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THEME

Prudential Norms On Income


Recognition, Asset Classification And
Provisioning On Advances

P
rudential norms on in- and does not carry more than One will have to determine
come recognition, asset normal risk attached to the the due date of interest and in-
classification and pro- business. stalment. If either interest or
visioning (IRAC norms) per- Non-Performing Asset instalment is overdue for more
taining to advances portfolios (NPA): An asset becomes than 90 days then the account
of banks were introduced for NPA when it ceases to gener- would become NPA. Interest
the first time by Reserve Bank ate income for the bank. This or instalment, which is due as
of India during financial year would mean that interest, on 30th December, would be
1992-93 i.e. year ended 31st which is debited to borrower’s overdue for more than 90 days
March 1993 in line with the account, has to be realised by as on 31st March 2006 and the
international practices. the bank. An account has to be account would become NPA.
However, if the same was due
Vipul K.
Choksi For bank branch audits the auditors have to keep them- on 31st December 2005, then
selves abreast of the applicable IRAC norms incorporated in the account would not become
The author is NPA as on 31st March 2006.
member of
the RBI’s Master Circular dated 1st July 2005. On the basis
of the guidelines provided in this circular which are relevant Overdraft/Cash Credit: If
the Institute. an account remains out of or-
He can be for audit of F.Y.2005-06, auditor will be required to take the
audit steps like Asset Classification, Income Recognition, der, it would become NPA. For
reached at this purpose an account would
choksi.vipul@ Provisioning Norms, Restructuring of loans/CDR/Project
under implementation, Agricultural advances, Classification be treated as ‘out of order’ if:
gmail.com i) The outstanding balance
of NPA borrower-wise and not facility-wise, Upgradation of
Account From NPA to Standard and Regularisation of ac- remains continuously in
excess of the sanctioned
count at near about balance sheet date.This article discusses
limit/drawing power for
salient features and some of the practical aspects of prudential
90 days or more, or
norms pertaining to advances of banks.
ii) Even if the outstanding
in the account is less than
The prudential norms are classified as NPA on the basis the sanctioned limit/
formulated on the basis of ob- of record of recovery rather drawing power, there are
jective criteria rather than on than security charged in fa- no credits in the account
any subjective consideration. vour of the bank in respect continuously for 90 days
This has brought in uniform of such account. Thus, an ac- as on the date of the Bal-
and consistent application of count of a borrower may be- ance sheet, or
the norms and greater trans- come NPA if interest charged iii) Credits in the account are
parency in published accounts to that particular borrower is not sufficient to cover in-
of banks. not realised despite the ac- terest debited during the
Reserve Bank of India has count being fully secured. same period.
been issuing Master Circu- Thus, as on 31st March
lars on prudential norms for Identification Of Account 2006, if any of the above cri-
past few years. Last Master As Npa teria is satisfied, the account
circular on prudential norms RBI has laid down various would be classified as NPA.
pertaining to advances was is- criteria for classification of vari- There may be a situation where
sued by Reserve Bank of In- ous types of advances as NPA say for example drawing power
dia on 1st July 2005. which are as under: of an account is Rs.10 lacs, bal-
Term Loan: Interest and /or ance is Rs.8 lacs and there are
Asset Type instalment of principal remain no credits in the account for 90
Standard Asset: The ac- overdue for a period of more days. Such account would be
count is not non-performing than 90 days. classified as NPA.

1328 The Chartered Accountant March 2006


Bills Purchased/Discounted: relied upon by the banks crual basis but is booked
If the bills purchased or dis- for determining draw- as income only when it is
counted remains overdue for ing power should not be actually received. There-
a period of more than 90 days older than three months. fore interest on any NPA
from its due date. The outstanding in the should not be recognized
Agricultural Advances: a account based on draw- unless realized.
loan granted for ing power calculated However, interest on ad-
i) Short duration crops will from stock statements vances against term de-
be treated as NPA, if the older than three months, posits, NSCs, IVPs, KVPs
installment of principal or would be deemed as ir- and Life policies may be
interest thereon remains regular. A working capi- taken to income account
overdue for two crop sea- tal borrowal account will on the due date, provided
sons. become NPA if such ir- adequate margin is avail-
ii) Long duration crops will regular drawings are per- able in the accounts.
be treated as NPA, if the Regular mitted in the account for For example: A borrower
installment of principal or and ad- a continuous period of 90 has taken loan of Rs.1
interest thereon remains hoc credit days even though the unit lac against term deposit
overdue for one crop limits need may be working or the of Rs.1.25 lacs. Balance
season. to be borrower’s financial posi- in the account as on 31st
For the purpose of these reviewed/ tion is satisfactory. March’06 is Rs.1.10 lacs.
guidelines, “long duration” regularised Thus, if a borrower is al- Even though account is
crops would be crops with crop not later lowed drawing on the over drawn, income would
season longer than one year and than three basis of stock statement be recognized since value
crops, which are not “long du- months of September’05, the ac- of deposit is more than
ration” crops would be treated from the count will be classified as the balance outstanding.
as “short duration” crops. due date/ NPA as on 31st March ii) Fees and commissions
Thus an auditor will have date of ad 2006. earned by the banks as a
to verify the nature/duration hoc b) Regular and adhoc credit result of re-negotiations
of crop circle and accordingly sanction. limits need to be re- or rescheduling of out-
verify whether an agricultural viewed/regularised not standing debts should be
account is NPA as on 31st later than three months recognised on an accrual
March 2006. from the due date/date basis over the period of
Other Credit Facility: In of ad hoc sanction. In time covered by the re-
case of any other credit facil- case of constraints such negotiated or rescheduled
ity, if the amount to be received as non-availability of fi- extension of credit.
remains overdue for more than nancial statements and iii) If Government guaran-
90 days, then the account will other data from the bor- teed advances become
be classified as NPA. rowers, the branch should NPA, the interest on such
Accounts with temporary furnish evidence to show advances should not be
deficiencies: that renewal/review of taken to income account
Even though criteria laid credit limits is already on unless the interest has
down for identification of an and would be completed been realised.
account as NPA are objective, soon. In any case, delay Reversal of income
an account should not be classi- beyond six months is not i) If any advance, including
fied as NPA, if the deficiencies considered desirable as a bills purchased and dis-
like non-submission of stock general discipline. Hence, counted, becomes NPA
statement and, non-renewal of an account where the reg- as at the close of any year,
facility in the account are tem- ular/ adhoc credit limits interest accrued and cred-
porary in nature. RBI guide- have not been reviewed/ ited to income account in
lines in this regard as under. renewed within 180 days the corresponding previ-
a) Drawing power is re- from the due date/date ous year, should be re-
quired to be arrived at of ad hoc sanction will be versed or provided for if
based on the stock state- treated as NPA. the same is not realized
ment, which is current. during the year under
However, considering the Income Recognition audit. This will apply to
difficulties of large bor- i) Income from NPA is Government guaranteed
rowers, stock statements not recognised on ac- accounts also.

March 2006 The Chartered Accountant 1329


ii) In respect of NPAs, fees, Asset Classification by the bank or accepted
commission and similar Having identified assets by RBI at the time of last
income that have accrued as NPA, banks are required to inspection, as the case
should cease to accrue in classify them further into –– may be. Such NPAs may
the current period and a) Sub-standard Assets be straightaway classified
should be reversed or b) Doubtful Assets under doubtful category
provided for with respect c) Loss Assets and provisioning should
to past periods, if uncol- i) Sub-standard Assets: be made as applicable to
lected. A sub-standard asset is doubtful assets.
iii) The finance charge com- one, which has remained ii) If the realisable value of
ponent of finance in- NPA for a period of the security, as assessed
come [as defined in ‘AS less than or equal to 12 by the bank/approved
19 – Leases’ issued by the months. valuers/RBI is less than
Council of the Institute ii) Doubtful Assets: 10 per cent of the out-
of Chartered Accoun- An asset is classified standing in the borrowal
tants of India (ICAI)] on as doubtful if it has re- accounts, the existence of
the leased asset which has mained in the sub-stan- security should be ignored
accrued and was credited dard category for a period A loss as- and the asset should be
to income account before of 12 months. set is one straightaway classified as
the asset became non- iii) Loss Assets: where loss loss asset. It may be either
performing and remain A loss asset is one where has been written off or fully pro-
unrealised, should be re- loss has been identified identified vided for by the bank.
versed or provided for in by the bank or internal by the bank
the current accounting or external auditors or or internal Asset Classification– Some
period. the RBI inspection but or external Clarifications:
Appropriation of recovery in the amount has not been auditors (i) Asset Classification to be
NPAs written off wholly. In or the RBI borrower-wise and not facility-
i) Interest realised on NPAs other words, such an as- inspection
may be taken to income wise
set is considered uncol- but the All the facilities granted by
account provided the lectible and of such little amount has
credits in the accounts to- a bank to a borrower and in-
value that its continuance not been vestment in all the securities is-
wards interest are not out as a bankable asset is not written off
of fresh/additional credit sued by the borrower will have
warranted although there wholly. to be treated as NPA/NPI and
facilities sanctioned to
may be some salvage or not the particular facility/in-
the borrower concerned.
recovery value. vestment or part thereof which
ii) In the absence of a clear
agreement between the Exceptions: has become irregular.
bank and the borrower In respect of accounts where (ii) Advances under consortium
for the purpose of appro- there are potential threats for arrangements
priation of recoveries in recovery on account of ero- Asset classification of ac-
NPAs banks should adopt sion in the value of security or counts under consortium should
an accounting principle non-availability of security and be based on the record of recov-
and exercise the right of existence of other factors such ery of the individual member
appropriation of recover- as frauds committed by bor- banks and other aspects having
ies in a uniform and con- rowers, it will not be prudent a bearing on the recoverabil-
sistent manner. Thus, as that such accounts should go ity of the advances. Where the
per the consistent policy through various stages of asset remittances by the borrower
of the bank recovery may classification. In cases of such under consortium lending ar-
be appropriated towards serious credit impairment the rangements are pooled with
interest or principal. asset should be straightaway one bank and/or where the
iii) As per income recogni- classified as doubtful or loss bank receiving remittances is
tion norms, bank cannot asset as appropriate. not parting with the share of
recognise income unless i) Erosion in the value of se- other member banks, the ac-
realised. However, bank curity can be reckoned count will be treated as not ser-
can debit interest to NPA as significant when the viced in the books of the other
account provided it is realisable value of the se- member banks and therefore,
credited to interest sus- curity is less than 50 per be treated as NPA. If the banks
pense account. cent of the value assessed participating in the consortium

1330 The Chartered Accountant March 2006


are able to arrange to get their (b) In the case of housing loan the data available, the account
share of recovery transferred or similar advances grant- should be deemed as a NPA.
from the lead bank or get an ed to staff members where In other genuine cases, the au-
express consent from the lead interest is payable after re- ditors must obtain satisfactory
bank for the transfer of their covery of principal, inter- evidence about the manner of
share of recovery, they may be est need not be considered regularisation of the account
able to make proper classifica- as overdue from the first to eliminate doubts on their
tion in their books. quarter onwards. Such performing status.
(iii) Advances to PACS/FSS ced- loans/advances should be
ed to Commercial Banks classified as NPA only Restructuring/rescheduling
In respect of agricultural when there is a default in Of Loans
advances as well as advances repayment of instalment i) The restructuring/reschedul-
for other purposes granted by of principal or payment of ing/renegotiation of the terms of
banks to ceded PACS (Primary interest on the respective loan agreement could take place:
agricultural credit society)/ FSS due dates. a) before commencement of
(Farmers Service Society) un- (vi) Government guaranteed commercial production;
der the on-lending system, only advances b) after commencement of
that particular credit facility The credit facilities backed commercial production
granted to PACS/FSS which If arrears by guarantee of the Central but before the asset has
is in default will be classified of interest Government though overdue been classified as sub stan-
as NPA and not all the credit and prin- may be treated as NPA only dard,
facilities sanctioned to a PACS/ cipal are when the Government repu- c) after commencement of
FSS. The other direct loans & paid by the diates its guarantee when in- commercial production
advances, if any, granted by the borrower voked. This exemption from and after the asset has been
bank to the member borrower in the case classification of Government classified as sub standard.
of a PACS/ FSS outside the of loan guaranteed advances as NPA is ii) Treatment of Restructured
on-lending arrangement will accounts not for the purpose of recogni- Standard Accounts
become NPA even if one of the classified tion of income. a) A standard asset (first
credit facilities granted to the as NPAs, State Government guaran- two categories) whose
same borrower becomes NPA. the account teed advances and investments instalments are being re-
(iv) Advances against Term De- should no in State Government guaran- structured need not be
posits, NSCs, KVP/IVP, etc longer be teed securities would attract classified as sub standard
Advances against term de- treated as asset classification and provi- provided the loan/credit
posits, NSCs eligible for sur- non-per- sioning norms if interest and/or facility is fully secured (se-
render, IVPs, KVPs and life forming principal or any other amount curity would also include
policies need not be treated as and may due to the bank remains over- collateral security provided
NPAs. Advances against gold be clas- due for more than 90 days. it is tangible and charged
ornaments, government securi- sified as (vii) Upgradation of loan ac- to the bank)
ties and all other securities are ‘standard’ counts classified as NPAs b) A standard asset (first two
not covered by this exemption. accounts. If arrears of interest and categories) whose inter-
(v) Loans with moratorium for principal are paid by the bor- est is being restructured
payment of interest rower in the case of loan ac- would not cause it to be
(a) In cases where mora- counts classified as NPAs, the downgraded to sub stan-
torium is available for account should no longer be dard category subject to
payment of interest, treated as non-performing and the condition that the
payment of interest be- may be classified as ‘standard’ amount of sacrifice, if any,
comes ‘due’ only after the accounts. in the element of interest,
moratorium or gestation (viii) Accounts regularised near measured in present value
period is over. Therefore, about the balance sheet date terms, is either written off
such amounts of interest The asset classification or provision is made to the
do not become overdue of borrowal accounts where extent of the sacrifice in-
and hence do not be- a solitary or a few credits are volved. For the purpose,
come NPA with refer- recorded before the balance the future interest due as
ence to the date of debit sheet date should be care- per the original loan agree-
of interest. They become fully checked and without ment in respect of an ac-
overdue after due date scope for subjectivity. Where count should be discount-
for payment of interest if the account indicates inher- ed to the present value at a
uncollected. ent weakness on the basis of rate appropriate to the risk

