Prudential Norms

Prudential Norms

Subject: Economy

Section: Monetary Policy

Context:

Non-performing Assets

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or an advance where:

• interest and/ or installment of principal remains overdue for a period of more than 90 days in respect of a term loan,
• the account remains ‘out of order’, in respect of an Overdraft/Cash Credit 
• the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted,
• the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,
• the installment of principal or interest thereon remains overdue for one crop season for long duration crops,
• the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of the Reserve Bank of India (Securitisation of Standard Assets) Directions, 2021.
• the overdue receivables representing positive mark-to-market value of a derivative contract, remain unpaid for a period of 90 days from the specified due date for payment with respect of derivative transactions,

Out of Order

Cash credit/Overdraft (CC/OD) account is classified as NPA if it is ‘out of order’.An account shall be treated as ‘out of order’ if:

• the outstanding balance in the CC/OD account remains continuously in excess of the sanctioned limit/drawing power for 90 days, or
• the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but there are no credits continuously for 90 days, or
•  the outstanding balance in the CC/OD account is less than the sanctioned limit/drawing power but credits are not enough to cover the interest debited during the previous 90 days period.

Asset Classification 

Banks are required to classify non performing assets further into the following three categories based on the period for which the asset has remained non performing and the realisability of the dues:

• Substandard Assets-remained NPA for a period less than or equal to 12 months.
• Doubtful Assets-an asset would be classified as doubtful if it has remained in the substandard category for a period of 12 months.
• Loss Assets-A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value.

Income Recognition:

Internationally income from NPA is not recognized as income on an accrual basis but is booked as income only when it is actually received. The banks should not charge and take income account interest on any NPA. This will apply to Government guaranteed accounts also.

However, interest on advances against Term Deposits, National Savings Certificates (NSCs), Indira Vikas Patras (IVPs), Kisan Vikas Patras (KVPs) and Life policies may be taken to income account on the due date, provided adequate margin is available in the accounts.

Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the renegotiated or rescheduled extension of credit.

If any advance becomes NPA, the entire interest accrued and credited to the income account in the past periods, should be reversed if the same is not realized. This will apply to Government guaranteed accounts also.

Provisioning

Banks/Financial Institutions are required to set aside a portion of their income as provision for the loan assets so as to be prepared for any contingent losses that may arise in the event of non-recovery of loans. 

The amount of provision to be kept by the bank/FI, will depend on the probability of loan recovery. This probability of loan recovery is identified based on the asset classification of the loan asset. The minimum provision that a bank has to create for various types of assets is as follows: