-: PRESENTATION BY :-

CA VIPUL DATTANI

B.COM, DTLP, FCA

INCOME RECOGNITION

AND

ASSETS CLASSIFICATION NORMS

Objects For IRAC Norms

In line with the international practices and as per the

recommendations made by the Committee on the

Financial System, the Reserve Bank of India has

introduced, in a phased manner, prudential norms

for income recognition, asset classification and

provisioning for the advances portfolio of the banks

so as to move towards greater consistency and

transparency in the published accounts.

Fund Based Non Fund

Based

Various Types of Advances

Various Types of Advances – Fund Based

Cash Credit / Over Draft

Term Loans (Home Loan, Car Loan

etc…)

Agricultural Term Loan

Agricultural Cash Credit

Export Packing

Bills Discounted

Various Types of Advances – Non Fund Based

Bank Guarantee

Letter of Credit

Classification of Assets

Standard Assets

Sub Standard Assets

Doubtful Assets

Loss Assets

PA And NPA

Performing Assets (PA) :- An assets which provides positive returnannually.

Non-Performing Assets (NPA) :- An assets could be classified asNon-Performing Assets if it ceases to generate income for the bank.

PA And NPA

Following points are the trigger points of NPA :-

1. Interest / Installments Outstanding For more than 90 days.

2. OD / CC account remains “Out of Order”.

3. Bills Purchased and Discounted Remains Outstanding For

more than 90 days.

4. Interest / Installments Remains Overdue For Two Crop

Seasons For Short Duration Crops and One Crop Season For

Long Duration Crops.

Note :- Banks should classify an account as NPA only if the interest

due and charged during any quarter is not serviced fully

within 90 days from the end of the quarter

Cash Credit :-

Cash Credit Examples.docx

Examples of NPA

Examples of NPA

Term Loans :-

Date of sanction is 31/12/2015. Amount of loan is Rs. 12,00,000/-

and amount of installment is Rs. 10,000/- + Interest (Non

EMI).Outstanding as on 31/03/2018 is Rs. 10,10,000/-.

Theatrical balance should be Rs. 9,30,000/-. (27 Installments of Rs.

10,000/- each should have been served). Thus account is overdue by

Rs. 80,000/-. (8 Monthly Installments)

Above account is NPA and required to be classified under sub-standard

assets.

Examples of NPA

Agricultural Advances :-

Long Duration Crops & Short Duration Crops :-

For the purpose of these guidelines, 'long duration' cropswould be crops with crop season longer than one year andcrops, which are not 'long duration' crops, would be treatedas 'short duration' crops.

The crop season for each crop, which means the period upto harvesting of the crops raised, would be as determined bythe State Level Bankers' Committee in each State.

Government Guaranteed Advances

The credit facilities backed by guarantee of the

Central Government though overdue may be treated

as NPA only when the Government repudiates its

guarantee when invoked. This exemption from

classification of Government guaranteed advances as

NPA is not for the purpose of recognition of income.

The requirement of invocation of guarantee has been

delinked for deciding the asset classification and

provisioning requirements in respect of State

Government guaranteed exposures.

Government Guaranteed Advances

With effect from the year ending March 31, 2006

State Government guaranteed advances and

investments in State Government guaranteed

securities would attract asset classification and

provisioning norms if interest and/or principal or

any other amount due to the bank remains overdue

for more than 90 days.

Standard Assets

An asset could be classified as

Standard Assets if arrears of interest

and the principal amount of loan does

not exceed 90 days.

Standard asset for a bank is an asset

that is not classified as an NPA.

Following Provision Required For Standard Assets :-

1. Direct Advances to Agriculture & SME Sector –

0.25%.

2. Commercial Real State Advances – 1%.

3. Commercial Real State Advances (Residential

Housing Sector) – 0.75%

4. All Other Loans & Advances Not Included in

Above – 0.40%.

