INSTITUTE OF MANAGMENT STUDIES, DAVV, INDORE

FINANCE AND ADMINISTRATION – SEMESTER IV

CREDIT MANAGEMENT AND RETAIL BANKING

NON PERFORMING ASSETS

 Concept in line with international practices and as per recommendations of Committee on

financial reforms – M Narsimhan
 An asset which ceases to generate income is called NPA
 Three concepts:
 Income recognition
 Asset classification
 Provisioning norms

 Non-Performing Assets
 Interest or installment remain overdue for a period more than 90 days - term loans
 Account remain out of order - CCloan and overdrafts
 Bill remain overdue for more than 90 days
 Installment and interest overdue for more than two crop seasons- Agricultural advance short
duration crops
 Installment and interest overdue for more than one crop season-Long duration crops
o Out of order, means
 Balance remain more than sanctioned limit for 90 days
 DP or credits are less than Interest charged for a period of 90 days,
 non submission of stock statement
 non renewal of the limits
 Overdue means amount due not paid on or before the due date

 Income recognition
 Income is not recognized from an NPA on an accrual basis, but is booked as income only
when it is actually received.
 Loan against bank deposits, NSC, KVP, IVP and Life policy are taken to the account provided
adequate margin is available.
 The income of previous year have to be reversed or provided for - INCA
 Interest can be charged to NPA account by taking the same to Interest suspense account.

 Asset classification
 Standard asset-do not show any adverse feature
 Special mention accounts-for early warning signal, and overdue up to 90 days-deficiencies of
temporary nature
 Substandard assets-asset which remain NPA for a period less than or equal to twelve months
 Doubtful assets-assets which remain in sub standard asset for a period of twelve months.
 Loss assets-where loss is recognize by the bank, internal auditors, statutory auditors, or RBI
auditors, identified as loss but amount is not written off.
 Asset classification is borrower wise and not facility wise
 Accounts with temporary deficiency:
 Stock statement to be relied should not be older than 3 months. Otherwise irregular.
 Adhoc limits on renewal should be regularized within 6 months, otherwise NPA
 Under consortium advance – it is individual bank to decide depending on recovery
 Moratorium period is to be excluded
 Government guaranteed advance will be classified as standard assets but it will not generate
income
 DICGC, ECGC claims to be excluded
 Auto up gradation for sub standard account- for restructured sub standard account - one year
of satisfactory performance for upgradation
 Loan against bank TDR, NSC,KVP, IVP and LIC policy are not classified as NPA provided
sufficient margin is available

 Provisioning Norms
 Loss assets-100%
 Doubtful assets (unsecured portion)-100%
 Doubtful assets (secured portion)-25% for one year, 40% up to 3 year, 100% for more than 3
year.
 Sub Standard assets-15% general provision without making any allowance for ECGC
guarantee or security cover available.10% additional provision for unsecured portion
o (total 15+10=25%)
 Standard assets-0.25% for SME and direct agricultural advance, 1% on personal loans, capital
market exposures, housing loans beyond 20 lakh, loan to commercial real estate. For all other
advance 0.40%
 Advances against gold loans, government securities are not exempted. advance against NSC,
Term deposits, IVP, KVC, Life policies will attract provisioning norms.
 A general provision @ 0.25 to 100% for country risk as per the risk category of the specific
country.
Risk category ECGC classification Provisioning requirement
Insignificant A1 0.25
Low A2 0.25
Moderate B1 5.00
High B2 20.00
Very high C1 25.00
Restricted C2 100.00
Off credit D 100.00

 Computation of gross advance, gross NPA, net advance and net NPA
 Gross advance – standard asset + gross NPA
 Gross NPA as % of gross advance – gross NPA/ gross advance
  Net advance – gross advance – deductions (provision held in NPA account, DICGC/ ECGC
claims received and held pending for adjustment, part payment kept in suspense account,
floating provision etc.)
 Net NPA – (Gross NPA – deductions)
 Net NPA as % to net advance – net NPA/ net advance in %

 Central Repository of Information on large credit

 RBI set up CRILC to collect, store and disseminate data on all borrower including SMA
accounts having fund based and non fund bases credit exposure of Rs. 50 million and above

 Early recognition of stress

 Before a loan a/c turns in to NPA banks are required to identify incipient stress in account by
creating a sub-asset category of SMA
 SMA 0 – Principal and interest payment not overdue for more than 30days, but account
showing incipient stress
 SMA 1 - Principal and interest payment not overdue between 31 to 60 days
 SMA 2 - Principal and interest payment not overdue between 61 to 90 days

 Corporate Debt restructuring (CDR) mechanism

 It is applicable in case of Multiple banking/ consortium/ syndication where all banks have
exposure of Rs.100 million and above. Approval is done if super majority of 75% creditors by
value agrees for CDR and makes binding on remaining 25%. It has a 3 tier structure – CDR
standing forum, CDR empowered group and CDR cell.

Prepared by:
Arvind Paranjape, M.Sc. CAIIB
paranjape.arvind@yahoo.com
9425067026