M.

COM (ADVANCED ACCOUNTING)

1ST SEMESTER

PROVISIONING REQUIREMENTS OF BANKING COMPANIES

SUBMITTED BY ANURADHA RAI ROLL NO: 91

CERTIFICATE

This is to certify that Ms. Anuradha Rai of M.Com. Advanced Accounting Semester 1st [2012 2013] has successfully completed the project on Provisioning Requirements of Banking Companies under the guidance Of Ms. Shamim Sayed.

Project Guide

_______________

Course Coordinator

_______________

Internal Examiner

_______________

External Examiner

_______________

Principal Date: ______ Place: Mumbai

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DECLARATION

I Ms. Anuradha Rai the student of M.Com (Advanced Accounting) 1st Semester (2012-2013), hereby declare that I have complete the project on Provisioning Requirements of Banking Companies

The information submitted is true and original to the best of my knowledge.

Anuradha Rai

(Signature)

ACKNOWLEDGEMENT

TABLE OF CONTENTS

DEFINITION OF BANKING
Banking is defined as the accepting, for the purpose of lending or investment, of deposits of money from public repayable on demand or otherwise and withdrawable by cheque , draft, order or otherwise Section 5[ (b) of the Banking Regulation Act, 1949]

DEFINITION OF BANKING COMPANY

As per Section 5(c) of Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India.

Explanation: Any company which is engaged in the manufacture of goods or carries on any trade and which accepts the deposits of money from public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause."

As per Section 5 (b) of Banking Regulation Act, 1949 , banking means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise.

As per Section 5(d) of Banking Regulation Act, 1 949 , company means any company as

defined in Section 3 of the Companies Act, 1956 and includes a foreign company within the meaning of Section 591 of that Act.

As per section 51 of Banking Regulation Act, 1949, certain provisions of the Banking Regulation Act are also applicable to the State Bank of India, any corresponding new bank, a regional rural bank and any subsidiary bank. "Corresponding new bank" has been defined under clause (ee) of section 2 of the DICGC Act to mean a corresponding new bank constituted under the Banking Companies (Acquisition and Transfer of Undertakings) Acts of 1970 or 1980.

The major companies carrying on business of banking in India include:

1. Nationalised banks. 2. State Bank of India and its subsidiaries. 3. Private Banking Companies. 4. Foreign Banks having branches in India. 5. Co-operative banks.

STATUTES GOVERNING BANKING COMPANIES

There is an elaborate framework governing the functioning of banks in India. The whole of banking sector can be categorized into several sectors such as commercial banks, cooperative banks, foreign banks, etc. The principal enactments which govern the functioning of various types of bank are as under:

a) Banking Regulation Act, 1949; b) Banking Companies (Acquisition of Transfer of Undertakings ) Act, 1970; c) Banking Companies (Acquisition and Transfer of Undertakings ) Act, 1980; d) State bank of India Act, 1955; e) State bank of India (Subsidiary Banks ) Act, 1959; f) Regional Rural Banks Act, 1976; g) Companies Act, 1956; and h) Co- operative Societies Act, 1912 or the relevant State Co-operative Societies Acts.

Besides the above enactments, the provisions of Reserve Bank of India Act, 1934, also affect the functioning of banks. The Act gives wide powers to Reserve Bank of India to give directions to banks; such directions also have considerable effect on the functioning of banks.

FUNCTIONS OF BANKS
Some of the main functions of modern commercial Banks are as follows:

1. Receiving deposits withdrawable by cheque etc. 2. Lending of money bya) Making loans and advances, and b) Purchasing or discounting of bills. 3. Making investments on its own account or for customers. 4. Transferring money from place to place by Issue of demand drafts, telegraphic transfers, traveller s cheque, etc., and Collection of bills

5. Issuing Letters of Credit. 6. Safe custody of securities and valueables. 7. Issuing Guarantees. 8. Acting as executors and Trustees, sometimes through subsidiaries formed for this purpose. 9. Buting , selling and dealing in foreign exchange. 10. Acting as Managers to issue of shares by Companies.

LEGAL PROVISIONS OF THE BANKING REGULATION ACT RELATING TO FINAL ACCOUNTS AND AUDIT

The provisions of the section 29-33 of the Banking Regulation Act relating to annual accounts and audit are as follows:

1. Prepartion of Annual Accounts: On 31st March each and every banking company incorporated in India, in respect of all business transacted by it, and every banking incorporated outside India, in respect of all business transacted through its branches in India shall prepare with reference to that year a balance sheet and profit and loss account as on the working day of the year in the forms set out in third schedule or as near thereto as circumstances admit. Form A in third schedule is the Balance Sheet and Form B is the Profit and Loss Account. The requirements of the Companies Act, 1956 relating to the Balance Sheet and Profit and Loss Account of a Company shall, is no far as they are not inconsistent with the Banking Regulation Act, apply to the Balance Sheet and Profit and Loss Account of a banking company.

2. Audit of Accounts: The Balance Sheet and the Profit and Loss Account of a banking company is required to be audited by a Chartered Accountants. The appointment of the auditor of a banking company is made as per the provisions of the Companies Act, 1956. His

powers, duties, and liabilities are also governed by the Companies Act, but the auditors report on the accounts of a banking company must include certain additional particulars.

3. Filing of Accounts: Three copies of the audited Balance Sheet and Profit and Loss Account together with the auditors report shall be furnished as returns to the Reserve Bank of India within three months from the end of the accounting year to which they relate. This period of three months can be extended by the Reserve Bank for a further period up to three months. Reserve Bank is authorized to call for any further information as it may think proper from a banking company relating to the business of such company. A banking company is also required to send to the Registrar of Companies 3 copies of its audited Balance Sheet and Profit and Loss Account and Auditors Report and when the Reserve Bank requires any additional information in connection with the accounts, a copy of any such additional information shall also be sent to the Registrar.

4. Publication of Accounts: The Balance Sheet, Profit and Loss Account and the Auditors Report of every banking company shall be published in any news- paper circulating at the place where it has principal office, within 6 months from the end of the accounting year.

IMPORTANT PROVISIONS UNDER BANKING REGULATION ACT, 1949 REGARDING CONTROL AND REGULATION OF BANKING SECTOR IN INDIA.

The requirements regarding the minimum paid-up capital and reserves for commence mint of banking business. Prohibition of charge on unpaid capital. Payment of Dividends only after writing off all Capitalized expenses.

Transfer to reserve fund out of Profits. (Minimum 20 per cent) Maintenance of cash reserves by the non- scheduled banks. (Minimum 3 per cent) Restrictions on holding shares in other companies.

Restrictions on loans and advances to directors and others. Licensing of banking companies. Licences for opening of new branches and transfer of existing place of business. Maintenance of a percentage of liquid assets (SLR). (Minimum 25 per cent and maximum 40 per cent)

Maintenance of Assets in India By a banking company. (Minimum 75 per cent of DTL) Submission of Return of unclaimed Deposits.

1. Power to call for and publish the information. Preparation of Accounts and Balance Sheets. Audit of the Balance sheet and Profit & Loss Account. Publication of Audited Accounts and Balance Sheet. Inspection of books and accounts of banking companies by RBI. Giving directions to banking companies

2. Prior approval from RBI for appointment of managing directors.

3. Removal of managerial and any other persons from office.

4. Power of RBI to appoint additional directors

5. Moratorium under the orders of a High Court.

6. Winding up of banking companies.

7. Scheme of amalgamation to be sanctioned by the RBI.

8. Power of RBI to apply to the

9. Central Government for an order of mortal rim in respect of a banking company and for a scheme of reconstruction or amalgamation.

10. Power of RBI to examine the record of proceedings and tender advice in winding up proceedings.

11. Power of RBI to inspect and make its report to winding up.

12. Power of RBI to call for Returns and information from the Liquidator of a Banking company.

13. Issue of No Objection Certificate for change of name.

14. Issue of No objection certificate for the Alteration of memorandum of a banking company. Central Government to consult the RBI for making rules regarding banking companies. Recommend to the Central Government for exempting any bank from the provisions of the Banking Regulation Act 1949.

15. Requirements regarding minimum paid up capital and reserves: Sections 11 & 12:

Section 11 of the Banking Companies Act lays down the requirements regarding the minimum standard of paid up capital and reserves as a condition for the commencement of business. The details of this Section are given below:

Although Section 11 prescribes a minimum capital of Rs.5.00 lakh only, Reserve Bank currently prescribed a minimum paid-up capital of Rs.100 crore for setting up a new banking company. In the case of foreign banks setting up office of business in India, they are required to bring in a minimum of ten million US dollars to India as Capital. (A million is equal to ten lakhs). The minimum capital required to start a Local Area Bank is fixed at Rs. 5.00 crores.

Under the provisions of Section 12, the subscribed capital of the company is not less than half of its authorized capital and the paid up capital is not less than half of its subscribed capital, provided when the capital is increased this proportion may be permitted to be secured

within a period to be determined by the Reserve Bank not exceeding two years from the date of increase.

16. Prohibition of charge on unpaid capital: Section 14

Under Section 14, no banking company shall create any charge upon its unpaid capital, and any such charge if created, shall be invalid.

17. Limiting the payment of dividends: Section 15

Section 15 prohibits every banking company from paying any dividend on its shares unless it has completely written off the capitalized expenses specified therein.

According to this section no banking company shall pay any dividend on its shares until all its capitalized expenses such as Preliminary Expenses, Brokerage and Commission on issue of shares, etc., have been completely written off.

However as per the Banking Companies (Amendment) Act 1959, Banking Company may pay dividend on its shares without writing off the following:

(a) The depreciation in the value of investments in the approved securities provided such depreciation has not been actually capitalized or accounted for a loss.

(b) The depreciation in the value of its investments in shares, debentures, bonds, etc., (other than approved securities) where adequate provision has been made for such depreciation. The auditor of the banking company should approve such provision.

(c) The bad debts where the adequate provision has been made in this behalf and the auditor of the banking company should approve such provision.

18. Transfer to Reserve Fund: Section 17

Under Section 17, Banking companies incorporated in India are obligated to transfer to the reserve fund a sum equivalent to not less than 20% of the profit each year, unless the amount in such fund together with the amount in the share premium account is more than or equal to its paid-up capital.

19. Maintenance of cash reserve by non-scheduled banks: Section 18

According to Section 18, every banking company not being a scheduled bank (i.e., a nonscheduled bank) has to maintain in India by way of cash reserve with itself or in current account opened with the Reserve Bank or the State Bank of India or any notified Bank or partly in cash with itself and partly in such account or accounts a sum equivalent to at least 3% of its total time and demand liabilities.

20. Restrictions on holding of shares in other companies: Section 19

Section 19 of the Act restricts the scope of formation of subsidiary companies by a banking company, as well as the holding of shares in other companies. That is, this section prevents banking companies from carrying on trading activities by acquiring a controlling interest in non-banking companies. This section restricts the scope of formation of subsidiary companies by a banking company, as well as the holding of shares in other companies.

A banking company may form a subsidiary company for the purposes referred to in the section, as well as for other purposes as are incidental to the business of banking, subject to the previous permission in writing of the RBI.

21. Restrictions on loans and advances: Sections 20 & 21

Section 20 lays down the restrictions on banking companies from entering into any commitment from granting any loan to any of its director or to any firm in which a director is interested or to any individual or whom a director stands as a guarantor. Further the banking companies are prohibited from granting loans or advances on the security of its own shares.

Under Section 21, the RBI has been empowered to determine the policy to be followed by the banks in relation to advances. Thus, RBI gives directions to banking companies on the following matters:

(i) The purposes for which an advance may or may not be granted

(ii) The margins to be maintained in case of secured advances

(iii) The rate of interest charged on advances, other financial accommodation and commission on guarantees

(iv) The maximum amount of advance or other financial accommodation that a bank may make to or guarantee that it may issue for, a single party, having regard to the paid-up capital, reserves and deposits of the concerned bank.

22. Licensing of banking companies: Section 22

According to this section, no banking company can commence or carry on banking business in India unless it holds a licence granted to it by the Reserve Bank for the purpose. This section states the following requirements for granting licence:

(i) Necessity of licensing and mode of applying for it (ii) Conditions for granting of licenses (iii) Cancellation of licenses and appeals from such orders

Before granting any license under this section, the Reserve Bank may require to be satisfied by an inspection of the books of the company that the following conditions are

(i) that the company is in a position to pay its present or future depositors in full as their claims accrue;

(ii) that the affairs of the company are not likely to be conducted in a manner detrimental to the interests of its present or future depositors;

(iii) in the case of the carrying on of banking business by such company in India will be in the public interest and that the government or laws of the country in which it is incorporated does not discriminate in any way against banking companies registered in India and that the company complies with all the provisions of this Act, applicable to banking companies incorporated outside India. However, RRBs have been established under a separate Act of Parliament, viz., RRBs Act 1976 and not under Banking Regulation Act.

