In case of any recovery in the NPA, the application of recovery towards interest/principal should be based on the agreement with the borrower. In the absence of a clear agreement, banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. Thus, as per the consistent policy of the bank, recovery may be appropriated towards interest or principal.
- Asset Classification
Having identified an account as NPA, it is further required to be classified into –
- Sub-standard Assets
- Doubtful Assets
- Loss Assets Sub-standard Assets:
An account which is classified as NPA for the first time, is categorised as sub-standard for a period of less than or equal to twelve months from the date of advance becoming NPA. However in following
If any advance, including bills purchased and
discounted, becomes NPA as at the close of any
year, entire interest accrued and credited to income
account in the past periods, should be reversed or
provided for if the same is not realised during the
year under audit.
circumstances, the NPA should be straightaway classified as doubtful/loss asset-
- Where there are potential threats for recovery on account of erosion in the value of security or non-availability of security and existence of other factors such as frauds committed by borrowers
- When erosion in the realisable value of the security is more than 50% of the value assessed by the bank or accepted by the RBI at the time of last inspection, NPAs should be straightaway classified under doubtful category.
- If the realisable value of the security, as assessed by the bank/approved valuers/RBI is less than 10% of the outstanding in the borrowal accounts, the NPA should be straightaway classified as loss asset.
An account is classified as doubtful if it has remained in the sub-standard category for a period of 12 months.
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 (less than 10% of balance outstanding).
- Prudential Guidelines on Restructuring of Advances by Banks
There is a different set of guidelines for classification of advances under restructuring in Part-B of the Master Circular of Reserve Bank of India
- Guidelines are extended to following four category of advances:
- Advances to industrial units
- Industrial units under the Corporate Debt Restructuring (CDR) mechanism
- Advances extended to Small and Medium Enterprises (SME)
- Restructuring of all other advances.
- Eligibility Criteria:
Banks may restructure the accounts classified under ‘standard’, ‘sub-standard’ and ‘doubtful’ categories.