Standard Assets – Provisioning Norms

Example :-

XYZ Bank has given advances of Rs. 2,50,000/- to

Mr. Bahubali (Farmer) for agriculture. Interest and

Principal amount is outstanding from 01/02/2018.

Thus the account is standard asset. Calculation of

provision is as under :-

0.25% of Advances – Rs. 625/-

Standard Assets – Provisioning Norms

Sub-Standard Assets

An asset could be classified as Sub-Standard Assets if

it remains Non-Performing Assets (NPA) for a

period less than or equal to 12 months.

A loan account could be classified as Sub-Standard

Assets when the terms and conditions pertaining to

the loan account are re-negotiated or revised.

The distinct possibility that the banks will sustain

some loss is deficiencies are not corrected.

Sub-Standard Assets – Provisioning Norms

Following Provision Required For Sub-Standard

Assets :-

1. Secured Exposure – 15%

2. Unsecured Exposure for Escrow A/c. available in

case of infrastructure lending, infrastructure loan

accounts – 20%.

3. Other Unsecured Exposure – 25%.

Sub-Standard Assets – Provisioning Norms

Example :-

M/s. NPA Bank has account of Mr. Kanha which has

outstanding balance as on 31/03/2018 Rs.

4,20,000/-. Security available to the extent Rs.

2,50,000/-. Calculation of provision is as under :-

15 % of secured portion Rs. 37,500/- and

25% of unsecured portion Rs. 42,500/-.

Doubtful Assets

An assets could be classified as Doubtful Assets if it remains

in the Sub-Standard Category for a period of more than 12

months to 3 years.

Doubtful Assets have all the characteristics that Sub-

Standard have in addition to collection of the same.

Accounts where there is erosion in the value of security and

the realisable value of the security is less than 50 per cent of

the value assessed by the bank or accepted by RBI at the

time of last inspection than such asset could be straight

away classified as doubtful assets.

Doubtful Assets – Provisioning Norms

Following Provision Required For Doubtful Assets :-

Particulars Secured Unsecured

Up to 1 Year 25% 100%

1 to 3 Year 40% 100%

More than 3 Years 100%

Doubtful Assets

Example:-

ABC Bank Ltd. has given advances of Rs. 10,00,000/- to

Mr. Keshav as on 01/12/2014. An advance became NPA

(Sub-Standard) on 31/12/2016 with outstanding of Rs.

9,50,000/-. There is security of Rs. 5,00,000/- and

unsecured portion is Rs. 4,50,000/-. It remain under the

category of sub-standard till 31/12/2017. Then it became

doubtful asset as on 01/01/2018.

Calculation of provision will be as under :-

Doubtful Assets

25% of Secured Portion

(i.e. 25% of 5,00,000/-) 1,25,000/-

100% of Unsecured Portion

(i.e. 100% of 4,50,000/-) 4,50,000/-

_________

Total Provision Required By Bank 5,75,000/-

Less :- Provision already made at the

Time of classifying the account as sub-

Standard asset as on 31/12/2016

[5,00,000*15% + 4,50,000*25%] 1,87,500/-

_________

Provision to be made on 31/03/2018 3,87,500/-

Doubtful Assets

40% of Secured Portion

(i.e. 40% of 5,00,000/-) 2,00,000/-

100% of Unsecured Portion(i.e. 100% of 4,50,000/-) 4,50,000/-

_________Total Provision Required By Bank 6,50,000/-Less :- Provision already made at theTime of classifying the account as doubtful asset as on 31/03/2018 [5,00,000*25% + 4,50,000*100%]

5,75,000/-_________

Provision to be made on 31/03/2019 75,000/-

Doubtful Assets

100% of Outstanding Amount

(i.e. 100% of 9,50,000/-) 9,50,000/-_________

Total Provision Required By Bank 9,50,000/-

Less :- Provision already made at the

Time of classifying the account as doubtful

asset as on 31/03/2019

[5,00,000*40% + 4,50,000*100%]6,50,000/-

_________

Provision to be made on 31/03/20203,00,000/-

Loss Assets

An Assets could be

classified as Loss

Assets if 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.

Loss Assets

Accounts where there is erosion in the value of

security and the realisable value of the security is less

than 10 per cent of the value assessed by the bank /

approved valuers / RBI than the such asset could be

classified as loss assets.

In case of loss assets, provision required is 100% of

Outstanding Amount.

Additional Provisions For NPAs at Higher Than

Prescribed Rates

The regulatory norms for provisioning represent the minimum

requirement. A bank may voluntarily make specific provisions for

advances at rates which are higher than the rates prescribed under

existing regulations, to provide for estimated actual loss in

collectible amount, provided such higher rates are approved by

the Board of Directors and consistently adopted from year to

year. Such additional provisions are not to be considered as

floating provisions. The additional provisions for NPAs, like the

minimum regulatory provision on NPAs, may be netted off from

gross NPAs to arrive at the net NPAs.

Provision On Leased Assets

Substandard Assets :-

a) 15 percent of the sum of the net investment in the lease

and the unrealised portion of finance income net of finance

charge component. The terms ‘net investment in the lease’,

‘finance income’ and ‘finance charge’ are as defined in ‘AS

19 Leases’ issued by the ICAI.

b) Unsecured (as defined in paragraph 5.4 above) lease

exposures,, which are identified as ‘substandard’ would

attract additional provision of 10 per cent, i.e., a total of 25

per cent.

Provision On Leased Assets

Doubtful Assets :-100 percent of the extent to which the finance is not

secured by the realisable value of the leased asset, should be

provided for. Realisable value is to be estimated on a

realistic basis. In addition to the above provision, provision

at the following rates should be made on the sum of the net

investment in the lease and the unrealised portion of finance

income net of finance charge component of the secured

portion, depending upon the period for which asset has been

doubtful:

Provision On Leased Assets

Period for which the advance has

remained in ‘doubtful’ category

Provision

requirement

(%)

Up to One Year 25

One to Three Years 40

More Than Three Years 100

Loss Assets :-

The entire asset should be written off. If for

any reason, an asset is allowed to remain in

books, 100 percent of the sum of the net

investment in the lease and the unrealised

portion of finance income net of finance

charge component should be provided for.

Provision On Leased Assets

Guidelines for Provisions under Special

Circumstances

Advances granted under rehabilitation packages

approved by BIFR/term lending institutions :-

1. In respect of advances under rehabilitation package approved

by BIFR/term lending institutions, the provision should

continue to be made in respect of dues to the bank on the

existing credit facilities as per their classification as substandard

or doubtful asset.

2. As regards the additional facilities sanctioned as per package

finalised by BIFR and/or term lending institutions, provision

on additional facilities sanctioned need not be made for a

period of one year from the date of disbursement.

Guidelines for Provisions under Special

Circumstances

3. In respect of additional credit facilities granted to SSI units

which are identified as sick [as defined in Section IV (Para 4.6)

of circular RPCD.SME&NFS.BC.No.3/06.02.31/2014-15

dated July 1, 2014] and where rehabilitation packages/nursing

programmes have been drawn by the banks themselves or

under consortium arrangements, no provision need be made

for a period of one year.

4. Advances against term deposits, NSCs eligible for surrender,

IVPs, KVPs, gold ornaments, government & other securities

and life insurance policies would attract provisioning

requirements as applicable to their asset classification status.

Guidelines for Provisions under Special

Circumstances

• Treatment of interest suspense account :-

Amounts held in Interest Suspense Account

should not be reckoned as part of provisions.

Amounts lying in the Interest Suspense

Account should be deducted from the

relative advances and thereafter, provisioning

as per the norms, should be made on the

balances after such deduction.

