This action might not be possible to undo. Are you sure you want to continue?
PROJECT ON INCOME RECOGNITION & ASSETS CLASSIFICATION OF BANKING COMPANIES. MASTER OF COMMERCE (ADVANCED ACCOUNTING) SUBJECT: FINANCIAL ACCOUNTING SEMESTER 1 2012-13 In Partial Fulfillment of the Requirement under Semester Based Credit and Grading System for Post Graduates (PG) Programe under Faculty of Commerce SUBMITTED BY KAKUBHAI EBRAHIM MANNAN ROLL NO: 10
PROJECT GUIDE MS. SHAMIM SAYED
K.P.B.Hinduja College of Commerce, 315 New Charni Road, Mumbai
This is to certity that Mr. KAKUBHAI EBRAHIM MANNAN of M.Com. Advanced Accounting Semester 1st [2012 - 2013] has successfully completed the project on “Income Recognition & Assets Classification of Banking Companies.” under the guidance of Ms Shamim Sayed
Project Guide Course Coordinator Internal Examiner External Examiner
Date: --------------------Place: Mumbai
I Mr. Kakubhai Ebrahim Mannan the student of M.Com ( AdvanceAccounting) 1st Semester ( 2012 – 2013 ), hereby declare that I have completed the project on „Income Recognition & Assets Classification Of Banking Companies‟.
The Information submitted is true and original to the best of my knowledge.
Kakubhai Ebrahim Mannan
The pleasure that follows the successful completion of an assignment would remain incomplete without a word of gratitude for the people without whose cooperation the achievement would have remained a distant dream. So I would like to intend my immense in debtless to all of them who have guided and motivated me through my research project. I sincerely thank to all for their valuable contribution without which this project report would have not reached its goal. . My sincere thanks go to my supervisor Ms. Shamim Sayed under whose help and guidance I could successfully complete my project.
I would also like to thank my faculty of Advanced Accounting , for grooming me to with stand the challenges of professional career.
TABLE OF CONTENTS .
The Committee on Financial System (CFS). recommended a policy of income recognition and asset classification based on record of recovery and other objective criteria as also provisioning based on the classification of assets into different categories. RBI introduced prudential norms for banking regulation. Narasimham.INTRODUCTION As a major element of the Financial Sector Reforms in India. . Capital adequacy. exposure ceilings for lending to individual and group of borrowers. asset classification and provisioning norms for the loan portfolio (IRAC in short) formed the core of prudential regulation. marking to market of the investment portfolio and. income recognition. RBI largely accepted the recommendations of the CFS and introduced the IRAC norms for the Urban Cooperative Banks (UCBs) in a phased manner over a three-year period from the year 1992-93. under the Chairmanship of Shri M. The IRAC norms serve two primary purposes – (i) to depict the true position of a bank's loan portfolio and (ii ) to help arrest its deterioration.
In other words.Income recognition (i) Effective from April 1. (The amount held in the Overdue Interest Reserve Account. but show them separately under "Interest Receivable Account" and a corresponding amount under "Overdue Interest Reserve Account" on the assets and liabilities side of the balance sheet respectively. unless actually received. (ii) Accrued interest on NPA Banks should not debit to the borrower‟s accounts interest accrued on NPA. 1992. cannot be regarded as a "reserve" or as part of the owned funds of the Bank as it is not created out of income actually received by the bank). Such un realised interest on NPA taken as income in the earlier year has to be provided for. and not on accrual basis. income from NPA is booked as income only when actually received. however. classified as Non-Performing Assets (NPA). banks cannot consider as income interest on loan accounts. 8 .
sanctioned 9 . the can be debited to the borrower‟s account and taken to income account.accrued and credited to income account. If bank should credit facility becomes NPA later. In the relevant provide for the interest accrued and bank should provide for such cases. In such cases. accrued interest can be debited to the borrower‟sof loan accounts. classified assets (iii) Accrued interest on performing as performing assets. is not out such recovery is not credit facilities sanctioned to the borrowers provided of fresh / additional out of fresh / additional credit facilities concerned. while the interest while making provision the amount held in "Overdue Interest Reserve Account" should be deducted from the should be deducted from the advances outstanding. advances outstanding. If the relevant credit facility In respect account and taken to income performing assets.(iii) Accrued interest on performing assets In respect of loan accounts. classified as account. provided such recovery Banks can take partial recovery of interest on NPA to their income account. thecredited to income account. (iv) Partial recovery of interest Banks can take partial recovery of interest on NPA to their income account. accrued interest becomes NPA later. to the borrowers concerned.
