Income Recognition and Asset Classification

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Income Recognition and Asset
Classification

• M Rama Kumari
• AGM MoF
• College of Agricultural Banking
• Reserve Bank of India, Pune

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• Why do we need IRAC Norms ?

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What is IRAC

• A policy of income recognition on the basis of
  record of recovery rather than on any subjective
  considerations.
• The classification of assets of banks on the
  basis of objective criteria ensuring a uniform
  and consistent application of the norms

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What is Performing Asset

• A performing 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 is classified as Standard Asset

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What is Non-Performing Asset

• A non performing asset is a loan or an advance
  where
• (i) interest and/ or installment remain overdue
  for a period of more than 90 days in respect of a
  Term Loan
• (ii) The amount remains out of order for a
  period of more than 90 days, in respect of an
  Overdraft/ cash credit
• (iii) The bills remains overdue for a period of
  more than 90 days in case of bills purchased and
  discounted,

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(iv) In case of direct agricultural advances if
the installment of principal thereon remains
overdue for more than two crop seasons (in case
of short duration crops) and more than one crop
season (in case of long duration crop) crop
pattern as determined by SLBC (v) Similar
treatment for gold loans granted for agricultural
purposes
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Some exceptions

• (vi) Gold loans for non agricultural purposes
  will have the same treatment like any other
  loans. However, in case of a Board approved
  policy and subject to adequate margin gold loan
  up to Rs.1.0 lakh would not be NPA with bullet
  repayment option (not exceeding 12 months). It
  will be NPA only after it is overdue form the
  date of bullet repayment as fixed by the bank.
  (Nov.26, 2007)

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Some exceptions

• (vii) Advances against term deposits, NSCs
  eligible for surrender, IVPs, KVPs and Life
  policies need not be treated as NPAs provided
  adequate margin is available.
• (viii) Central Govt. guaranteed accounts need not
  be treated as NPAs. However, income not to be
  recognised unless interest/ inatallment is really
  paid.
• (ix) Staff housing loan as per the due date
  fixed by the bank, where interest is payable
  after recovery of principal.

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What is an Out of Order A/c

• the outstanding balance remains continuously in
  excess of the sanctioned limit/drawing power.
• Or
• there are no credits continuously for 90 days
• or
• credits are not enough to cover the interest
  debited during the same period

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A few other criteria of classification of CASH
CREDIT account as NPA

• No monthly stock statement has been submitted by
  the borrower for last six months (3 months90
  days)
• or
• The Cash Credit account has not been reviewed/
  renewed for more than 90 days
• or
• Where there is a solitary or a few credit
  entries before the balance sheet date but the
  account goes out of order thereafter

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Classification of Assets

• Identification of assets as NPAs should be done
  on an ongoing basis. Provisions to be made at the
  end of each calendar quarter.
• Charging of interest at monthly rests. However,
  the date of classification of an advance as NPA
  shall not change on account of charging of
  interest at monthly basis
• Treatment of NPAs Borrower-wise not
  Facility-wise, Bank-wise not borrower-wise

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Classification of Assets

• If the asset is non-performing, the investment in
  the shares and bonds of the same borrower shall
  also be classified as NPA.
• If the bank is not receiving regular dividend,
  the investment shall be classified as NPI.

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ASSET CLASSIFICATION
Sub Standard Assets The sub standard asset is
one which has remained as NPA for a period less
than or equal to 12 months. Provision requirement
10 of total outstanding irrespective of
available security. However, if there is an
erosion in the value of security (less than 50
of the original value as assessed by the bank or
accepted by RBI at the time of last inspection)
or a fraud has been committed by the borrower,
the account will be straight away classified as
doubtful category and will attract provision
accordingly.
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CAB, RBI, PUNE
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College of Agricultural Banking, RBI, PUNE
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ASSET CLASSIFICATION

• Further, if the erosion in the value of security
  is to the extent that the realisable value of
  security depletes to less than 10 of the
  outstanding loan, the account can be straight
  away classified as Loss and provision shall be
  made accordingly.

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Doubtful Asset

• Doubtful Assets
• D I, D II, D III
• An asset which has remained NPA for more than 12
  months but is less than or upto 24 months is
  classified in Doubtful I category
• Provision required is 20 on secured portion and
  100 on unsecured portion

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Doubtful Asset

• Doubtful II
• NPA for more than 2 years and up to 4 years
• Provision required is 30 on secured portion and
  100 on unsecured portion
• Doubtful III
• More than 4 years

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Doubtful Asset

• Provision required
• 100 for new (after April 1,2010) D III accounts
  for both T I banks and T II banks
• For T II banks 100 in case of old D III
  accounts also.

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Doubtful Asset

• For T I banks In case of NPAs(D III) as on March
  31, 2010
• (i) 60 w.e.f. March 31, 2011
• (ii) 75 w.e.f. March 31,2012
• (iii)100 w.e.f. March 31, 2013

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Loss Asset
Loss Assets An NPA account where realisable
value of security is either nil or is less than
10 of the outstanding. Realisibility is the main
criterion not the value of security per se. Loss
asset will attract 100 provision
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College of Agricultural Banking, RBI, PUNE
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Internal System for classification of asset

• Banks should establish appropriate internal
  systems to eliminate the tendency to postpone the
  identification of NPAs , especially in respect of
  high value accounts.
• Responsibility and validation levels for ensuring
  asset classification may be fixed by the bank
• RBI would continue to identify the divergences
  arising due to non-compliance, for fixing
  responsibility.

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Prudential Guidelines on restructuring of Advances
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Prudential Guidelines on Restructuring of
Advances

• Asset classification norms
• As a general rule
• Standard accounts should be immediately
  reclassified as sub standard assets upon
  restructuring
• The non performing asset would slip into further
  lower asset classification category as per extant
  asset classification norms with reference to pre
  restructuring repayment schedule.

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Prudential Guidelines on Restructuring of Advances

• non-performing assets upon restructuring, would
  be eligible for up-gradation to the 'standard'
  category after observation of 'satisfactory
  performance' during the 'specified period i.e.
  one year
• the asset classification of the restructured
  account would be governed as per the applicable
  prudential norms with reference to the
  pre-restructuring payment schedule.

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Restructured A/c-Income recognition norms

• However, this rule is not applicable in case of
  (i) Project Financing, (ii) borrowers engaged in
  important business activities (iii) housing loan
• This exceptional treatment is not available to
• (i) consumer and personal advances
• (ii) Advances to traders

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Restructuring of Agricultural Advances

• In case of default in payment of agricultural
  loans due to natural calamities UCBs on their own
  may decide to
• convert the short term production loan into a
  long term loan or reschedule the repayment period
  and
• sanction fresh short term loans
• these fresh/ restructured loans will not be
  treated as NPAs and will be governed by fresh
  terms and conditions

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Restructured A/c- Provisioning norms

• PRECONDITIONS
• (i)Provision for diminution in the fair value of
  restructured Advances
• Interest sacrifice to be calculated on the basis
  of discounting present value of cash flow with
  both pre and post restructuring rate of banks
  BPLR appropriate term premium credit risk
  premium
• Simpler method5 of the exposure
• (ii)The dues of the bank are fully secured with
  certain exceptions

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Restructured A/cs-Income recognition norms-

• Exceptions of (ii)
• (a) SSI borrowers where outstanding is up to
  Rs.25.0 lakh
• (b) Infrastructure projects with an escrow
  account with valid legal claim and where the cash
  flows generated form the project are adequate for
  repayment of the advance

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Restructured A/cs-Income recognition norms-

• WCTL part (created out of irregular principal
  repayment) may remain unsecured with the
  condition that a provisioning of 20 would be
  required on standard restructured asset and for
  substandard asset it should be 20 in the first
  year with yearly increase of 20 each subsequent
  year

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Restructured A/cs-Income recognition norms-

• (iii)The unit becomes viable in 10 years if it is
  engaged in infrastructure and in 7 years in case
  of other units
• (iv)The repayment period of the restructured
  advance should not exceed 15 years in case of
  infrastructure and housing loans 10 years in all
  other cases.

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Restructured A/cs-Income recognition norms-

• (v) Personal guarantee is offered by the promoter
  (except when the unit is affected by external
  factors pertaining to the economy and industry
• (vi) The account should not be subjected to
  repeated restructuring

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Restructured A/cs-Income recognition norms-

• (vii)Promoters additional contribution should
  not be less than 15 of banks sacrifice
• (viii) If FITL is created out of unpaid interest,
  the unrealised income should have a corresponding
  credit in the account styled as Sundry
  Liabilities Account (Interest Capitalisation)

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Other important issues

• FITL will be classified in the same category as
  the restructured advance
• The bank should disclose in their published
  annual Balance Sheet, under Notes on Account
  information relating to number and amount of
  advances restructured and the amount of
  diminution in the fair value of advances

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PROVISIONING NORMS
Rate of Provisioning on Standard Asset
Loan Type T II banks T I banks
Direct advances to Agriculture and SME sector 0.25 0.25
Commercial Real Estate (CRE) sector 1.00 1.00
All other loans and advances not included in (a) and (b) above 0.40 0.25
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• Thank you