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& Provisioning Norms

Asset Classification & Provisioning Norms

Major portion of income of banks comes from interest on

loans, advances and investments. Interest is charged to the accounts and is recovered from the party usually on a monthly basis. Thus, income is booked on accrual basis initially. But if the bank is not able to recover the interest within a reasonable time, then, interest should not be booked on accrual basis but on cash basis as and when actually recovered. If an asset or investment of a bank fails to pay the interest / installment due, then it becomes a NPA.

Narasimham Committee
In August 1991, a high level committee headed by

Mr.M.Narasimham, Rtd. Governor, was appointed by RBI to examine various aspects of our financial system. One of the important recommendations of this committee was that the balance sheets of banks must be transparent and comply with international accounting standards. The committee recommended that banks should adopt uniform accounting practices in regard to income recognition, asset classification and provisioning. In particular, income recognition in respect of NPA s should be on cash basis ad not on accrual basis. The committee further recommended that provisioning should be based on a proper classification of assets which in turn should be based on objective criteria.

RBI Guidelines IRAC Norms.

Following the Narasimham Committee recommendations, RBI issued

guidelines to banks in August 1992, called IRAC Norms. In the beginning , an advance was considered a non performing asset if interest / installment remained overdue for 4 quarters. This has been progressively reduced and, at present, a loan / investment is considered NPA if the interest / installment remain overdue for a period of 90 days. Also assets are classified into four categories and provisioning is made accordingly. These categories are 1) Standard Assets Assets which are regular 2) Sub standard Assets Assets which are NPA for 12 months. 3) Doubtful Assets Assets which are substandard for 12 months 4) Loss Assets Assets which have become uncollectable.

Provisioning Norms
A non performing asset causes a two fold impact on the

profitability of a bank. Firstly, the bank ceases to earn interest on the asset and secondly, the bank has to make a provision for the asset. RBI introduced IRAC norms in line with international best practices in 1993. The norms have undergone several changes since then and the guidelines presently in force are as under 1) Substandard Assets These can be secured(21) or unsecured (22). Unsecured assets are those where the realizable value of security is less than 10% of the balance due in the account.

Provisioning Norms ( continued)

For substandard secured assets (21), the provision required

is 10% of the outstanding dues. For assets in 22 category, the provision required is 20% of the outstanding dues. Doubtful Assets are classified into three categories based on the age of NPA D1, D2 and D3 (asset codes 31, 32 and 33) D1 NPA s 12 to 24 months old Provision required is 20% of realizable value of security plus 100% of shortfall in security. D2 NPA s 24 to 48 months old Provision required is 30% of realizable value of security plus 100% of shortfall. D3 NPA s more than 48 months old Provision required is 100% of the outstanding dues. For obvious reasons, the provision required increases with the age of the NPA.

Provisioning Norms For Agri. Advances

In case of agricultural advances, the asset classification and

provisioning norms are as under If a loan is granted for a short duration crop, it will be treated as NPA if the installment and or interest thereon remain overdue for two harvesting seasons, and If a loan is granted for a long duration crop, the loan will be treated as NPA if the interest and or installment thereon remain overdue for one harvesting season.
Long duration crops are those where the crop season is longer than one year.

General Provision for Standard Assets

As a matter of high prudence and abundant precaution,

RBI has also advised banks to make a small general provision on standard assets too as under
In case of agricultural and SME advances, the general

provision required for standard assets shall be @ 0.25% of the total standard assets.
In case of advances other than agricultural and SME

advances, the general provision required for standard assets shall be 0.40% of the total standard assets.