Prudential Norms on Ira

8/12/2019 Prudential Norms on Ira

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IMPORTANT GUIDELINES ON PRUDENTIAL NORMS ON INCOMERECOGNITION, ASSET CLASSIFICATION*

1. DEFINITION

Out of orderstatus

An out of order account is one in which the outstanding balance remainscontinuously in excess of the sanctioned limit/drawing power or the outstandingbalance is less than the sanctioned limit/drawing power, but there are no creditscontinuously for 90 days as on the date of Balance heet or credits are notenough to co!er the interest debited during the same period"

O!erdue

O!erdue is the unpaid amount due to the ban# under any credit facility on due date"

$on%performing Assets

An asset &including a leased asset' ceases to generate income is treated as nonperforming asset &$(A'" A )oan or an ad!ance is classified as $(A as under*%

$ature of +acility (arameters

erm )oan -nterest and/or instalment of principalremain o!erdue beyond 90 days

O!erdraft/.ash .redit emains out of order as indicated

abo!eBill (urchased/discounted emains o!erdue beyond 90 days

.rop )oans &short durationcrops'

-nstalment of principal or interestthereon remains o!erdue for cropseasons

.rop )oans &)ong durationcrops'

-nstalment of principal or interestthereon remains o!erdue for 1 cropseason

ecuriti2ation transactions Amount of li3uidity facility remainsoutstanding beyond 90 days

4eri!ati!e transactions O!erdue recei!ables representing

positi!e mar#%to%mar#et !alue of aderi!ati!e contract which remainsunpaid beyond 90 days from specifieddue date for payment

Ban#s are re3uired to classify an account as $(A wherein the interest due andcharged during any 3uarter is not ser!iced fully within 90 days from the end ofthe 3uarter"


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2. INCOME RECOGNITION

-ncome from $(A assets is to be recogni2ed only when it is actually recei!ed"5owe!er, interest on ad!ances against term deposits, $., -6(s, 76(s, and )ife

policies may be ta#en into income account on the due date pro!ided ade3uatemargin is a!ailable in the accounts"

On an account &incl" bills purchased and discounted and 8o!ernmentguaranteed accounts'turning $(A, ban#s should re!erse the interest alreadycharged and not collected by debiting (rofit and )oss account, and stopfurther application of interest" )i#ewise fees, commission and similar income inrespect of past periods, if uncollected, need to be re!ersed"

-nterest reali2ed on $(As may be ta#en to income account pro!ided thecredits in the accounts towards interest are not out of fresh/ additional credit

facilities sanctioned to the borrower concerned"

Ban#s may continue to record such accrued interest, but not reali2ed, in aemorandum account in their boo#s which should not be ta#en into accountfor computing 8ross Ad!ances,

3. ASSET CLASSIFICATION

$(As are being classified, based on the period for which the asset has remainednon%performing and realisability of the dues, into three categories as under*%

$o" .ategory (arameters01" ubstandard Assets

: emained $(A for a period not lessthan or e3ual to1 year":-n such cases, the current net worthof the borrower/guarantor or mar#et!alue of the security charged is notenough to ensure reco!ery of theban#s dues;* Likely to sustain some loss ifdeficiencies are not corrected"

0" 4oubtful Assets :emained in substandard category

beyond 1 year;

:eco!ery % highly 3uestionable andimprobable"

0


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:.ontinuance as ban#able assetsalthough it may ha!e some sal!age orreco!ery !alue"


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-n staff housing loan or similar other accounts where the interest is to be reco!eredafter repayment of principal, such accounts would become $(A only when there isdefault in repayment of principal or interest on respecti!e due dates"

Ad!ances bac#ed by guarantee of .entral 8o!ernment though o!erduemay be treated as $(A only when the 8o!ernment repudiates its guarantee

whenin!o#ed" 5owe!er, tate 8o!ernment guaranteed ad!ances and in!estments intate 8o!ernment guaranteed securities would attract asset classificationand pro!isioning norms if interest and/or principal or any other amount due to theban# remains o!erdue for more than 90 days"

(ro@ects under implementation &.lassification of $(A'

(ro@ect )oans are classified into categories !i2" (ro@ect )oans for infrastructuresectorand (ro@ect )oans for non%infrastructure sector"

An infrastructure pro@ect loan would be classified as $(A before the date ofcommencement of commercial operations &4..O' as per record of reco!ery &90days' unless it is restructured and eligible for classification as standard asset"

An infrastructure pro@ect would be classified as $(A if it fails to commencecommercial operations within years from the original 4..O"

-f a pro@ect loan classified as standard asset is restructured any time during theperiod up to two years from the original date of 4..O, it can be retained as astandard asset if the fresh 4..O is fixed and the account continues to beser!iced as per the restructured terms sub@ect to the application for restructuringshould be recei!ed before the expiry of period of two years from the original

4..O and when the account is still standard as per record of reco!ery" 4elay in infrastructure pro@ects in!ol!ing court cases and pro@ects in other than

court cases, extension of 4..O up to another years &beyond the existingextended period of years i"e" total extension of years' and up to another 1year &beyond the existing extended period of years i"e" total extension of ? offundedoutstanding:1"00? offundedOutstanding

:"00? duringteaser rateperiod and0"0? after 1year of ratereset":+orrestructured


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ad!ances "00?for first yearsfrom date ofrestructuring":$(A

restructuredaccountH"00? in thefirst > years fromthe date ofupgradation"

0" ubstandard Assets :All sectors

:Cnsecured Ad!ances

:1>?ofutstandingwithout ma#ingany allowancefor E.8. and

securitya!ailable":Additional 10?i"e" total >?and forinfrastructureloans G total0? pro!idedEscrowmechanism isa!ailable"

0


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aside to co!er loan losses" Ban#s are re3uired to maintain their total pro!isioningco!erage ratio, including floating pro!isions, at not less than J0? by eptember010"

05.SALE OF FINANCIAL ASSETS TO SC/RC

Cnder the A+AE- Act 00, ban#s/+-s are permitted to sell financialassets to ecuriti2ation .ompanies &.' and econstruction .ompanies&.'" A financial asset which can be sold to the ./. by any ban#/ +- is*%

a) A $(A, including a non%performing bond/ debenture, and

b) A tandard Asset where*i) he asset is under consortium/multiple ban#ing arrangements;ii) At least J>? of !alue of the asset is classified as $(A in the boo#s of

other ban#s/+-s; and

iii) At least J>? &by !alue' of the ban#s/+-s who are under theconsortium/multiple ban#ing arrangements agree to the sale of the assetto ./."

he prudential guidelines ha!e been grouped under !arious heads as under*%

a) +inancial assets which can be sold"

b) (rocedure for sale of ban#s/ +-s financial assets to ./ ., including!aluation and pricing aspects"

c) (rudential norms, in the following areas, for ban#s/ +-s for sale of their

financial assets to ./ . and for in!esting in bonds/debentures/security receipts and any other securities offered by the ./. ascompensation conse3uent upon sale of financial assets*

i) (ro!isioning / 6aluation normsii) .apital ade3uacy normsiii) Exposure norms

d) 4isclosure re3uirements

he guidelines, prudential norms, procedure for sale, disclosure re3uirements,etc" are detailed in the B- aster .ircular dt" 01"0J"011" Ban#s/+-s in!estment

in ./. in debentures/bonds/security receipts/(.s issued by ./. willconstitute exposure on the ./." As only a few ./. are being set up now,ban#s/ +-s will be allowed, in the initial years, to exceed prudential exposureceiling on a case%to%case basis"

6. PURCHASE & SALE OF NPAs

8uidelines ha!e been framed for underta#ing purchase and sale of $(Aswithout in!ol!ing ./., as an option a!ailable, to de!elop a healthy


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secondary mar#et for $(As" he option would be conducted within thefinancial system and has to be initiated with due diligence and care"

he guidelines are applicable to ban#s, +-s and $B+.s purchasing/ selling nonperforming financial assets, from/ to other ban#s/+-s/$B+.s &excluding.s/.s'"

A financial asset, including assets under multiple/consortium ban#ingarrangements, would be eligible for purchase/sale in terms of the guidelines if itis a $(A/$(-in the boo#s of the selling ban#"

he guidelines ha!e been grouped under the following headings*

a) (rocedure for purchase/ sale of non performing financial assets by ban#s,including !aluation and pricing aspects"

b) (rudential norms, in the following areas, for ban#s for purchase/ sale of nonperforming financial assets*

i' Asset classification norms

ii' (ro!isioning normsiii' Accounting of reco!eriesi!' .apital ade3uacy normsiv) Exposure norms

c) 4isclosure re3uirements

he guidelines, procedure, prudential norms, exposure norms, disclosurere3uirements, etc" are detailed in the B- aster .ircular dt" 01"0J"011"

7. WRITE OFF OF NPAs

-n terms of ection


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he guidelines on restructuring issued by B- are grouped in four categories asunder*%

i) estructuring of ad!ances extended to industrial units"

ii) estructuring of ad!ances extended to industrial units under the .orporate 4ebtestructuring &.4' echanism

iii) estructuring of ad!ances extended to mall and edium Enterprises &E'

iv) estructuring of all other ad!ances"

Eligibility

Accounts classified under tandard, ubstandard and doubtful categories"

Ban#s cannot reschedule / restructure / renegotiate borrowal accounts with

retrospecti!e effect" Khile a restructuring proposal is under consideration, theusual asset classification norms would continue to apply"

$o account is ta#en up for restructuring by the ban#s unless the financial!iability is established and there is a reasonable certainty of repayment from theborrower, as per the terms of restructuring pac#age"

Borrowers indulged in frauds and malfeasance is ineligible for restructuring"

B-+ cases are not eligible for restructuring without their express appro!al".4 .ore 8roup in the case of ad!ances restructured under .4echanism / the lead ban# in the case of E 4ebt estructuring echanismand the indi!idual ban#s in other cases, may consider the proposals forrestructuring in such cases, after ensuring that all the formalities in see#ing the

appro!al from B-+ are completed before implementing the pac#age"

Asset classification norms

estructuring of ad!ances could ta#e place in the following stages*

&a' Before commencement of commercial production / operation;

&b' After commencement of commercial production / operation but before the assethas been classified as Dsub%standardD;

&c' After commencement of commercial production / operation and the asset hasbeen classified as Dsub%standardD or DdoubtfulD"

Cpon restructuring*%

Dtandard assetsD should be reclassified as Dsub%standard assetsD


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$(As would continue asset classification as prior to restructuring and may slipinto further lower asset classification categories with reference to the pre%restructuring repayment schedule"

All $(A accounts would be eligible for being reclassified as standard category afterobser!ation of satisfactory performance during the specified period" hereafter,

the account would be go!erned as per the existing prudential norms with referenceto repayment schedule"

Additional finance considered may be treated as standard asset during thespecified period" Any -nterest income should be recogni2ed only on cash basis inrespect of accounts classified as substandard or doubtful at pre%restructuringstage"

A restructured standard asset is sub@ected to restructuring on a subse3uentoccasion; it should be classified as substandard" imilarly, a sub%standard ora doubtful restructured asset which is sub@ected to restructuring on asubse3uent occasion, its asset classification will be rec#oned from the datewhen it became $(A on the first occasion"

-nterest income in respect of restructured standard asset can be recogni2ed onaccrual basis

-n case part of the outstanding principal amount is con!erted into debt ore3uity instruments as per the restructuring pac#age, the asset so createdwill be classified in the same asset classification category in which therestructured ad!ance has been classified"

he +-) / debt or e3uity instrument created by con!ersion of unpaidinterest will be classified in the same asset classification category in which therestructured ad!ance has been classified"

Ban#s will hold pro!ision in respect of restructured assets as per existing

pro!isioning norms

Asset classification benefits are a!ailable to ban#s sub@ect to*%

he dues of the ban#s are fully secured except - borrowers where theoutstanding is upto s"> )a#h

