RESERVE BANK OF INDIA GUIDELINES REGARDING INVESTMENT PORTFOLIO OF THE URBAN COOPERATIVE BANKS (UCBs) :
As a major element of the Financial Sector Reforms in India, RBI introduced prudential norms for banking regulation. Capital adequacy, exposure ceilings for lending to individual and group of borrowers, marking to market of the investment portfolio and, income recognition, asset classification and provisioning norms for the loan portfolio (IRAC in short) formed the core of prudential regulation. The IRAC norms serve two primary purposes - (i) to depict the true position of a bank's loan portfolio and (ii) to help arrest its deterioration. The Committee on Financial System (CFS), under the Chairmanship of Shri M. Narasimham, recommended a policy of income recognition and asset classification based on record of recovery and other objective criteria as also provisioning based on the classification of assets into different categories. RBI largely accepted the recommendations of the CFS and introduced the IRAC norms for the Urban Cooperative Banks (UCBs) in a phased manner over a three-year period from the year 1992-93.
2. Income recognition
(i) Effective from April 1, 1992, banks cannot consider as income interest on loan accounts, classified as Non-Performing Assets (NPA), unless actually received. Such unrealised interest on NPA taken as income in the earlier year has to be provided for. In other words, income from NPA is booked as income only when actually received, and not on accrual basis.
(ii) Accrued interest on NPA
Banks should not debit to the borrower’s accounts interest accrued on NPA, but show them separately under "Interest Receivable Account" and a corresponding amount under "Overdue Interest Reserve Account" on the assets and liabilities side of the balance sheet respectively. (The amount held in the Overdue Interest Reserve Account, however, cannot be regarded as a "reserve" or as part of the owned funds of the Bank as it is not created out of income actually received by the bank).
(iii) Accrued interest on performing assets
In respect of loan accounts, classified as performing assets, accrued interest can be debited to the borrower’s account and taken to income account. If the relevant credit facility becomes NPA later, the bank should provide for the interest accrued and credited to income account. In such cases, while making provision the amount held in "Overdue Interest Reserve Account" should be deducted from the advances outstanding.
(iv) Partial recovery of interest
Banks can take partial recovery of interest on NPA to their income account, provided such recovery is not out of fresh / additional credit facilities sanctioned to the borrowers concerned.
(v) Income recognition on investments classified as NPA
Investments also are subjected to prudential norms on income recognition. As such, banks should not take to income interest on accrual basis in respect of any security irrespective of the category in which it is included, where interest / principal in respect of which is in arrears for more than 90 days.
Wherever the State Cooperative Societies Acts prescribe a more stringent accounting procedure, the same should be followed. Further, where the bank has a more stringent accounting procedure, it can continue to follow such a procedure.
3. Non-performing assets
A credit facility is considered non-performing when it ceases to generate income for the bank. Earlier, an asset was classified as NPA if interest and / or instalment of principal remained ‘past due’ for a specific period. ‘Past due’ was replaced by ‘overdue’ with effect from the year ended March 31, 2001. Any dues to a bank under a credit facility will be overdue if not paid by the due date fixed by the bank. RBI implemented the 90 days delinquency norm for NPA classification for the UCBs from the year ended March 31, 2004. Given the heterogeneity of the sector, RBI prescribed relaxed IRAC norms for smaller UCBs. Details of those relaxations, together with relaxation in provisioning requirements, are in the Annex. The criteria for treating a loan account as NPA depend on the nature of facility as under:
(i) Term loan:
A term loan is to be classified as NPA if interest and / or principal remained overdue for more than 90 days.
(ii) Cash credit and overdraft account:
A cash credit / overdraft account is classified as NPA if the account is ‘out of order’ for more than 90 days. An account is treated as ‘out of order’ if the balance outstanding is continuously in excess of the sanctioned limit or drawing power (whichever is lower) or where the outstanding balance in the principal operating account is within the sanctioned limit or drawing power, but there are no credits continuously for 90 days as on the date of balance sheet, or credits made are not enough to cover the interest debited during the same period.
(iii) Bills purchased and discounted:
A bill is treated as NPA, if it remains overdue and unpaid for a period of more than 90 days. Overdue interest should not be charged or taken to income account in respect of overdue bills, unless it is realised.
(iv) Other credit facilities:
Any other credit facility is to be treated as NPA, if it remains outstanding for a period of more than 90 days.