The Reserve Bank may cancel a license granted to a banking company under this section:

(i) If the company ceases to carry on banking business in India; or

(ii) If the company at any time fails to comply with any of the conditions imposed upon it; or* (iii) Any banking company aggrieved by the decision of the Reserve Bank cancelling a licence under this section may, within thirty days from the date on which such decision is communicated to it, appeal to the Central Government. The decision of the Central Government shall be final.

Thus, every banking company which likes to start banking business in India must obtain licence from RBI.

23. Control on the opening of new business: Section 23

According to this section, the RBI has been empowered to control the opening of new and transfer of existing places of business of banking companies. As such, no banking company shall open a new place of business in India or outside India and change the place without obtaining the prior permission of the RBI.

No permission is required for opening a branch within the same city, town or village and for opening a temporary place of business for a maximum period of one month within a city, where the banking company already has a place of business for the purpose of providing banking facilities to the public on the occasion of an exhibition, a conference, a mela, etc.

24. Maintenance of a percentage of liquid assets (SLR): Section 24

Under this section, every banking company shall maintain in India in liquid assets for an amount not less than 25% of the total of its time and demand liabilities at the close of business on any day. The liquid assets include cash, gold or unencumbered approved securities and they are valued at a price not exceeding the current market price.

25. Maintenance of Assets in India: Section 25

Section 25 requires for the maintenance of assets equivalent to at least 75% of its demand and time liabilities in India, at the close of business of the last Friday of every quarter.

26. Submission of Returns of unclaimed Deposits: Section 26

According to this section, every banking company shall submit a return in the prescribed form and manner to the RBI, giving particulars, regarding un operated accounts in India for 10 years. This return is to be submitted within 30 days after the close of each calendar year.

In the case of fixed deposits, the 10 years period is counted from the date of expiry of such fixed period. RRBs are however required to forward such returns to NABARD.

27. Submission of Return, Forms, etc., to RBI: Section 27

Under this section, every banking company shall submit to be RBI a return in the prescribed form (form 13) and manner showing its assets and liabilities in India on the last Friday of every month, (if that Friday is a public holiday under the negotiable instruments Act, 1881, on the preceding working day.)

Besides, the RBI may at any time direct a banking company to furnish the statements and information relating to the business or affairs of the banking company within the specified period mentioned therein.

Such directions may be issued when the RBI considers it is necessary or expedient to obtain for the purpose of the Act. And the RBI may call for information every half year, regarding the investments of banking company and the classifications of advance given in respect of industry, commerce and agriculture.

28. Powers to Publish Information: Section 28

Under this section, the RBI is authorized to publish in the public interest any information obtained under the Banking Regulation Act. The information is published in the consolidated form as the RBI may think fit.

29. Maintenance of Accounts and Balance Sheets: Section 29

This section provides for the preparation of Balance Sheet and Profit & Loss Account as on the last working day of the year in respect of all business transacted by a banking company incorporated in India and in respect of all business transacted through its branches in India by a banking company incorporated outside India. It is prepared in the forms set out in the Third Schedule.

The central government after giving not less than three months notice of its intention so to do by a notification in the official gazette, may from time to time by a like notification amend the forms set out in the Third Schedule.

In the view of the fact that in the opinion of experts, as well as the Banking enquiry committee, that form "f " required to be used by every company in preparing its balance sheet.

30. Audit of the Balance Sheet and Profit & Loss Account: Section 30

As per this section, the balance sheet and Profit & Loss Account prepared in accordance with Section 29 shall be audited by a person duly qualified under any law for the time being in force to be an auditor of companies.

The auditor is required to state in his report in the case of a banking company incorporated in India,

(i) Whether or not the information and explanation required by him have been found to be satisfactory

(ii) Whether or not the transactions of the company which have come to his notice have been within the powers of the company (iii) Whether or not the returns received from branch offices of the company "have been found adequate for the purposes of this audit (iv) Whether the Profit & Loss Account shows a true balance of profit or loss for the period covered by such account

(v) Any other matter which he considers should be brought to the notice of shareholders of the company.

31. Submission of returns to RBI: Section 31

This section provides for publication of the Profit & Loss Account, Balance Sheet and the Auditor's report in the prescribed manner as well as for the submission of three copies thereof as returns to the Reserve Bank within a period of three months which may be extended up to six months.