-nfrastructure pro@ects pro!ided the cash flows generated from thesepro@ects are ade3uate for repayment of the ad!ance, escrow mechanism forthe cash flows a!ailable, and ban#s ha!e a clear and legal first claim on thesecash flows"

he unit becomes !iable in 10 years, if it is engaged in infrastructure acti!ities,

and in J years in the case of other units" he repayment period of the restructured ad!ance including the moratorium, if

any, does not exceed 1> years in the case of infrastructure ad!ances and10 years in the case of other ad!ances other than restructured home loans"

(romotersD sacrifice &contribution' and additional funds brought by themshould be a minimum of 1>? of ban#sD sacrifice upfront" 5owe!er, if the ban#sare con!inced that the promoters face genuine difficulty in bringing the share of


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sacrifice immediately, the promoters could be allowed to bring in >0? of theirsacrifice i"e" >0? of 1>? upfront and the balance within a period of one year"

OBLE.-6E O+ EC.C-$8

-t may be obser!ed that the basic ob@ecti!e of restructuring is to preser!eeconomic !alue of units and not e!er greening of problem accounts" his can beachie!ed by ban#s and the borrowers only by careful assessment of the !iability,3uic# detection of wea#nesses in accounts and a time%bound implementation ofrestructuring pac#ages"

he entire .orporate 4ebt estructuring &.4' echanism and E 4ebtestructuring echanism are detailed in B- aster .ircular"

9. AGRICULTURAL DEBT WAIVER AND DEBT RELIEF SCHEME 2008ADWDRS!

he guidelines pertaining to -ncome ecognition, Asset .lassification and(ro!isioning, and .apital Ade3uacy as applicable to the loans co!ered by thedebt wai!er and debt relief scheme for farmers are as under*%

N"#$s %"# ''"()s ()+# D- W#

he small and marginal farmers eligible for debt wai!er, the eligible amount forwai!er may be transferred by the ban#s to a separate account named MAmountrecei!able from 8o!ernment of -ndia under Agricultural 4ebt Kai!er cheme00=M and the balance amount be as a MperformingM asset"

$o pro!ision for standard assets as per current norms is re3uired to be made in

respect of the balance amount, etc"

N"#$s %"# ''"()s ()+# D- R%

Cnder the scheme, the DotherD farmers, are gi!en a rebate of >? of the MeligibleamountM, by the 8o!ernment by credit to his account and the balance &J>?' is tobe paid by the farmer in three instalments as detailed in the scheme &sinceextended upto


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as MstandardM / MperformingM pro!ided ade3uate pro!ision is made by the ban#s andthe farmers pay their share of settlement with one month of the due dates"

(ro!isioning

Accounts under 4ebt elief cheme are classified as standard assets and attractthe prudential pro!isioning as applicable to such assets"

-n case default/delay in ma#ing their share under O by farmers by the due dates&within one month', the outstanding amount in the rele!ant accounts shall betreated as $(A with reference to the original date of $(A and pro!isioning is to bemade as applicable, etc"

.apital Ade3uacyAmount outstanding under Amount recei!able from 8O- attract 2ero ris# weight for thepurpose of capital ade3uacy norms and amount outstanding in the accounts co!eredunder the cheme is to be treated as a claim on the borrowers and ris# weighted as

per extant norms"

8rant of +resh )oans to the Borrowers co!ered under the A4K4

A small or marginal farmer is eligible for fresh agricultural loans upon theeligible amount being wai!ed and the fresh loan may be treated as MperformingassetM, regardless of the asset classification of the loan sub@ected to the 4ebtKai!er"

imilarly fresh short%term production loans and in!estment loans to MotherfarmersM may be treated as Mperforming assetsM, regardless of the assetclassification of the loan sub@ected to the 4ebt elief, and its subse3uent

asset classification should be go!erned by the extant -A. norms"

&OC.E * B- AE .-.C)A'

Prudential Norms on Ira

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