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:
- Consumer and personal advances;
- 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
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:
- The dues to the bank are ‘fully secured’ by tangible assets except in the following
- SSI borrowers, where the outstanding is up to ?25 lakh.
- 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.
- 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.
- 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
- While a restructuring proposal is under consideration, the usual asset classification norms would continue to apply.
- The process of restructuring can be initiated by the bank in deserving cases subject to customer agreeing to the terms and conditions.
- No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower, as per the terms of restructuring package.
- The borrowers indulging in frauds and malfeasance are ineligible for restructuring. However, in old cases where the manner of classification of a borrower as a wilful defaulter was not transparent and bank satisfies itself that the borrower is in a position to rectify the wilful default, the restructuring of such cases may be done with board’s approval and for accounts the restructuring under the CDR Mechanism may be carried out with the approval of the Core Group
- BIFR cases are eligible for restructuring after their express approval and ensuring that all the formalities in seeking the approval from BIFR are completed before implementing the package.
- Asset Classification Norms
- The restructuring/rescheduling/renegotiation of the terms of loan agreement could take place:
- before commencement of commercial operations;
- after commencement of commercial operations but before the asset has been classified as sub standard;
- after commencement of commercial operations and after the asset has been classified as substandard.
- Upon restructuring, the accounts classified as ‘standard assets’ would get reclassified as ‘substandard assets’ and account which is already NPA would continue to have the same classification and slip in to further lower asset classification as per the extant asset classification norms.
- Any additional finance may be treated as ‘standard asset’, up to a period of one year after the first interest/principal payment, whichever is earlier, falls due under the approved restructuring package.
No account will be taken up for restructuring by the banks unless the financial viability is established and there is a reasonable certainty of repayment from the borrower as per the terms of restructuring package.
All restructured accounts which have been classified as NPA upon restructuring, would be eligible for up-gradation to the ‘standard’ category after observation of ‘satisfactory performance’ during the specified period. Specified period means a period of one year from the commencement of the first payment of interest or principal whichever is later, on the credit facility with longest period of moratorium under the terms of restructuring package.
- However, accounts of the borrower can continue to be classified in existing asset classification category subject to fulfilment of conditions enumerated in para 7 below.
6.4. Provisioning Norms:
- The total provisions required against an account under restructuring would be normal provisions plus provisions in lieu of diminution in the fair value of the advances.
- Normal provision is discussed in para 8.
- Diminution in fair value of the advance is difference between fair value of advance before and after restructuring. Fair value of advance before/after restructuring is computed as the present value of cash flows representing the interest at the existing rate/revised rate charged on the advance before/after restructuring and discounted at an appropriate rate. The difference between two fair values would be the diminution in value of advance which would be provided for.
- The diminution in the fair value would be required to be re-computed on each balance sheet date till satisfactory completion of all repayment obligations and full repayment of the outstanding in the account. Consequently, banks would be required to provide for the shortfall in provision or reverse the amount of excess provision.
- As an alternative to the methodology prescribed above for computing the amount of diminution in the fair value, banks will have the option of notionally computing the amount of diminution in the fair value and providing therefore, at five percent of the total exposure, in respect of all restructured accounts where the total dues to bank are less than ? 1 crore. Restructured advances classified as standard or classified as NPA but subsequently upgraded would attract higher provision.
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.
Banks may restructure the accounts classified under ‘standard’, ‘sub-standard’ and ‘doubtful’ categories.
An account which is generally irregular, where a solitary or a tew credits are recorded before the balance sheet date, should be carefully checked.
lead bank for the transfer of their share of recovery, they may be able to make proper classification in their books.
- Advances against Term Deposits, NSCs and KVP/IVP,
Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs. Advances against gold ornaments, government securities and all other securities are not covered by this exemption.
- Government guaranteed advances
The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the government repudiates its guarantee when invoked.
- Up gradation of loan accounts classified as NPAs
If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non-performing and may be classified as ‘standard!
- Accounts regularised near about the balance sheet date
An account which is generally irregular, where a solitary or a few credits are recorded before the balance sheet date, should be carefully checked. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the auditors must obtain satisfactory evidence about the manner of regularisation of the account to eliminate doubts on their performing status.
- As per Accounting Standard 9 on Revenue Recognition and as per the Master Circular of the RBI, income should be recognised when there is a reasonable certainty about its realisability. In respect of NPA, there is no reasonable certainty about realisability of interest, therefore it is booked as income only when it is actually realised. If bank follows policy of charging interest in NPA account then same should not be taken to income but to unrealised interest or interest suspense account.
However, interest on advances against term deposits, NSCs, IVPs. KYPs and Life policies may be taken to inc me account on the due date, provided adequate margin is available in the accounts. For example: A borrower has taken loan of ^ 1 lakh against term deposit of ? 1.25 lakh. Balance in the account as on 31st March, 2015 is ? 1.10 lakh. Even though account is over drawn, income would be recognised since value of deposit is more than the balance outstanding.
- Income on standard advances is recognised on accrual basis except in case of income on Central Government guaranteed advances, which would ha e otherwise become NPA, income is recognised on realisation.
- In the case ol accounts where the pre restructuring facilities were classified as substandard’ and ci. ubtful interest income on the additional finance sh< >uld be recognised only on cash basis.
- In project loans, am funding of interest in respect of NPA’ ifgnised as income, should be fully providec for.
- If the amount of interest dues is converted into equity or am ther instrument, and income is recognised in consequence, full provision should be made for the amount of income so recognised However, if the conversion of interest is inn equitx which is quoted, interest income can be recognised at market value of equity, as on the date of conversion, not exceeding the am unt of interest converted to equity.
- The income in respect of unrealised interest which is con .x rted into debentures or any other fixed maturin instrument should be recognised only on redempti n of such instrument.
- Fees and commissi ms earned by the banks as a result of re-r.cg tiations or re-scheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re-neg d c r re-scheduled extension of credit.
- Reversal of Income
- If any advance, .nduding bills purchased and discounted bee mes 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. This will apply to government guaranteed accounts also.
- In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.
- The ‘finance charge’ component of finance income [as defined in ‘AS 19-Leases’ issued by the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to income account before the asset became non-performing, and remaining unrealised, should be reversed or provided for in the current accounting period.
- The increase in scope and size of the project takes place before commencement of commercial operations of the existing project.
- 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.
- 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:
- 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.
- 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:
- 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.
- 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.
- 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