32. Inspection of books of accounts: Section 35

This Section was incorporated with a view to safeguard the interest of shareholders and depositors of banking companies, as a result of which bank directors and managers are likely to be cautious in employing the funds of their institutions.

This section provides wide powers to RBI to cause an inspection of any banking company and its books and accounts.

33. Giving directions to Banking Companies: Section 35A

Under Section on 35A, the Reserve Bank may caution or prohibit banking companies generally or any banking company in particular against entering into certain types of operations.

Prior approval from RBI for appointment of Managing Director, etc. Section 35 AB

According to this section, prior approval of RBI should be obtained for the appointment, reappointment, remuneration and removal of the chairman or a director of a banking company. And for the amendments of provisions in the Memorandum or Articles or Resolutions of a General Meeting or Board of Directors, the prior approval of RBI is necessary.

Removal of managerial and any other persons from office: Section 36AA and Section 36AB

Under these sections, the RBI has power to remove managerial and other persons from office and to appoint additional directors.

34. Moratorium under the orders of High Court (Suspension of Business) Section 37

According to this section when a banking company is temporarily unable to meet its obligations it may apply to the High Court requesting an order for staying the commencement or continuance of all legal actions and proceedings against it for a period of not exceeding 6 months. Such stay is generally called a moratorium.

For such requisition, the banking company should submit an application along with a report of the RBI in this regard. In that report the RBI indicates that the banking company is able to pay its debts if the application is granted. If such report is not obtained from the RBI, the banking company cannot get the grant of moratorium.

35. Winding up of Banking Companies: Section 38 to 44

Sections 38 to 44 of the Act lay down the provisions for winding up of a banking company. The RBI may apply for the winding up of a banking company if,

(i) It fails to comply with the requirements as to minimum Paid-up capital and reserves as laid down in Section 11, or

(ii) Is disentitled to carry on the banking business for want of license under Section 22, or

(iii) It has been prohibited from receiving fresh deposits by the Central Government or the Reserve Bank, or

(iv) It has failed to comply with any requirement of the Act, and continues to do so even after the Reserve Bank calls upon it to do so,

(v) The Reserve Bank thinks that a compromise or arrangement sanctioned by the court cannot be worked satisfactorily, or

(vi) The Reserve Bank thinks that according to the returns furnished by the company it is unable to pay its debts or its continuance is prejudicial to the interests of the depositors.

The banking company cannot be voluntarily wound up unless the Reserve Bank certifies that it is able to pay its debts in full.

36. Amalgamation of Banking Companies: Section 44A

The procedures for amalgamation of banking companies are given under this section. As per this section the scheme of amalgamation (i.e., the terms and conditions of amalgamation) is to be approved by a majority - 2/3 of the total voting ratios - of the shareholders in a general meeting.

The unwilling shareholders are entitled to receive the value of their shares as may be determined by the RBI. The RBI has to sanction the scheme of amalgamation after the shareholders' approval.

The assets and liabilities are transferred to the acquiring bank according to the directions of RBI mentioned in the sanction order. The RBI issues order for the dissolution of the first bank on a specified date.

37. Application by RBI for Moratorium: Section 45

Under this section the RBI may apply to the Central Government for an order of Moratorium in respect of banking company, if it considers fit. According to the application, an order is passed staying all actions and proceedings against the banking company for a specified period. During the period of Moratorium the RBI may prepare a detailed scheme for its reconstruction or amalgamation with any other banking company.

The Reserve Bank of India (RBI) increased the provisioning requirements on certain categories of non-performing assets and restructured loans. Bankers, however, said the additional provisioning was unlikely to stress their earnings in coming quarters. In April 2011, banks were advised to segregate the surplus of provisions under the provision coverage ratio (PCR) vis--vis what was required as per prudential norms as on September 30, 2010, into an account styled as counter-cyclical buffer, RBI said in its monetary policy statement for 2011-12.

While the counter-cyclical buffer so created would be available to banks for making specific provisions during economic downturns, there is a need for banks to make higher specific provisions also as part of the prudential provisioning framework, the central bank said.

Under the new guidelines, loans classified as sub-standard will attract a provision of 15 per cent as against the existing 10 per cent requirement.

For unsecured loans that are classified as sub-standard assets an additional 10 per cent provision has to be made over the 15 per cent. So, the total provisioning for sub-standard unsecured loans will now be 25 per cent instead of 20 per cent as mandated earlier.

