230s difficult. It is, therefore, advised that if the debts arising out of
devolvement of letters of credit or invoked guarantees are parked in a
separate account, the balance outstanding in that account also should be
treated as a part of the borrower6s principal operating account for the purpose
of application of prudential norms on income recognition, asset classification
and provisioning.
Treatment of loss assets 0n 230 account will be classified as a loss
asset only when there is no security in the account or where there is
considerable erosion in the reali!able value of the security in the account.
0&at can 'e te!e$ asGconsi$ea'leG eosion fo t&e acco#nt to 'e
classifie$ as a loss assetC
If the reali!able value of the security, as assessed by the bank9
approved values 9 4BI is less than (' per cent of the outstanding in the
borrower accounts, the existence of security should be ignored and the asset
should be straightaway classified as loss asset. It may be either written off
after obtaining necessary permission from the competent authority as per the
:o-operative %ocieties 0ct94ules, or fully provided for by the bank.
Naluation of %ecurity 0 ma#or source of divergence in provisioning
requirement was the reali!able value of the primary and collateral security.
:an uniform guidelines be prescribed for adoption in this area, at least for
large value accountsV
<ith a view to bringing down divergence arising out of difference in
assessment of the value of security it has been decided that in cases of 230s
with balance of 4s.(' lakh and aboveA
7a8 The current assets and their valuation are looked into at the time of
%tatutory 0udit9:oncurrent audit. Cowever, in order to enhance the
reliability on stock valuations, stock audit at annual intervals by external
agencies could be considered in case of larger advances. The cut off
limit and the names of the external agencies may be finali!ed by the
Board.
7b8 :ollaterals such as immovable properties charged in favor of the
bank should the Board of irectors.
52
TY B.B.I NPA
Re"istation an$ !attes inci$ental t&eeto
7i8 >very %ecuriti!ation :ompany or 4econstruction :ompany shall
apply for registration in the form of application specified vide
notification 2o.2B%.(9:$17:%18-*''-, dated 1arch I, *''- and
obtain a certificate of registration from the Bank as provided under
%ection - of the 0ct=
7ii8 0 %ecuriti!ation :ompany or 4econstruction :ompany, which has
obtained a certificate of registration issued by the Bank under %ection -
of the 0ct, can undertake both securiti!ation and asset
reconstruction activities=
7a8 0 %ecuriti!ation :ompany or 4econstruction :ompany shall
commence business within six months room the date of grant of
:ertificate of 4egistration by the Bank= provided that on the
application by the %ecuriti!ation :ompany or 4econstruction
:ompany, the Bank may rant extension for such further period,
not exceeding one year in aggregate from he date of grant of
:ertificate f 4egistration.
7b8 0 %ecuriti!ation :ompany or 4econstruction :ompany,
which has obtained a :ertificate of 4egistration from the Bank
under %ection - of the 0ct and not commenced business as on
the date of the 2otification shall commence business within six
months from the date of 2otification.
7iii8 0ny entity not registered with the Bank under %ection - of the 0ct
may conduct the business of securiti!ation or asset reconstruction
outside the purview.
52
TY B.B.I NPA
CONC1USION:-
2pa are usually not good for the banks. 2pa should e as minimum as it
can be.
The sugertion for decreasing npa are as follows A
Identification of new avenues, assessment of existing product
line and portfolio based on the risk-return profile andprevious
experience of the bank to update negative, discretionary and
open list of the bank.
<ith robust interest rate policy in place, selective deployment of
credit on isk-return scale to maintain the earning9spread risk
diversification of the bank with sub plr polocies for maintaining
and improving credit portfplio quality of the bank.
%ector wise9industry wise diversification of credit portfolio with
regard to macro economic scenario and the
performance9prospects9outlook of the sector9industries.
>xport sector plays pivotal role in the country@s economy and the
bank@s thrust on export credit will be maintained9fine-tuned with
specific references to the gold card scheme in vogue and new
potential export avenues.
In a phased manner, all credit exposures shall be covered under
credit rating framework of the bank.
:ompliance with all the statutory and regulatory
stipulations9requirements shall be strictly ensured in credit
operations of the bank.
Based on the credit expansion plans, the bank shall assess,
induct and develop through training and work experience,
adequate number of credit officers for assessing, approving and
managing credit risks.
52