Guidelines for Provisions under Special

Circumstances

• Advances covered by ECGC guarantee :-

In the case of advances classified as doubtful and

guaranteed by ECGC, provision should be made only

for the balance in excess of the amount guaranteed by

the Corporation. Further, while arriving at the

provision required to be made for doubtful assets,

realisable value of the securities should first be

deducted from the outstanding balance in respect of

the amount guaranteed by the Corporation and then

provision made as illustrated hereunder:

Guidelines for Provisions under Special

Circumstances

• Examples :-

Examples of Advances Covered

By ECGC Guarantee.pdf

Income Recognition

Policy of income recognition has to be objective and based

on record of recovery.

Banks should not charge and take to income account

interest on any NPA.

Interest on advances against Term Deposits, NSC, KVP, IVP

and life policies may be taken to income account on due

date, provided adequate margin is available in the account.

Fees and Commissions earned by banks as a result of

renegotiation and reschedulement of outstanding debts

should be recognised on accrual basis over the period of

time covered by extension of credit.

Income Recognition

Banks may recognize income on accrual basis in respect of the

projects under implementation, which are classified as

standard.

Banks should not recognize income on accrual basis in

respect of the projects under implementation which are

classified as a sub-standard asset. Banks may recognize

income in such accounts only on realization on cash basis.

Banks which have wrongly recognized income in the past

should reverse the interest if it was recognized as income

during the current year or make a provision for an equivalent

amount if it was recognized as income in the previous year.

Income Recognition

Funded Interest :- Income recognition in respect of the

NPAs, regardless of whether these are or are not subjected

to restructuring/ rescheduling/ renegotiation of terms of

the loan agreement, should be done strictly on cash basis,

only on realization and not if the amount of interest overdue

has been funded.

If, however, the amount of funded interest is recognized as

income, a provision for an equal amount should also be

made simultaneously. In other words, any funding of

interest in respect of NPAs, if recognized as income, should

be fully provided for.

Income Recognition

Conversion into equity, debentures or any other

instrument :- The amount outstanding converted into other

instruments would normally comprise principal and the interest

components.

If the amount of interest dues is converted into equity or any

other instrument, and income is recognized in consequence, full

provision should be made for the amount of income so

recognized to offset the effect of such income recognition.

Such provision would be in addition to the amount of provision

that may be necessary for the depreciation in the value of the

equity or other instruments, as per the investment valuation

norms.

Income Recognition

However, if the conversion of interest is into equity which is

quoted, interest income can be recognized at market value of

equity, as on the date of conversion, not exceeding the amount

of interest converted to equity.

Such equity must thereafter be classified in the “available

for sale” category and valued at lower of cost or market

value.

In case of conversion of principal and /or interest in respect of

NPAs into debentures, such debentures should be treated as

NPA, ab initio, in the same asset classification as was

applicable to loan just before conversion and provision made

as per norms.

Income Recognition

This norm would also apply to zero coupon bonds or other

instruments which seek to defer the liability of the issuer.

On such debentures, income should be recognized only on

realization basis.

The income in respect of unrealized interest which is converted

into debentures or any other fixed maturity instrument should

be recognized only on redemption of such instrument.

Subject to the above, the equity shares or other instruments

arising from conversion of the principal amount of loan would

also be subject to the usual prudential valuation norms as

applicable to such instruments.

Income Recognition

Example :-

NPA Ltd. has advanced Rs. 25,00,000/- to

Mr. Natvarlal. Total Outstanding amount as on

31/03/2018 is Rs. 23,50,000/-. The bank has

debited interest of Rs. 1,88,000/-. Bank has

charged Rs. 20,000/- as bank charges.

How income should be recognized?

Income Recognition

Income Recognition is as follows :-

Particulars Amount

Total Outstanding 23,50,000

Less :- Unrealised Interest 1,88,000

Less :- Charges to be reversed 20,000

Net Outstanding 21,42,000

Provision @ 15% under Sub-Standard

[Assume that 100% security is available]

3,21,300

Source

Master Circular of Reserve Bank of India – RBI/2015-16/101,

DBR.No.BP.BC.2/21.04.048/2015-16 dated July 01, 2015.