RBI

PRUDENTIAL
NORMS.
What Are Prudential Norms?
 Prudential norms are definitionally the guidelines &
general norms issued by the regulating bank of the
country for the proper and accountable functioning of
a bank and bank-like establishments.

 These norms are introduced by RBI in 1992-93

financial year.

 According to this norm “interest is not to be debited

on the accrual basis but only on the Cash basis”

 The prudential norms are based on the NPA concept,

N for No income, P for Provisioning and A for Asset
classification.

Classification of Prudential Norms

Prudential Norms is comprised of,

• Income Recognition
• Asset Classification
• Provisioning
Income Recognition

 Income from nonperforming assets (NPA) is not

recognized on accrual basis but is booked as income
only when it is actually received.

 The banks should not charge and take to income

account interest on any NPA.

 Interest on advances against term deposits, NSCs,

IVPs, KVPs and Life policies may be taken to income
account on the due date, provided adequate margin
is available in the accounts

Reversal of Income
 If any advance, including bills purchased and
discounted, becomes NPA, the entire interest
accrued and credited to income account in the past
periods, should be reversed if the same is not
realized. 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 with
respect to past periods, if uncollected.
Asset Classification
Categories of NPAs

NPAs are classified into the following

three categories based on

(a)The period for which the asset has

remained non-performing &

(b)The realizability of the dues

NPAs:

 Sub-Standard Assets

 Doubtful Assets

 Loss Assets

Classification of Assets:

 Sub-Standard Assets:

A Substandard asset would be done which has

remained NPA for a period less than or equal to

12 months.

 Doubtful Assets:

• An Asset would be classified as doubtful if it has

remained NPA for a period of 12 months.

 • A loan Classified as doubtful has all the
weakness inherent in assets that were classified
as Sub-Standard.

 Loss Assets:

• A loss asset is one which is considered

uncollectible and of such little value that is
continuance as a bankable asset is not
Warranted.

• These have been identified by the Bank or

External or RBI inspection, but the amount
would not have been Written off wholly.

Provisioning

» In Conformity with the prudential norms, Provisions

should be made on NPAs.

» Banks are required to make provision against Sub-

Standard assets, doubtful assets and Loss Assets.

» In addition to this, the banks are required to make

certain amount of provision against Standard assets
also.
Provisioning on NPA’S
Sub-Standard Assets:

• General Provision of 15% on total outstanding

should

be made.

• Additional provision of 10% will be added to the

“Unsecured Exposures” identified as substandard,

thus Constituting 25% on the outstanding balance.

Loss Assets:

• Loss Assets should be either written off or

100% Provided for.

Doubtful Assets:

• Provision of 100% to extent the advance is not

covered

• Value of security will be provided for at rates

ranging

from 25 to 100% on following basis.

 Period remained Provision requirement

Up to 1 year 25%

1 to 3 years 40%

> 3 years 100%

Provisioning Coverage ratio

 A key relationship in analyzing asset quality of the
bank.

 A measure that indicates the extent to which the

bank has provided against the troubled part of its
loan portfolio.

 A high ratio suggests that additional provisions to be

made by the bank in the coming years would be
relatively low (if gross NPAs do not rise at a faster
clip).

 Thus, PCR refers to the percentage of the loan

amount that the bank has set aside as provisions to
meet an eventuality where the loan might have to be
written off it becomes irrecoverable.

 PCR = Cumulative provisions / Gross NPAs

Thus, more the NPAs lesser will be the PCR