The central bank also raised the provision required for the secured portion of advances, which have remained in the doubtful category for up to one year, to 25 per cent from the present 20 per cent. The secured advances in this category for more than one year but up to three years will now attract a provision of 40 per cent instead of 30 per cent.

The restructured loans classified under the standard category will need a provision of two per cent in the first two years from the date of restructuring. In case of moratorium on payment of interest and principal after restructuring, two per cent provision has to be maintained for the period covering the moratorium and two years thereafter, RBI said.

If restructured loans, which are classified as non-performing advances, are upgraded to the standard category, banks have to make a provision of two per cent in the first year from the date of upgrade. The existing provision on these loans was 0.25-1.00 per cent depending on the category of advances.

RBI said it would issue detailed guidelines on new provisioning norms separately.

The new guidelines come within days of RBI saying banks would not be required to set aside additional capital for incremental non-performing assets after September 2010.

Banks are required to maintain a provision coverage ratio of 70 per cent on non-performing loans as on September 30, 2010.

It is not going to change the provisioning substantially but whatever you provide for overall will now be backed up by a regulatory prescription. If you have more than 70 per cent provision coverage ratio, there will be no immediate impact, said K R Kamath, chairman and managing director of Punjab National Bank.

His views were echoed by Chanda Kochhar, managing director and chief executive officer of ICICI Bank. This is not going to be a major issue for a bank that already has provision coverage ratio in excess of 70 per cent. The higher provisioning criteria for certain categories of assets continues RBIs moves towards a general increase in provisioning levels for banks to improve the resilience in their balance sheets through the cycle, she said. The countrys largest lender, State Bank of India, which is one of the few banks to have less than 70 per cent provision coverage ratio, also dismissed concerns that the burden of excess provisions would deteriorate its earnings. We are falling short of the overall provision coverage. But I believe, we will get some relief because we were doing well in respect of prudential provisioning, Chairman Pratip Chaudhuri said.

Some analysts and bankers said while additional provisioning for non-performing loans would not hit the banks earnings; some concerns remain over higher provision requirements for restructured assets.

The stress from (higher provisioning in) restructured assets could increase, said M D Mallya, chairman and managing director, Bank of Baroda.

RESERVE BANK OF INDIA PRUDENTIAL NORMS

The Master Circular of the Reserve Bank of India prescribing the Prudential norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances are as follows:

NON PERFORMING ASSETS

An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. A non performing asset (NPA) is a loan or advance where-

i.

Interest and / or installment of principal remain overdue for a period of more than 90 days in respect of a term loan,

ii.

The amount remains out of order in respect of an Overdraft/Cash Credit (OD/CC),

iii.

The bills remain overdue for a period of more than 90 days in the case of bills purchased and discounted,

iv.

The installment of principal or interest thereon remains overdue for two crop seasons for short duration crops,

v.

The installment of principal or interest thereon remains overdue for one crop season for long duration crops,

vi.

The amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitization transaction undertaken in terms of guidelines on securitization dated February 1, 2006.

vii.

In respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for 90 days from the specified due date for payment.

Notes:
1. Interest: banks should, classify an account as NPA only if the interest

charged during any quarter is not serviced fully within 90 days from the end of the quarter. 2. 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 3. Overdue: 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.

INCOME RECOGNITION
1. Income Recognition Policy : The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non performing assets (NPA) is not recognized on accrual basis but is booked as income only when it is actually received. Therefore the banks should not charge and take to income account interest on any NPA However, interest on advances against term deposits, NSCs, IVPs, KVPs and life policies may be taken to income account on the due date, provided adequate margin is available in the accounts. Fees and commissions earned by the banks as a result of renegotiations or rescheduling of outstanding debts should be recognized on an accrual basis over the period of time covered by the re- negotiated or rescheduled extension of credit. If government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realized.

2. Reversal of Income : If any advance, including bills purchased and discounted, becomes NPA as at the close of any year, the entire interest accrued and credited to income in the past periods, should be reversed or provided for if the same is not realized. This will apply to Government guaranteed accounts also.

In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected.

Leased Assets: The finance charge component of finance income issued by the council of the Institute of Chartered Accountants of India (ICAI) on the leased asset which has accrued and was credited to income account before the asset became non performing, and remaining unrealized, should be reserved or provided for in the current accounting period.

3. Appropriation of recovery in NPAs : Interest realized on NPAs may be taken to income account provided the credits in the accounts towards are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. In the presence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs, banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner.