Internationally income from Non-Performing Assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. In line with the international practices and in terms of recommendations made by Mr.Narasimham committee on financial system, RBI has introduced prudential norms for income recognition and asset classifications for Indian banks and financial institutions, to ensure proper provisioning and transparency in the published accounts.In agreement with the prudential norms for loans & advances, provisioning should be made on the non-performing assets (NPA) of the banks. The provisions are made by the banks on the basis of classification of assets into prescribed NPA categories viz. Sub-standard,bad and doubtful and loss accounts.
Definition of Non-performing Assets (NPA): An asset, including a leased asset, is called NPA when the asset ceases to generate income for the bank.If interest and or installment of principal amount of loan remain overdue for a period of more than 90 days, of term loan or the account remain ‘out of order’ in case of overdraft/Cash Credit account or the bills purchased /discounted remain overdue for a period of more than 90 days the account, such accounts will be classified as NPA.
In case of agricultural advance the account is classified as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops. If the loan is for long duration crop, the account is classified as NPA if the outstanding for one crop season.
What is ‘Overdue’ Status?
Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank.
What is ‘Out of order’ status?
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 as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as ‘out of order’.
Categories of NPAs
Based on the period, for which the asset remained nonperforming and the realisability of the dues, Banks are required to classify their assets into the following categories.
(i) Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. In other words, 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.
(a) The entire assets should be written off after obtaining necessary approval from the competent authority and as per the provisions of the Co-operative Societies Act / Rules. If the assets are permitted to remain in the books for any reason, 100 per cent of the outstanding should be provided for.
(b) In respect of an asset identified as a loss asset, full provision at 100 per cent should be made if the expected salvage value of the security is negligible.
(ii) Doubtful Assets: If an account remains in substandard category for a period of 12 months, the account will be classified as ‘Doubtful Asset.’ A loan classified as doubtful.
(a) Provision should be for 100 per cent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse should be made and the realisable value is estimated on a realistic basis.
(b) In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 per cent to 100 per cent of the secured portion depending upon the period for which the asset has remained doubtful:
iii) Sub-standard Assets: If interest and or installment of principal amount of loan remain overdue for a period of more than 90 days, of term loan or the account remain ‘out of order’ in case of overdraft/Cash Credit account or the bills purchased /discounted remain overdue for a period of more than 90 days the account, such accounts will be classified as NPA- Sub standard accounts.In case of agricultural advance the account is classified as NPA, if the installment of principal or interest thereon remains overdue for two crop seasons for short duration crops. If the loan is for long duration crop, the account is classified as NPA if the outstanding for one crop season such accounts also classified as NPA –Sub standard account. The above classified accounts remain substandard, if the account is not regularized within 12 months of classifying the same as substandard. If an account remains in substandard category for a period of 12 months, the account will be classified as ‘Doubtful Asset.’
A general provision of 10 per cent on total outstanding should be made without making any allowance for DICGC / ECGC guarantee cover and securities available. However, under the new revised norms, loans classified as sub-standard, would attract a provision of 15 per cent, against the current 10 per cent. For unsecured loans classified as sub-standard assets, an additional 10 per cent provision would have to be made over the current 15 per cent. Thus, the total provisioning for sub-standard unsecured loans would now be 25 per cent, against 20 per cent mandated earlier.
The provision for the secured portion of advances, which have been in the doubtful category for up to one year, was raised to 25 per cent from the current 20 per cent. Restructured loans classified under the standard category would need a provision of two per cent in the first two years from the date of restructuring.
Income recognition: Banks all over the world do not recognize the income from non-performing assets on accrual basis. Income is booked only when it is actually received. In India also banks do not charge and show interest income from NPA accounts. However interest on advances against term deposits, NSCs, IVPs, KVPs and Life policies are recognized as income when adequate margin is available in the accounts.
Reversal of income credited for the past period:
Once, 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 realised. This will apply to Government guaranteed accounts also. The fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed with respect to past eriods, if uncollected.
What is Standard Assets?: If the loan accounts or the bills purchased /discounted which do not fall under NPA classification are called standard account.