Master Circular
Income Recognition, Asset Classification, Provisioning and Other Related
Matters
Contents
Sl Particulars Page No.
No
1. GENERAL 1
2. NON-PERFORMING ASSETS (NPA) 2
2.1 Classification of assets as Non-Performing 2
2.2 Treatment of Accounts as NPAs 4
2.2.1 Record of Recovery 4
2.2.2 Treatment of NPAs – Borrower – wise and not Facility-wise 5
2.2.3 Agricultural Advances 5
2.2.4 Housing Loans to staff 5
2.2.5 Credit Facilities backed by Guarantees by Government of India/ 5
State Governments
2.2.6 Project Financing 6
2.2.7 Prudential Guidelines on Restructuring of Advances 6
2.2.8 Other Advances 13
2.2.9 Recognition of Income on Investment treated as NPA 13
2.2.10 NPA Reporting to Reserve Bank 13
3. ASSET CLASSIFICATION 14
3.1 Classification 14
3.2 Definitions 14
3.3 Guidelines for Classification of Assets 15
3.3.1 Basic Considerations 15
3.3.2 Advances Granted under Rehabilitation Packages Approved by 15
BIFR/Term Lending Institutions
3.3.3 Internal System for Classification of Assets as NPAs 16
4. INCOME RECOGNITION 16
4.1 Income Recognition – Policy 16
4.2 Reversal of Income on Accounts Becoming NPAs 16
4.3 Booking of Income on Investments in Shares & Bonds 17
4.4 Partial Recovery of NPAs 17
4.5 Interest Application 17
1. General
1.1 In order to reflect a bank's actual financial health in its balance sheet and as per
the recommendations made by the Committee on Financial System (Chairman
Shri M. Narasimham), the Reserve Bank has introduced, in a phased manner,
prudential norms for income recognition, asset classification and provisioning for
the advances portfolio of the banks.
1.2 Broadly, the policy of income recognition should be objective and based on
record of recovery rather than on any subjective considerations. Likewise, the
classification of assets of banks has to be done on the basis of objective criteria,
which would ensure a uniform and consistent application of the norms. The
provisioning should be made on the basis of the classification of assets into
different categories.
1.3 The requirements of the State Co-operative Societies Acts and / or rules made
thereunder or other statutory enactments may continue to be followed, if they are
more stringent than those prescribed hereby.
1.4 With the introduction of prudential norms, the Health Code based system for
classification of advances has ceased to be a subject of supervisory interest. As
such, all related reporting requirements, etc. also ceased to be a supervisory
requirement, but could be continued in the banks entirely at their discretion and
the management policy, if felt necessary.
2. Non-performing Assets (NPA)
2.1 Classification of Assets as Non-Performing
2.1.1 An asset becomes non-performing when it ceases to generate income for the
bank. Earlier an asset was considered as non-performing asset (NPA) based on
the concept of 'Past Due'. A 'non performing asset' (NPA) was defined as credit
in respect of which interest and / or installment of principal has remained 'past
due' for a specific period of time. The specific period was reduced in a phased
manner as under:
Year ended March, 31 Specific period
1993 4 quarters
1994 3 quarters
1995 2 quarters
An amount is considered as past due, when it remains outstanding for 30 days
beyond the due date. However, with effect from March 31, 2001 the 'past due'
concept has been dispensed with and the period is reckoned from the due date
of payment.
2.1.2 With a view to moving towards international best practices and to ensure greater
transparency, '90 days' overdue* norms for identification of NPAs have been
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made applicable from the year ended March 31, 2004. As such, with effect from
March 31, 2004, a non-performing asset shall be a loan or an advance where:
(i) Interest and / or installment of principal remain overdue for a period of
more than 90 days in respect of a Term Loan.
(ii) The account remains 'Out of order'@ for a period of more than 90
days, in respect of an Overdraft / Cash Credit (OD/CC).
(iii) The bill remains overdue for a period of more than 90 days in the
case of bills purchased and discounted,
(iv) In the case of direct agricultural advances as listed in Annex 1, the
overdue norm specified at para 2.1.5 would be applicable. In respect of
agricultural loans, other than those specified in Annex 1, identification of
NPAs would be done on the same basis as non-agricultural advances.
(v) Any amount to be received remains overdue for a period of more
than 90 days in respect of other accounts.
* Any amount due to the bank under any credit facility, if not paid by the
due date fixed by the bank becomes overdue.
@ "An account should be treated as 'out of order' if the outstanding
balance remains continuously in excess of the sanctioned limit / drawing
power. In cases where the outstanding balance in the principal operating
account is less than the sanctioned limit / drawing power, but there are no
credits continuously for 90 days or credits are not enough to cover the
interest debited during the same period, these accounts should be treated
as 'out of order'".
2.1.3 Tier I Banks # were permitted to classify loan accounts including gold loans and
small loan upto Rs.1 lakh as NPAs based on 180 days delinquency norm instead
of the extant 90 days norm. This relaxation was in force upto March 31, 2009.
The relaxations were given for the explicit purpose of enabling the UCBs
concerned to transit to the 90 day NPA norm in the year 2009-10 by building up
adequate provisions and strengthening their appraisal, disbursement and post
disbursement procedures. Accordingly, with effect from 1 April 2009, Tier I UCBs
would also classify an account as NPA based on 90-day NPA norm as indicated
in para 2.1.2 above
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# (i) Banks having deposits below Rs.100 crore, operating in a single district.
ii) Banks with deposits below Rs.100 crore operating in more than one district,
provided the branches are in contiguous districts and deposits and advances of
branches in one district separately constitute at least 95% of the total deposits
and advances respectively of the bank.
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iii) Banks with deposits below Rs.100 crore, whose branches were originally in
a single district but subsequently, became multi-district due to reorganization of
the district.
The deposits and advances as referred to in the definition may be reckoned as
on 31st March of the immediate preceding financial year.
2.1.4 All UCBs shall classify their loan accounts as NPA as per 90-day norm with effect
from 1 April 2009 .
2.1.5 Agricultural Advance
(i) With effect from September 30, 2004 the following revised norms are applicable
to all direct agricultural advances (Annex 1):
a) A loan granted for short duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for two crop seasons.
b) A loan granted for long duration crops will be treated as NPA, if the
installment of principal or interest thereon remains overdue for one crop season.
(ii) For the purpose of these guidelines, "long duration" crops would be crops with
crop season longer than one year and crops, which are not "long duration" crops
would be treated as "short duration" crops.
(iii) The crop season for each crop, which means the period up to harvesting of the
crops raised, would be as determined by the State Level Bankers' Committee in
each state.
(iv) Depending upon the duration of crops raised by an agriculturist, the above NPA
norms would also be made applicable to agricultural term loans availed of by
him. In respect of agricultural loans, other than those specified in the Annex 1
and term loans given to non-agriculturists, identification of NPAs would be done
on the same basis as non-agricultural advances, which, at present, is the 90
days delinquency norm.
(v) Banks should ensure that while granting loans and advances, realistic repayment
schedules are fixed on the basis of cash flows / fluidity with the borrowers.
2.1.6 Identification of Assets as NPAs should be done on an ongoing basis
The system should ensure that identification of NPAs is done on an on-going
basis and doubts in asset classification due to any reason are settled through
specified internal channels within one month from the date on which the account
would have been classified as NPA as per prescribed norms. Banks should also
make provisions for NPAs as at the end of each calendar quarter i.e as at the
end of March / June / September / December, so that the income and
expenditure account for the respective quarters as well as the P&L account and
balance sheet for the year end reflects the provision made for NPAs.
2.1.7 Charging of Interest at monthly rests
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3. Asset Classification
3.1 Classification
3.1.1 Banks should classify their assets into the following broad groups, viz. -
(i) Standard Assets
(ii) Sub-standard Assets
NPAs (iii) Doubtful Assets
(iv) Loss Assets
3.2 Definitions
3.2.1 Standard Assets
Standard Asset is one which does not disclose any problems and which
does not carry more than normal risk attached to the business. Such an
asset should not be an NPA.
3.2.2 Sub-standard Assets
(i) With effect from March 31, 2005 an asset would be classified as sub-
standard if it remained NPA for a period less than or equal to 12 months.
In such cases, the current net worth of the borrowers / guarantors or the
current market value of the security charged is not enough to ensure
recovery of the dues to the banks in full. In other words, such assets will
have well defined credit weaknesses that jeopardise the liquidation of the
debt and are characterised by the distinct possibility that the banks will
sustain some loss, if deficiencies are not corrected.
(ii) An asset where the terms of the loan agreement regarding interest
and principal have been re-negotiated or rescheduled after
commencement of production, should be classified as sub-standard and
should remain in such category for at least 12 months of satisfactory
performance under the re-negotiated or rescheduled terms. In other
words, the classification of an asset should not be upgraded merely as a
result of rescheduling, unless there is satisfactory compliance of this
condition.
3.2.3 Doubtful Assets
With effect from March 31, 2005, an asset is required to be classified as
doubtful, if it has remained NPA for more than 12 months. For Tier I
banks, the 12-month period of classification of a substandard asset in
doubtful category is effective from April 1, 2009. As in the case of sub-
standard assets, rescheduling does not entitle the bank to upgrade the
quality of an advance automatically. A loan classified as doubtful has all
the weaknesses inherent as that classified as sub-standard, with the
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added characteristic that the weaknesses make collection or liquidation in
full, on the basis of currently known facts, conditions and values, highly
questionable and improbable.
3.2.4 Loss Assets
A loss asset is one where loss has been identified by the bank or internal
or external auditors or by the Co-operation Department or by the Reserve
Bank of India inspection but the amount has not been written off, wholly or
partly. In other words, such an asset is considered un-collectible and of
such little value that its continuance as a bankable asset is not warranted
although there may be some salvage or recovery value.
3.3 Guidelines for Classification of Assets
3.3.1 Basic Considerations
(i) Broadly speaking, classification of assets into above categories should
be done taking into account the degree of well defined credit
weaknesses and extent of dependence on collateral security for
realisation of dues.
(ii) In respect of accounts where there are potential threats to recovery on
account of erosion in the value of security and existence of other
factors such as, frauds committed by borrowers, it will not be prudent
for the banks to classify them first as sub-standard and then as
doubtful after expiry of 12 months from the date the account has
become NPA. Such accounts should be straight away classified as
doubtful asset or loss asset, as appropriate, irrespective of the period
for which it has remained as NPA.
3.3.2 Advances Granted under Rehabilitation Packages Approved by BIFR /
Term Lending Institutions
(i) Banks are not permitted to upgrade the classification of any advance
in respect of which the terms have been re-negotiated unless the
package of re-negotiated terms has worked satisfactorily for a period of
one year. While the existing credit facilities sanctioned to a unit under
rehabilitation packages approved by BIFR / term lending institutions
will continue to be classified as sub-standard or doubtful as the case
may be in respect of additional facilities sanctioned under the
rehabilitation packages the income recognition and asset classification
norms will become applicable after a period of one year from the date
of disbursement.
(ii) A similar relaxation be made in respect of SSI units which are
identified as sick by banks themselves and where rehabilitation
packages / nursing programmes have been drawn by the banks
themselves or under consortium arrangements.
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