Bank Audit Special Regulatory Treatment for Asset Classification

Reserve Bank of India has stipulated special regulatory frame work for asset classification, in modification to guidelines as enumerated in para 6 above. This special treatment will be available to the borrowers engaged in important business activities, subject to compliance with certain conditions as enumerated herein and is not extended to the following categories of advances:

  1. Consumer and personal advances;
  2. Advances classified as capital market exposures;
  • Advances classified as commercial real estate exposures

Thus benefit of special regulatory frame work would be available subject to compliance of conditions stipulated in the paragraph 7.1 below. If these conditions are not complied then guidelines as discussed in para 6 would apply to restructured accounts.

  • Elements of special regulatory framework

The special regulatory treatment has the following two components:

  • Incentive for quick implementation of the

restructuring package.

As an incentive for quick implementation of the package, if the approved package is implemented by the bank as per the following time schedule, the asset classification status may be restored to the position which existed when the reference was made to the CDR Cell or when the restructuring application was received by the bank.

  • Within 120 days from the date of approval under the CDR Mechanism.
  • Within 120 days from the date of receipt of application by the bank in other cases.
  • Retention of the asset classification of the restructured account in the pre­restructuring asset classification category Subject to the compliance with the

undernoted conditions in addition to the adherence to the prudential framework laid down in para 6 above,

  • An existing ‘standard asset’ will not be downgraded to the sub-standard category upon restructuring.
  • During the specified period, the asset classification of the sub-standard/doubtful accounts will not deteriorate upon restructuring, if satisfactory performance is demonstrated during the specified period.

These benefits will be available subject to compliance of the following conditions:

  1. The dues to the bank are ‘fully secured’ by tangible assets except in the following

cases:

  1. SSI borrowers, where the outstanding is up to ?25 lakh.
  2. Infrastructure projects, provided the cash flows generated from these projects are adequate for repayment of the advance, the financing bank(s) have in place an appropriate mechanism to escrow the cash flows, and also have a clear and legal first claim on these cash flows.
  3. The unit becomes viable in 8 years, if it is engaged in infrastructure activities, and in 5 years in the case of other units.
  • The repayment period of the restructured advance including the moratorium, if any, does not exceed 15 years in the case of infrastructure advances and 10 years in the case of other advances. The aforesaid ceiling of 10 years would not be applicable for restructured home loans; in these cases the Board of Directors of the banks should prescribe the maximum period for restructured advance keeping in view the safety and soundness of the advances.
  1. Promoters’ sacrifice and additional funds

Promoter’s personal guarantee should be obtained
in all cases of restructuring. Corporate guarantee
cannot be accepted as a substitute for personal
guarantee. However, the same can be accepted
in cases where promoters of a company are not
individuals.

 

Bank Audit Asset Classification to be borrower-wise and not facility-wise

  1. The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.
  2. The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of the original outlay.
  • The bank re-assesses the viability of the project before approving the enhancement of scope and fixing a fresh DCCO.
  1. On re-rating, (if already rated) the new rating is not below the previous rating by more than one notch.
  • Exceptions/ Clarifications
  • Accounts with temporary deficiencies:

An account should not be classified as NPA, if the deficiencies like non-submission of stock statement, non-renewal of facility in the account are temporary in nature, etc. RBI’s guidelines in this regard are as under:

  1. Drawing power is required to be arrived at based on the current stock statement.

However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding balance in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A CC/OD account would become NPA if such irregular drawings are permitted in the account for a continuous period of 90 days. For example, if borrower is allowed drawing on the basis of stock statement of August 2014 for next three months, then it would be irregular from December 2014. If the borrower does not submit fresh stock statement then the account would become NPA in March 2015.

  1. An account, where the regularladhoc credit limits have not been reviewed/renewed within

All the facilities granted by a bank to a borrower
and investment in all the securities issued by the
borrower will have to be treated as NPA/NPI and not
the particular facility/investment or part thereof
which has become irregular. However, there are few
exceptions to this guideline.

180 days from the due date/date of adhoc sanction, will be treated as NPA.

  • Asset Classification to be borrower-wise and not facility-wise

All the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. However, there are following exceptions to this guideline:

  1. Under the on-lending system, only that particular credit facility granted to PACS/FSS which is in default will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS.
  2. Any amount, representing positive mark-to- market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is/becomes receivable from the client, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC norms.
  3. In respect of additional facilities sanctioned under the rehabilitation package approved by BIFR, classification norms will become applicable after a period of one year from the date of disbursement, e., additional facility can be treated as standard upto one year from the date of disbursement.
  • Advances under consortium arrangements

Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with lead bank and the lead bank is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. If the bank is able to arrange to get their share of recovery transferred from the lead bank or get an express consent from the