March 2006 The Chartered Accountant 1331


category of the borrower restructuring etc., whether in restructured ‘substandard’
(i.e., current PLR+ the ap- respect of principal install- accounts as discussed in
propriate credit risk pre- ment or interest amount, by para 6 (ii) and (iii) above.
mium for the borrower- whatever modality, would be Such accounts will be
category) and compared eligible to be upgraded to the subjected to the pruden-
with the present value of standard category only after the tial norms in the normal
the dues expected to be specified period i.e., a period of course. Moreover, inter-
received under the restruc- one year after the date when est sacrifice as explained
turing package, discounted first payment of interest or of above will have to be pro-
on the same basis. principal, whichever is earlier, vided or written off.
c) In case there is a sacrifice falls due, subject to satisfactory (b) Banks cannot reschedule/
involved in the amount of performance during the period. restructure/renegotiate
interest in present value The amount of provision made borrower accounts with
terms, as at (b) above, the earlier, net of the amount pro- retrospective effect. The
amount of sacrifice should vided for the sacrifice in the in- asset classification status
either be written off or pro- terest amount in present value It has to be as on the date of approval
vision made to the extent terms as aforesaid, could also borne in of the restructured pack-
of the sacrifice involved. be reversed after the one year mind that age by the competent
Example: A term loan which period. During this one-year income authority would be rel-
was originally sanctioned at the period, the sub-standard asset recognition evant to decide the asset
rate of interest of 13% and re- will not deteriorate in its clas- in respect classification status of the
payable by 2010 is rescheduled sification if satisfactory perfor- of resched- account after restructur-
and the revised rate of interest mance of the account is dem- uled/re- ing/rescheduling/renego-
is 10% and is repayable by 2015. onstrated during the period. In structured tiation.
To determine interest sacrifice, case, however, the satisfactory account Banks cannot repeatedly
bank will calculate the interest, performance during the one- also should restructure/reschedule the
which it would have earned as year period is not evidenced, be strictly amounts (ever greening)
per original terms. It will also the asset classification of the on cash due to them unless there
calculate interest, which it will restructured account would be basis on are very strong and valid
earn as per revised terms. Sup- governed as per the applicable realisation. reasons which warrant
pose present value of interest, prudential norms with refer- such repeated restructur-
which the bank would have ence to the pre-restructuring ing/rescheduling.
earned, comes to Rs. 5 lacs and payment schedule. (c) It has to be borne in mind
which it would earn comes to (v) Other related issues/clarifi- that income recognition
Rs.3.5 lacs. Thus interest sacri- cations: in respect of rescheduled/
fice of Rs.1.5 lacs will have to (a) The above guidelines restructured account also
be provided or written off by would be applicable to should be strictly on cash
the Bank. all type of credit facilities basis on realization. If,
iii) Treatment of restructured including working capital however, funding of in-
sub-standard accounts limits, extended to indus- terest in respect of NPAs,
a) A sub-standard asset trial units, provided they if recognised as income,
whose instalments are are fully covered by tan- should be fully provided
being rescheduled can gible securities. for.
be continued in the sub- However these guidelines (d) At times, as per the
standard category for the should not be applied to terms of restructuring,
specified period, provided credit facilities extended the amount outstand-
the loan/credit facility is to traders. ing is converted into
fully secured. This does not necessarily other instruments like
b) A sub-standard asset can mean that banks cannot equity, debentures or any
continue to be classified restructure the accounts other instrument. If the
as such provided interest other than that of in- amount of interest dues
sacrifice as explained in dustrial units. They can is converted into equity
para (ii) (b) and (c) above restructure such account or any other instrument,
is worked out and either provided they are viable and income is recognised
provided for or written off. However, these accounts in consequence, full pro-
(iv) Upgradation of restructured would not qualify for the vision should be made for
accounts: special asset classifica- the amount of income so
The sub-standard accounts, tion status available to re- recognised to offset the
which have been subjected to structured ‘standard’ and effect of such income rec-