Any dues to a bank under a credit facility will be overdue if not paid by the due date fixed by the bank. RBI prescribed relaxed IRAC norms for smaller UCBs. are in the Annex. Earlier. 2004.Non-performing assets A credit facility is considered non-performing when it ceases to generate income for the bank. The criteria for treating a loan account as NPA depend on the nature of facility as under: 10 . „Past due‟ was replaced by „overdue‟ with effect from the year ended March 31. RBI implemented the 90 days delinquency norm for NPA classification for the UCBs from the year ended March 31. Given the heterogeneity of the sector. 2001. an asset was classified as NPA if interest and / or instalment of principal remained „past due‟ for a specific period. Details of those relaxations. together with relaxation in provisioning requirements.
(i) Term loan: A term loan is to be classified as NPA if interest and / or principal remained overdue for more than 90 days. A bill is debited during the remains overdue and unpaid for a period of more than 90 days. (ii) Cash credit and overdraft account: A cash credit / overdraft account is classified as NPA if the account is „out of order‟ for more than 90 days. but there are no credits continuously for 90 days as on the date of balance sheet. 11 . or credits made are not enough to cover the (iii) Bills purchased and discounted: interest treated as NPA. Overdue interest should not be charged or taken to income account in respect of overdue bills. unless it is realised. if itsame period. An account is treated as „out of order‟ if the balance outstanding is continuously in excess of the sanctioned limit or drawing power (whichever is lower) or where the outstanding balance in the principal operating account is within the sanctioned limit or drawing power.
poultry farming etc. Depending upon the duration of crops raised by a farmer. 2004 an account should be treated as NPA if interest and / or installment of principal remained overdue for two crop seasons from the due date for short duration crops and one crop season from the due date for long duration crops. (v) Agricultural advances: In case of all direct agricultural advances. NPA classification would be done on 90 days impairment norm as in the case of other advances. The crop season for each crop. floriculture or allied activities such as animal husbandry. 12 . which are not long duration crops are treated as short duration crops.. In respect of other activities like horticulture. which means the period up to harvesting. Long duration crops have a crop season longer than one year and crops. the above NPA norms would also be applied to agricultural term loan availed of by him. has to be decided by the State Level Bankers Committee in each state. if it remains outstanding for a period of more than 90 days.(iv) Other credit facilities: Any other credit facility is to be treated as NPA. effective September 30.
it can continue to follow such a procedure. where interest / principal in respect of which is in arrears for more than 90 days. As such. where the bank has a more stringent accounting procedure.(v) Income recognition on investments classified as NPA Investments also are subjected to prudential norms on income recognition. 13 . (vi) Others Wherever the State Cooperative Societies Acts prescribe a more stringent accounting procedure. the same should be followed. Further. banks should not take to income interest on accrual basis in respect of any security irrespective of the category in which it is included.
(b) Project finance: In the case of project finance. however. 14 . where interest is payable after recovery of principal should be classified as NPA only when there is a default in payment of interest on due date. should not be treated as NPA. State Government guaranteed advances and investments in State Government guaranteed securities would attract extant IRAC norms. Therefore. the respective amounts will become due only after moratorium / gestation period is over. no provision is required to be made on such accounts.Few exceptions (a) Housing loans to staff members: Housing loans or similar advances granted to staff members. should not be taken to income account unless it has been actually realised. (c) Credit facilities guaranteed by Government Credit facilities backed by Central Government guarantee. if interest and / or principal or any other amount due to a bank remains overdue for more than 90 days. though overdue. (industrial) where moratorium is allowed for payment of interest / principal. From the year ended March 31. Interest on such advances. 2006. A bank is not required to invoke the guarantee before classifying such advances / investments as NPA.
the term loan or the fresh short-term loan will be treated as current dues and need not be classified as NPA. Advances against fixed and other term deposits. In such cases. Asset classification of these loans will be governed by the revised terms and conditions and these would be classified as NPA as per the extant norms applicable for classifying agricultural advances as NPA. NSCs etc. Indira Vikas Patras (IVPs) and Kisan Vikas Patras (KVPs) need not be treated as NPA although interest thereon is not paid. 15 . National Savings Certificates (NSCs). life policies. Interest on such advances may be taken to income account on the due dates.(d) Advances against Term Deposits. UCBs may consider i) converting the crop loan in to an agricultural term loan or rescheduling the repayment period and ii) sanctioning fresh short-term loans. provided adequate margin is available in the accounts. (e) Advances affected by natural calamity Where natural calamities impair the repaying capacity of the agricultural borrower.
which do not disclose any problem and do not carry more than the normal risk attached to the business. the UCBs should classify loan assets into the following categories. CATEGORY Standard FEATURE 1 Assets. Such assets are not NPA.Asset Classification In order to facilitate assessment of quality of the advances portfolio and to enable them to make adequate provisions. 2005. 16 2 Sub-standard . Effective from year ended March 31. They have well defined credit weaknesses and are characterized by the distinct possibility that the bank will sustain some loss if the deficiencies are not rectified. assets are classified substandard if they remain non-performing for less than or equal to 12 months.
assets are classified doubtful if they remain nonperforming for more than 12 months. 3 Doubtful Effective from year ended March 31. where the terms of loan agreement relating to payment of interest and repayment of principal have been negotiated or rescheduled after commencement of production. 2005.An account. They have all the weaknesses inherent in substandard assets with the added characteristic that collection or liquidation of the dues is highly improbable. As in the case of sub-standard asset. rescheduling does not entitle a bank to upgrade the quality of the account automatically. 17 . should be classified as substandard and retained as such for at least one year of satisfactory performance under the renegotiated terms.
wholly or in part. 18 . but the amount has not been written off. even though there may be some salvage or recovery value. Such assets are considered uncollectible and of so little value that their continuance as bankable assets is not warranted.4 Loss These are assets where loss has been identified by the bank or internal / external auditors or RBI inspection.
Net worth of borrower / guarantor should not be taken into account while determining whether an advance is NPA. They should evolve a system to eliminate the tendency to delay or postpone identification of NPA. 19 . (i) Identification of assets as NPA on on-going basis Banks should identify assets as NPA on an on-going basis. particularly in respect of high-value accounts.Guidelines for asset classification Assets are to be classified generally on the basis of well-defined credit weaknesses and the extent of dependence on collaterals for realization of dues. Banks should bear in mind the following RBI guidelines for asset classification. They should internally resolve doubts regarding asset classification within one month of the date by which the account would have been classified as NPA as per prescribed norms.
20 . be ensured that the account remains in order subsequently and a solitary credit made in the accounts near about the balance sheet date to extinguish the overdue interest or installment of principal is not reckoned as the sole criterion for treating the account as a standard asset. Banks should not classify an account as non-performing due to the existence of „temporary deficiencies‟ such as balance exceeding limit. are required to be treated as NPA. non-submission of stock statement or non-renewal of accounts on due date. non-availability of adequate drawing power. even if the operations in those accounts are satisfactory. b) Borrower-wise and not facility-wise Where one credit facility extended to a borrower becomes NPA. banks must furnish to the Statutory Auditor / RBI Inspecting Officer satisfactory evidence of regularisation of the account. If an account is regularized before the balance sheet date by repayment of overdue through genuine sources (not by sanction of additional facilities or transfer of funds between accounts). the account need not be treated as NPA.(ii) Treatment of accounts as NPA a) Record of recovery The classification of an asset as NPA has to be done on the record of recovery. all the other facilities. however. It should. In other genuine cases.
as the case may be. e. A working capital account will be classified as NPA if such irregular drawings are allowed for more than 90 days.(iii) Potential threats to recovery In respect of accounts where there are potential threats to recovery on account of erosion in the value of security or existence of factors such as frauds committed by borrowers. i. irrespective of the period for which they have remained as NPA. (iv) Classification as NPA for arrears in submission of stock statements Outstanding in the account based on drawing power calculated from stock statements older than three months would be considered as irregular. 21 . such accounts should be straightway classified as doubtful or loss asset. Similar treatment should be provided to accounts where there is significant erosion in value of security. less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection.
as assessed by the bank or approved value or RBI. is less than 10% of the outstanding in the borrower‟s account. where remittances by the borrower under consortium lending arrangements are pooled with one bank. (vii) Classification of accounts under consortium Asset classification of accounts under consortium will be done on the record of recovery in individual banks. (vi) Treatment of loss assets If the realizable value of the security. the account in the member bank will be treated as not having been serviced and will be treated as NPA as per extant norms.(v) Classification as NPA for non-review or non-renewal of limits An account where regular / ad-hoc credit limits are not reviewed or not renewed within 90 days from the due date or date of ad-hoc sanction will be classified as NPA. However. . existence of security should be ignored and the account should be classified straightway as a loss asset. and that bank does not part with the share of a member bank.
interest has to be charged at yearly intervals as per the Supreme Court judgement and payment should coincide with harvesting.(viii) Fixing realistic repayment schedules UCBs should fix monthly / quarterly installments for repayment of gold loans for non-agricultural purposes after taking in to account the income generation pattern and repayment capacity of the borrower. Such gold loans should be classified as NPA if interest and / or installment remain overdue for more than 90 days. Banking Non Performing Assets 23 . In case of gold loans for agricultural purpose. Such advances will be NPA only if installment and / or interest become overdue after the due date.
