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RBI’s Prudential Norms on Income Recognition- ‘Asset Classification and Provisioning’

  • February 16, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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RBI’s Prudential Norms on Income Recognition- Asset Classification and Provisioning’

TOPIC: Economy

Context- Loans can be upgraded from NPA to standard category only after repayment of arrears: RBI says in its Prudential Norms on Income Recognition, Asset Classification and Provisioning’.

Concept-

  • This means is that if a borrower has two credit facilities, with one of them (say, a housing loan) being standard and the other (say business loan) non-per- forming, the lender’s entire exposure to this borrower will be treated as non-performing.
  • This exposure can be upgraded only if the non-performing account is regularised.
  • Banks wanted the RBI to allow them to treat the two exposures separately due to provisioning implications.
  • The central bank had clarified that loan accounts classified as NPAs may be upgraded as ‘standard’ asset only if entire arrears of interest and principal are paid by the borrower.

Non-Performing Asset (NPA):

  • NPAs are loans or advances made by a financial institution, on which both principal or interest is unpaid for a specified period of time.
  • Thus, NPAs are those loans that have ceased to generate income for the bank.

Types of NPA:

  • Sub Standard: A sub-standard asset is one that is classified as an NPA for a period not exceeding twelve months.
  • Doubtful: A doubtful asset is one that has remained as an NPA for a period exceeding twelve months.
  • Loss: A loss asset is one where loss has already been identified by the bank or an external institution, but it is not yet completely written off, due to its recovery value, however little it may be.
economy RBI's Prudential Norms on Income Recognition- 'Asset Classification and Provisioning'
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