1332 The Chartered Accountant March 2006


ognition. However, if the banking accounts/syn- eligible for restructuring
conversion of interest is dication/consortium ac- under the CDR system if
into equity, which is quot- counts with outstanding specifically recommended
ed, interest income can be exposure of Rs.20 crore by the CDR Core Group.
recognised at market value and above by banks and The Core Group shall
of equity, as on the date of institutions. recommend exceptional
conversion, not exceeding b) The Category 1 BIFR cases on a case-
the amount of interest CDR system will be ap- to-case basis for consid-
converted to equity. The plicable only to accounts eration under the CDR
income in respect of un- classified as ‘standard’ system. It should be en-
realised interest, which It has to and ‘sub-standard’. There sured that the lending
is converted into deben- be noted may be a situation where institutions complete all
tures or any other fixed that banks a small portion of debt by the formalities in seeking
maturity instrument, are not a bank might be classified the approval from BIFR
should be recognised only required to as doubtful. In that situ- before implementing the
on redemption of such re-compute ation, if the account has package.
instrument. the extent been classified as ‘stan- iii) Category 2 CDR System
(e) The provision made in a of sacrifice dard’/ ‘substandard’ in There have been instances
restructured/rescheduled each year the books of at least 90% where the projects have been
account towards interest and make of lenders (by value), the found to be viable by the lend-
sacrifice, may be reversed adjust- same would be treated ers but the accounts could not
on satisfactory comple- ments in as standard/substandard, be taken up for restructuring
tion of all repayment the provi- only for the purpose of under the CDR system as they
obligations and the out- sions made judging the account as fell under ‘doubtful’ category.
standing in the account towards eligible for CDR, in the Hence, a second category of
is fully repaid. It has interest books of the remaining CDR is introduced for cases
to be noted that banks are sacrifice. 10% of lenders. where the accounts have been
not required to re-com- c) In no case, the re- classified as ‘doubtful’ in the
pute the extent of sacri- quests of any corporate books of lenders, and if a mini-
fice each year and make indulging in willful de- mum of 75% (by value) of the
adjustments in the provi- fault, fraud or misfea- lenders satisfy themselves of
sions made towards inter- sance, even in a single the viability of the account and
est sacrifice. bank, will be considered consent for such restructuring.
for restructuring under iv) Accounting treatment for re-
Corporate Debt CDR system. structured accounts
Restructuring (CDR) d) The accounts where Restructuring of corpo-
i) The objective of the recovery suits have been rate debts under CDR system
CDR framework is to filed by the lenders could take place in the follow-
ensure timely and trans- against the company, may ing stages:
parent mechanism for re- be eligible for consid- a. before commencement of
structuring the corporate eration under the CDR commercial production;
debts of viable entities system provided, the ini- b. after commencement of
facing problems, outside tiative to resolve the case commercial production
the purview of BIFR, under the CDR system but before the asset has
DRT and other legal is taken by at least 75% been classified as ‘sub-
proceedings, for the ben- of the lenders (by value). standard’;
efit of all concerned. In However, for restructur- c. after commencement of
particular, the framework ing of such accounts un- commercial production
will aim at preserving vi- der the CDR system, it and the asset has been
able corporates that are should be ensured that classified as ‘sub-standard’
affected by certain inter- the account meets the ba- or ‘doubtful’.
nal and external factors sic criteria for becoming Detailed guidelines regard-
and minimize the losses eligible under the CDR ing prudential norms in respect
to the creditors and other mechanism. of rescheduled/restructured ac-
stakeholders through an e) BIFR cases are not counts have been given earlier
orderly and coordinated eligible for restructur- in this article. The same norms
restructuring programme. ing under the CDR would apply to accounts re-
ii) a) The CDR mechanism system. However, large structured under CDR system.
will cover only multiple value BIFR cases may be (Reader may refer Master cir-

March 2006 The Chartered Accountant 1333


cular dt.1st July’05 of RBI for In all the three forego- without any security. If such
detailed guidelines and clarifi- ing categories, in case of time account becomes NPA and
cation in this regard.) overruns beyond the aforesaid is classified as substandard
period of two years, the asset then provision of 20% would
Projects Under should be classified as sub- be made.
Implementation: standard regardless of the re- Banks are permitted to
i) The projects under implemen- cord of recovery and provided phase the additional provision-
tation for the purpose of deter- for accordingly. ing consequent upon the re-
mining the date when the project (ii) Income recognition duction in the transition period
ought to be completed and the as- (a) Banks may recognise in- from substandard to doubtful
set classification norms in respect come on accrual basis in asset from 18 to 12 months
thereof are as under: respect of the above three over a four year period com-
Category I: Projects where categories of projects mencing from the year ending
financial closure had been A general under implementation, March 31, 2005, with a mini-
achieved and formally docu- provision which are classified as mum of 20 % each year.
mented. of 10 ‘standard’. EXAMPLE: An asset be-
In such cases the date of per cent (b) If asset under above cat- came NPA for the first time
completion of the project on total egory is classified as ‘sub- on 31st March 2004. Balance
should be as envisaged at the outstand- standard’ income should outstanding in the account is
time of original financial clo- ing should be recognised on realisa- Rs.25 lacs. Account is classi-
sure. In all such cases, the asset be made tion on cash basis. fied as sub standard and there-
may be treated as standard as- without (c) Income which is wrongly fore provision of Rs.2.5 lacs is
set for a period not exceeding making any recognised should be re- made as on 31st March 2004.
two years beyond the date of allowance versed if it was recognised As per the old norms, the as-
completion of the project, as for ECGC as income during the set would have remained in the
originally envisaged at the time guarantee current year or provision category of sub-standard as on
of initial financial closure of the cover and should be made for an 31st March 2005. However due
project securities equivalent amount if it to reduction in period from 12
Category II: Projects sanc- available. was recognised as income months to 18 months, the asset
tioned before 1997 with origi- in the previous year(s). got migrated to doubtful Cat-
nal project cost of Rs.100 crore (d) As regards the treat- egory as on 31st March 2005
or more where financial closure ment of ‘funded interest’ and, therefore, bank will have
was not formally documented. recognised as income and to make provision of Rs.5 lacs
An expert group consti- ‘conversion into equity, i.e.20% of Rs.25 lacs. Thus, ad-
tuted by the term lending debentures or any other ditional provision of Rs.2.5 lacs.
institutions based on all ma- instrument’ guidelines as This additional provision of
terial and relevant facts and given earlier in this article. Rs.2.5 lacs can be spread over a
circumstances, has decided the (Reader may refer Master period of four years with mini-
deemed date of completion of circular dt.1st July’05 of mum provision of Rs.50,000/-
the project, on a project-by- RBI for detailed guide- each year.
project basis. In such cases, lines and clarification in (ii) Doubtful assets
the asset may be treated as this regard.) Underlying a) 100 percent of the extent
standard asset for a period not principle, however is that to which the advance is
exceeding two years beyond any funding of interest in not covered by the realis-
the deemed date of comple- respect of NPAs, if recon- able value of the security
tion of the project, as decided gised as income, should to which the bank has a
by the Group. be fully, provided for valid recourse and the re-
Category III: Projects alisable value is estimated
sanctioned before 1997 with Provisioning Norms: on a realistic basis.
original project cost of less than (i) Sub-standard assets b) In regard to the secured
Rs.100 crore where financial A general provision of 10 portion, provision may
closure was not formally docu- percent on total outstanding be made on the following
mented. should be made without mak- basis, at the rates ranging
The asset may be treated as ing any allowance for ECGC from 20 percent to 100
standard asset only for a period guarantee cover and securities percent of the secured
not exceeding two years beyond available. portion depending upon
the date of completion of the At times bank give loans, the period for which
project as originally envisaged which are unsecured ab-ini- the asset has remained
at the time of sanction tio. i.e. the loan is sanctioned doubtful:

1334 The Chartered Accountant March 2006


Period for which the advance has Provision requirement (%) to be made for doubtful
remained in ‘doubtful’ category assets, realisable value
of the securities should
Up to one year 20
first be deducted from
One to three years 30 the outstanding balance
More than three years § 60 per cent with effect from in respect of the amount
i) Outstanding stock of NPAs as on March 31, 2005 guaranteed by the Cor-
March 31, 2004. § 75 per cent with effect from poration and then provi-
ii) advances classified as ‘doubt- March 31, 2006 sion should be made.
ful more than three years’ on or after § 100 per cent with effect from e. Provisioning norms for
April 1, 2004 March31, 2007 sale of financial assets to
100 percent with effect from
Advances Securitisation Company
March 31, 2005
against (SC) / Reconstruction
gold orna- company (RC) –
As per the provisioning (iv) Standard assets i) If the sale of finan-
ments,
norms applicable to year ended A general provision of a cial assets to SC/
govern-
31st March 2004, for asset, minimum of 0.40 percent on RC, is at a price
ment
which were doubtful for more standard assets on global loan below the net book
securities
than three years (doubtful 3), portfolio basis. value (NBV ) (i.e.
and all
50% provision was required to (v) Provisions under Special
other kinds book value less pro-
make secured portion. Howev- Circumstances: of securi- visions held), the
er, any asset, which gets migrat- a. In respect of additional ties are not shortfall should be
ed to doubtful 3 category, 100 credit facilities granted to exempted debited to the profit
% provision is required to be SSI units, which are iden- from pro- and loss account of
made on the entire balance i.e. tified as sick and where visioning that year.
secured portion also. However, rehabilitation packages/ require- ii) If the sale is for a
assets which were already in the nursing programmes have ments. value higher than
Doubtful 3 category, provision been drawn by the banks the NBV, the excess
as indicated above will be re- themselves or under con- provision will not be
quired to be made. sortium arrangements, no reversed but will be
(iii) Loss assets provision need be made utilized to meet the
Loss assets should be writ- for a period of one year. shortfall/loss on ac-
ten off. If loss assets are per- b. Advances against term
count of sale of oth-
mitted to remain in the books deposits, NSCs eligi-
er financial assets to
for any reason, 100 percent of ble for surrender, IVPs,
SC/RC.
the outstanding should be pro- KVPs, and life policies
vided for. would attract provision-
ing requirements as ap- Natural Calamities
Valuation of Security for
provisioning purposes plicable to their asset Our country is plagued
With a view to bringing classification status. by frequent occurrences of
down divergence arising out c. Advances against gold natural calamities like floods,
of difference in assessment of ornaments, government cyclones, draughts etc. This
the value of security, in cases securities and all other causes lot of economic damage
of NPAs with balance of Rs. kinds of securities are not to our country and, therefore,
5 crore and above stock au- exempted from provision- needs massive rehabilitation
dit at annual intervals by ing requirements. efforts by all agencies includ-
external agencies appointed as d. Advances covered by ing banks. RBI has issued
per the guidelines approved by ECGC/CGTSI –– In Master Circular dated 1st
the Board of the bank would the case of advances clas- July 2005 for relief measures
be mandatory in order to en- sified as doubtful and by banks in areas affected by
hance the reliability on stock guaranteed by ECGC/ natural calamities. RBI has
valuation. Collaterals such as CGTSI, provision is re- given detailed guidelines in
immovable properties charged quired to be made only this circular about restructur-
in favour of the bank should be for the balance in excess ing of loans and fresh loans in
got valued once in three years of the amount guaran- respect of agricultural loans,
by valuers appointed as per teed by the Corporation. crop loans, irrigation loans,
the guidelines approved by the Further, while arriving poultry, fisheries, artisans,
Board of Directors. at the provision required self-employed etc. r

March 2006 The Chartered Accountant 1335