UCBs should make provisions on the NPAs based on classification of assets in to prescribed categories as detailed in paragraph 4 above. banks are required to make provisions as detailed below against loss. Considering the time lag between an account becoming doubtful of recovery. its recognition as such. the realisation of the security and erosion in the value of security over time. doubtful and sub-standard assets: 24 .Provisioning (i) In conformity with prudential norms.
Non Performing Assets 25 .
RBI raised the general provisioning requirement for UCBs on standard advances in respect of personal loans.00 crore or more as per the last audited balance sheet).100. was raised to 0. personal loans witnessed a higher default rate.ii) Provision on Standard Assets UCBs were required to make a general provision of 0.40% to 1. loans and advances qualifying as capital market exposure and commercial real estate loans from 0. Certain categories of loans continued to experience high growth. loans and advances qualifying as capital market exposure and commercial real estate loans (excluding residential housing loans) was raised from 1% to 2% in February 2007. 2000.25% on standard assets from the year ended March 31. In order to ensure maintenance of asset quality in the context of high credit growth. provisioning requirement in respect of personal loans. after the above changes. The general provisioning requirement on standard assets.0% in June 2006. stand as summarized below: 26 . Therefore. Simultaneously. barring UCBs‟ direct advance to agriculture and SME sector.40% in November 2005. RBI decided to increase provisioning for loans and advances to Non-Deposit Taking Systematically Important Non-Banking Finance Companies (NBFC-ND-SI) from 0. The standard asset provisioning requirements for UCBs.40% to 2% (A systematically important NBFC is defined as an Non-Deposit Taking NBFC with an asset size of Rs.
27 . additional provision required for standard assets may be segregated from BDDR and parked under „Contingent Provision towards Standard Assets‟ with the approval of the Board of Directors.The provision towards „standard assets‟ need not be netted from gross advances but should be shown separately as „Contingent Provision towards Standard Assets‟ under „Other Funds and Reserves‟ in the Balance Sheet. This contingent provision will be available for inclusion in Tier II capital. In case a bank is having provision in excess of what is required for nonperforming assets under Bad & Doubtful Debt Reserve (BDDR).
banks should make provisions on existing credit facilities classified as sub-standard or doubtful in both the cases. provisioning is to be made only for the balance exceeding the amount of guarantee. they need not make provisions for a period of one year from the date of disbursement of such additional facilities. b) Additional facilities under rehabilitation package If under a rehabilitation package approved by BIFR / term lending institution.(iii) Guidelines for Provisions a) Advances covered by DICGC / ECGC guarantee In respect of advances guaranteed by ECGC/DICGC. 28 . which has been categorized as sub-standard or doubtful. However. Similar treatment should be made in respect of sick SSI units under a nursing programe. while arriving at the provision for Doubtful assets. realiable value of the securities should be deducted from the outstanding balance before the guarantee is set off . banks allow additional credit facilities to a unit. Further.
KVPs. immoveable property charged to the bank should be valued once in three years by the bank‟s approved valuers.00 lakh and above.c) Certain advances exempted Advances against banks‟ own term deposits. 29 . d) Valuation of security To have uniform assessment of valuation of security and reduce divergence in provisioning requirements. banks should undertake annual stock audit of current assets by external agencies in respect of NPAs with balance of Rs.10. However. NSCs. government securities and all other securities attract provisioning. Besides. advances against gold ornaments. IVPs and life policies are exempted from provisioning requirements.
e.100 crore are exempted from the extant asset classification and provisioning norms as under: 30 .ANNEX Relaxed Prudential Norms on Asset Classification and Provisioning for certain categories of UCBs Unit banks i.100 crore and banks having more than one branch within a single district with deposits up to Rs. banks having a single branch / Head Office with deposits up to Rs.
Commercial Banking : NPAs 32 .
Banking Non Performing Assets 33 .
Bank Credit (% to GDP) 34 .
Banking Non Performing Assets 35 .