(v) Agricultural advances:
In case of all direct agricultural advances, effective September 30, 2004 an account should be treated as NPA if interest and / or instalment of principal remained overdue for two crop seasons from the due date for short duration crops and one crop season from the due date for long duration crops. Long duration crops have a crop season longer than one year and crops, which are not long duration crops are treated as short duration crops. Depending upon the duration of crops raised by a farmer, the above NPA norms would also be applied to agricultural term loan availed of by him. The crop season for each crop, which means the period up to harvesting, has to be decided by the State Level Bankers Committee in each state. In respect of other activities like horticulture, floriculture or allied activities such as animal husbandry, poultry farming etc., NPA classification would be done on 90 days impairment norm as in the case of other advances.
(a) Housing loans to staff members:
Housing loans or similar advances granted to staff members, where interest is payable after recovery of principal should be classified as NPA only when there is a default in payment of interest on due date.
(b) Project finance:
In the case of project finance, (industrial) where moratorium is allowed for payment of interest / principal, the respective amounts will become due only after moratorium / gestation period is over.
(c) Credit facilities guaranteed by Government
Credit facilities backed by Central Government guarantee, though overdue, should not be treated as NPA. Therefore, no provision is required to be made on such accounts. Interest on such advances, however, should not be taken to income account unless it has been actually realised. From the year ended March 31, 2006, State Government guaranteed advances and investments in State Government guaranteed securities would attract extant IRAC norms, if interest and / or principal or any other amount due to a bank remains overdue for more than 90 days. A bank is not required to invoke the guarantee before classifying such advances / investments as NPA.
(d) Advances against Term Deposits, NSCs etc.
Advances against fixed and other term deposits, National Savings Certificates (NSCs), life policies, Indira Vikas Patras (IVPs) and Kisan Vikas Patras (KVPs) need not be treated as NPA although interest thereon is not paid. Interest on such advances may be taken to income account on the due dates, provided adequate margin is available in the accounts.
(e) Advances affected by natural calamity
Where natural calamities impair the repaying capacity of the agricultural borrower, UCBs may consider i) converting the crop loan in to an agricultural term loan or rescheduling the repayment period and ii) sanctioning fresh short-term loans. In such cases, the term loan or the fresh short-term loan will be treated as current dues and need not be classified as NPA. Asset classification of these loans will be governed by the revised terms and conditions and these would be classified as NPA as per the extant norms applicable for classifying agricultural advances as NPA.
4. Asset Classification
In order to facilitate assessment of quality of the advances portfolio and to enable them to make adequate provisions, the UCBs should classify loan assets into the following categories.
Assets, which do not disclose any problem and do not carry more than the normal risk attached to the business. Such assets are not NPA.
Effective from year ended March 31, 2005, assets are classified sub-standard if they remain non-performing for less than or equal to 12 months. They have well defined credit weaknesses and are characterised by the distinct possibility that the bank will sustain some loss if the deficiencies are not rectified.
An account, where the terms of loan agreement relating to payment of interest and repayment of principal have been negotiated or rescheduled after commencement of production, should be classified as sub-standard and retained as such for at least one year of satisfactory performance under the renegotiated terms.
Effective from year ended March 31, 2005, assets are classified doubtful if they remain non-performing for more than 12 months. They have all the weaknesses inherent in sub-standard assets with the added characteristic that collection or liquidation of the dues is highly improbable. As in the case of sub-standard asset, rescheduling does not entitle a bank to upgrade the quality of the account automatically.
These are assets where loss has been identified by the bank or internal / external auditors or RBI inspection, but the amount has not been written off, wholly or in part. Such assets are considered uncollectible and of so little value that their continuance as bankable assets is not warranted, even though there may be some salvage or recovery value.
5. Guidelines for asset classification
Assets are to be classified generally on the basis of well-defined credit weaknesses and the extent of dependence on collaterals for realisation of dues. Net worth of borrower / guarantor should not be taken into account while determining whether an advance is NPA. Banks should bear in mind the following RBI guidelines for asset classification.
(i) Identification of assets as NPA on on-going basis
Banks should identify assets as NPA on an on-going basis. They should evolve a system to eliminate the tendency to delay or postpone identification of NPA, particularly in respect of high-value accounts. They should internally resolve doubts regarding asset classification within one month of the date by which the account would have been classified as NPA as per prescribed norms.