Natural Calamities ....Why Loan accounts go bad ? BORROWER-SIDE Lack of Planning Diversion of Funds Disputes within… No contribution … No modernisation … Improper monitoring Industrial Relations. BANKER – SIDE Defective Sanction No post-sanction supervision. etc Delay in releases Directed lending … Slow decision making process Etc etc etc …. 37 .
Sub-Standard Assets 2. Loss Assets Banking Non Performing Assets 38 .Asset Classification – 4 way .1993 Standard Assets • All regular loan accounts & investments (Performing Assets) Non-Performing Assets 1. Doubtful Assets 3.
Performing Asset defined … An account (loan or investment) is classified as Performing Asset if it does not disclose any problems and carry more than normal risk attached to the business All loan facilities which are regular ! 39 .
ASSET TYPE STANDARD ASSET / PERFORMING ASSET The account is not non-performing and does not carry more than the normal risk attached to the business. (Para 2 of the Master Circular) 41 . NON-PERFORMING ASSET (NPA) The asset ceases to generate income for the bank.
IDENTIFICATION OF NPA Cash Credit / Overdrafts ‘out days Account remains of order’ for 90 or more. The account is treated as ‘out of order’ if : * Outstanding Balance remains continuously in excess of sanction limit/drawing power for 90 days or more. 42 . * Credits in the account are not sufficient to cover interest debited during the same period. * No credit continuously for 90 days or more as on the date of Balance Sheet.
Bill remains overdue for 90 days or more. 43 . one harvest season for long duration crop. Others Any amount to be received remains overdue for 90 days or more . Agricultural Advances Interest and/or installment remains overdue for two harvest seasons for short duration crop.IDENTIFICATION OF NPA … Term Loans Bills Purchased and Discounted Interest and/or instalment remains overdue for 90 days or more.
e.f. identified by the bank or internal or external auditors or by RBI Inspectors as wholly irrecoverable but the amount for which has not been written off. (w. 31st March 2005) Loss Assets These are accounts.CLASSIFICATION NORMS Standard Asset The account is not non-performing. 44 . Sub-Standard Asset A sub standard Asset is one which has remained NPA for a period less than or equal 12 months.
III Banking up to One Year Up to Three Years More than Three Years Non Performing Assets 45 .CLASSIFICATION NORMS Doubtful Asset .I Doubtful .II Doubtful .Three Categories Category Period Doubtful .
Adjustment of Recoveries . 46 . unrealised interest of the previous year to be derecognised/ reversed.Priority Unrealised Expenses Unrealised Interest Amount of Principal Outstanding Clarification vide Master Circular . an appropriate policy to be followed in uniform and consistent manner.INCOME RECOGNITION Income Recognition For NPA accounts income should be recognised on realisation basis.in the absence of clear agreement between the Bank and the Borrower. When an account becomes non-performing.
Provision for Standard Assets & NPAs. Movement in Provision for NPAs. Movements in NPAs. 47 . income Disclosure needs to be made as required in terms of the guidelines issued by the Reserve Bank of India in connection with Percentage of Net NPAs to Net Advances. At Head Office Level Advances are Suspense. disclosed net off NPA provisions & Interest Accounting policy for classification. provisioning & recognition need to be disclosed.DISCLOSURE At Branch Level Auditor needs to report the compliance with IRAC norms of RBI with respect to classification & provisioning for NPA and income recognition in Long Form Audit Report (LFAR) of the branch.
Developments in 2004 Revised Definition of NPA to 90 Days Banks managed to bring down NPAs < 3% SARFAESI Act. 2002 amended in Dec 2004 • To set up Asset Reconstruction Companies • Take possession of secured assets of borrowers • Right to lease out. sell and realize such assets • Right to take over the management of borrowers • 60 days notice by lenders is adequate • No appeal permissible unless borrowers deposit 50% amount due and approach DRT / DRAT 51 .
802 Gross Net NPAs NPAs 46.360 1.715 4.25.038 81.76.847 4.380 16.216 848 52 .135 8.NPAs in Banks : March 2005 (Rs in Cr) Banks Public (27) Private (29) Foreign (31) IDBI Bank Total Assets 16.
000 crores.000 crores Says unlocking value from NPAs will help banks meet additional capital requirements Gr NPAs in financial sector – Rs 1. 27. Bad Loans Written off by Banks Rs. Restructured Standard Assets – Rs.000 crores. 53 .11.36. Corporate Debt Restructring – Rs. 2006 Bad Loans cross 16% of India’s GDP ARCIL puts figure at Rs.Economic Times dt Jan 05.000 crores. 2.000 crs. 65. 77.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.