(ii) Treatment of accounts as NPA
a) Record of recovery
The classification of an asset as NPA has to be done on the record of recovery. Banks should not classify an account as non-performing due to the existence of ‘temporary deficiencies’ such as balance exceeding limit, non-availability of adequate drawing power, non-submission of stock statement or non-renewal of accounts on due date. If an account is
regularised before the balance sheet date by repayment of overdue through genuine sources (not by sanction of additional facilities or transfer of funds between accounts), the account need not be treated as NPA. It should, however, be ensured that the account remains in order subsequently and a solitary credit made in the accounts near about the balance sheet date to extinguish the overdue interest or instalment of principal is not reckoned as the sole criterion for treating the account as a standard asset. In other genuine cases, banks must furnish to the Statutory Auditor / RBI Inspecting Officer satisfactory evidence of regularisation of the account.
b) Borrower-wise and not facility-wise
Where one credit facility extended to a borrower becomes NPA, all the other facilities, even if the operations in those accounts are satisfactory, are required to be treated as NPA.
(iii) Potential threats to recovery
In respect of accounts where there are potential threats to recovery on account of erosion in the value of security or existence of factors such as frauds committed by borrowers, such accounts should be straightway classified as doubtful or loss asset, as the case may be, irrespective of the period for which they have remained as NPA. Similar treatment should be provided to accounts where there is significant erosion in value of security, i. e. less than 50% of the value assessed by the bank or accepted by RBI at the time of last inspection.
(iv) Classification as NPA for arrears in submission of stock statements
Outstanding in the account based on drawing power calculated from stock statements older than three months would be considered as irregular. A working capital account will be classified as NPA if such irregular drawings are allowed for more than 90 days.
(v) Classification as NPA for non-review or non-renewal of limits
An account where regular / ad-hoc credit limits are not reviewed or not renewed within 90 days from the due date or date of ad-hoc sanction will be classified as NPA.
(vi) Treatment of loss assets
If the realizable value of the security, as assessed by the bank or approved valuer or RBI, is less than 10% of the outstanding in the borrower’s account, existence of security should be ignored and the account should be classified straightway as a loss asset.
(vii) Classification of accounts under consortium
Asset classification of accounts under consortium will be done on the record of recovery in individual banks. However, where remittances by the borrower under consortium lending arrangements are pooled with one bank, and that bank does not part with the share of a member bank, the account in the member bank will be treated as not having been serviced and will be treated as NPA as per extant norms.
(viii) Fixing realistic repayment schedules
UCBs should fix monthly / quarterly instalments for repayment of gold loans for non-agricultural purposes after taking in to account the income generation pattern and repayment capacity of the borrower. Such gold loans should be classified as NPA if interest and / or instalment remain overdue for more than 90 days. In case of gold loans for agricultural purpose, interest has to be charged at yearly intervals as per the Supreme Court judgement and payment should coincide with harvesting. Such advances will be NPA only if instalment and / or interest become overdue after the due date.
(i) In conformity with prudential norms, UCBs should make provisions on the NPAs based on classification of assets in to prescribed categories as detailed in paragraph 4 above. Considering the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and erosion in the value of security over time, banks are required to make provisions as detailed below against loss, doubtful and sub-standard assets:
The bank should write off the entire outstanding. Otherwise, it has to make 100% provisioning for the outstanding.
(a) 100% of the portion not covered by the realisable value of security
(b) Over and above item (a) depending upon the period up to which the asset has remained doubtful, 20% - 100% of the secured portion (i.e. estimated realisable value) as given below:
Up to 1 year
1 – 3 years
Over 3 years
Outstanding stock of NPA as on March 31, 2007
i) 50 up to
ii) 60 as on
31. 3. 2008
iii) 75 as on 31. 3. 2009
iv) 100 as on 31. 3. 2010
Advances classified as ‘doubtful for more than three years’ on or after April 1, 2007
A general provision of 10% on total outstanding
ii) Provision on Standard Assets
UCBs were required to make a general provision of 0.25% on standard assets from the year ended March 31, 2000. The general provisioning requirement on standard assets, barring UCBs’ direct advance to agriculture and SME sector, was raised to 0.40% in November 2005. In order to ensure maintenance of asset quality in the context of high credit growth, RBI raised the general provisioning requirement for UCBs on standard advances in respect of personal loans, loans and advances qualifying as capital market exposure and commercial real estate loans from 0.40% to 1.0% in June 2006. Certain categories of loans continued to experience high growth; personal loans witnessed a higher default rate. Therefore, provisioning requirement in respect of personal loans, loans and advances qualifying as capital market
exposure and commercial real estate loans (excluding residential housing loans) was raised from 1% to 2% in February 2007. Simultaneously, RBI decided to increase provisioning for loans and advances to Non-Deposit Taking Systematically Important Non-Banking Finance Companies (NBFC-ND-SI) from 0.40% to 2% (A systematically important NBFC is defined as an Non-Deposit Taking NBFC with an
asset size of Rs.100.00 crore or more as per the last audited balance sheet). The standard asset provisioning requirements for UCBs, after the above changes, stand as summarized below:
Category of standard asset
Direct loans to agriculture and SME sectors
Personal loans, loans qualifying as capital market exposure, commercial real estate loans (excluding residential housing loans) and loans and advances to NBFC-ND-SI
All other loans and advances not included under (a) and (b) above
The provision towards ‘standard assets’ need not be netted from gross advances but should be shown separately as ‘Contingent Provision towards Standard Assets’ under ‘Other Funds and Reserves’ in the Balance Sheet. In case a bank is having provision in excess of what is required for non-performing assets under Bad & Doubtful Debt Reserve (BDDR), additional provision required for standard assets may be segregated from BDDR and parked under ‘Contingent Provision towards Standard Assets’ with the approval of the Board of Directors. This contingent provision will be available for inclusion in Tier II capital.
(iii) Guidelines for Provisions
In respect of advances guaranteed by ECGC/DICGC, provisioning is to be made only for the balance exceeding the amount of guarantee. Further, while arriving at the provision for Doubtful assets, realisable value of the securities should be deducted from the outstanding balance before the guarantee is set off.
If under a rehabilitation package approved by BIFR / term lending institution, banks allow additional credit facilities to a unit, which has been categorised as sub-standard or doubtful, they need not make provisions for a period of one year from the date of disbursement of such additional facilities. Similar treatment should be made in respect of sick SSI units under a nursing programme. However, banks should make provisions on existing credit facilities classified as sub-standard or doubtful in both the cases.
Advances against banks’ own term deposits, NSCs, KVPs, IVPs and life policies are exempted from provisioning requirements. However, advances against gold ornaments, government securities and all other securities attract provisioning.
To have uniform assessment of valuation of security and reduce divergence in provisioning requirements, banks should undertake annual stock audit of current assets by external agencies in respect of NPAs with balance of Rs.10.00 lakh and above. Besides, immoveable property charged to the bank should be valued once in three years by the bank’s approved valuers.
Relaxed Prudential Norms on Asset Classification and Provisioning for certain categories of UCBs
Unit banks i.e. banks having a single branch / Head Office with deposits up to Rs.100 crore and banks having more than one branch within a single district with deposits up to Rs.100 crore are exempted from the extant asset classification and provisioning norms as under:
Asset classification norm:
i) With effect from the year ended March 31, 2004 the norm for classification on an asset as NPA has been reduced to 90 days from 180 days
These banks will continue to identify NPAs based on 180-day delinquency norm for three more years commencing March 31, 2005, i.e. up to March 31, 2007.
The 180-day delinquency norm for NPAs has since been extended by one more year i.e. up to March 31, 2008.
ii) With effect from the year ended March 31, 2005 an asset would be classified as doubtful if it remained in the sub-standard category for 12 months
A sub-standard account will continue to be classified as doubtful after 18 months instead of 12 months up to March 31, 2007.
The 12-month period for classification of a sub-standard asset in doubtful category has since been extended by one more year i.e. up to March 31, 2008.
i) General provisioning requirement on standard assets (excepting direct agriculture and SME) raised from 0.25% to 0.40% and to 2% on specific sectors
General provisioning requirement on standard assets continue to remain at 0.25% for the exempted banks.
ii) 100% provisioning on secured portion of advances classified as Doubtful III on or after April 1, 2007
100% provisioning to be made by the exempted banks on secured portion of advances classified as Doubtful III on or after April 1, 2010.
iii) For the outstanding stock of D-III advances as on March 31, 2007 banks would be required to provide as under:
50% up to March 31, 2007
60% as on March 31, 2008
75% as on March 31, 2009
100% as on March 31, 2010
For the outstanding stock of D-III advances as on March 31, 2010 the exempted banks would be required to provide as under:
50% up to March 31, 2010
60% as on March 31, 2011
75% as on March 31, 2012
100% as on March 31, 2013
Prepared by Dr Sujata Elizabeth Prasad, Member of Faculty
Revised by Shri B. Raghavendran, Member of Faculty
Updated by Shri R. R. Borbora, Member of Faculty (May 2007)
Income Recognition,Asset Classification ... , By: R.R.Borbora