Asset Classification and Provisioning Norms

Module D: Balance Sheet Management

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Bank Financial Management: Asset Classification and Provisioning Norms

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Contents
Coverage:
1. Introduction

2. Asset Classification
3. Provisioning Norms

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1.

INTRODUCTION

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Introduction
If bank is not able to get/recover interest from the
counterparty within reasonable time, then the income should
not be accounted for or recognised, till it is actually received.
Accounting for interest is changed from accrual basis to
mercantile one
Asset is tagged non-performing

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2.

ASSET CLASSIFICATION

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Narsimham Committee
Committee on the Financial System chaired by M. Narsimham
August 1991
Recommendations:
Bank balance sheets should be transparent and compliant with
international accounting standards
Uniform accounting practices should be adopted
Prudential norms for income recognition, asset classification and
provisioning introduced by RBI based on the recommendations
Income recognition policy should be objective and based on record of
recovery
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Non-Performing Assets: Definition

Interest and/or installment of principal remain overdue for a period
of more than 90 days in respect of a term loan
Account remains out of order in respect of an Overdraft/Cash
Credit
Bill remains overdue for a period of more than 90 days in the case

of bills purchased and discounted

Installment of principal or interest thereon remains overdue for:
2 crop seasons for short duration crops
1 crop season for long duration crops
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Non-Performing Assets
Only if interest charged during any quarter is not serviced fully
within 90 days from the end of the quarter
Out of Order
Outstanding balance remains continuously in excess of the sanctioned
limit/drawing power
No credits continuously for 90 days
Credits not enough to cover interest debited during the period

Overdue
Amount not paid on due date fixed by the bank

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Income Recognition
Process to be objective and based on record of recovery
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
Fees and commissions earned by the bank as a result of

renegotiations or rescheduling of outstanding debts should be

recognized on accrual basis
For govt. guaranteed advances also the interest on advances should
not be taken into account unless realised
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Income Recognition contd.

In case of Funded Interest accounts also income recognition should be on

cash basis. Funding of interest in respect of NPAs, if recognised as income,
should be fully provided for

In case of conversion into Equity, Debentures or any other instruments:

If interest amount is converted and income is recognised full provision should be
made
In case of conversion to quoted equity , such equity must be classified as available
for sale category
In case of conversion of principal/interest to debentures, the debentures should be
treated as NPAs ab initio and provision made. Also applies to 0 Coupon Bonds
Income should be recognised on realisation basis

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Reversal of Income
Interest accrued and credited to income account in the
corresponding previous year should year should be reversed
or provided for if same is not realised. For govt. guaranteed
accounts also.
Fees, commission and similar income shall cease to accrue
and should be reversed or provided for with respect to past
periods if uncollected

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Leased Assets
Finance charge component of finance income accrued and
credited to income account and remaining unrealised should
be reversed or provided for

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Appropriation of recovery in NPAs

May be taken to income account provided the credits are not
out of fresh/additional credit facilities
Uniform and consistent process should be followed by the
bank

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Categories of NPAs
Substandard Assets

Doubtful Assets

Loss Assets

Remained NPA for

a period less than
or equal to 12
months
Well defined
credit weaknesses
that jeopardize
liquidation of
debt

Remained in
Substandard
category for a
period of 12
months
Weaknesses make
collection or
liquidation in full
highly
questionable and
improbable

Where loss has

been identified by
bank or internal
or external
auditors or during
RBI inspection
Uncollectible and
of little value

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90 days Out of
Order/Overdue:
Non-Performing
Asset

12 Months NPA:
Substandard
Asset

12 Months
Substandard:
Doubtful Asset

Loss has been

identified: Loss
Assets

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Upgradation of NPA accounts

If arrears of interest and principal are paid by the borrower
May be classified as Standard account
When account regularised near the Balance sheet date:
Should be handled with care
If account indicates inherent weakness the account should be deemed
NPA
Other cases bank must furnish to Statutory Auditors/Inspecting
Officers about manner of regularisation of account

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Other Important Points

Borrower Wise Classification and not account/facility wise
Advances against Term Deposits, NSCs, KVP/IVP etc need not be
treated as NPAs
Accounts with potential threats for recovery on account of erosion
in the value of security or non-availability of security or frauds

committed by borrowers such cases of serious credit impairment

should immediately be classified as doubtful or loss asset
Accounts with temporary deficiencies should not be classified as
NPA
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NPA Classification Norms

Advances under Consortium Arrangements
Based on record of recovery for the individual member banks

Loans with Moratorium Period for payment of interest

Become overdue after due date for payment of interest, if uncollected

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3.

PROVISIONING NORMS

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If not written off,

100% provision

100% of the extent to

which advance is not
covered by realisable
value of security
For secured portion,
depending on period
for which advance has
remained in doubtful
category:
< 1 yr: 20%
1-3 Years: 30%
> 3 yrs: 100%

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Substandard Assets

Should be written off

Doubtful Assets

Loss Assets

Norms

10% of Total
outstanding
For unsecured
exposures additional
10%, i.e., 20%

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Just mark an email to super.msahluwalia@yahoo.com

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M S Ahluwalia, amongst other things, is a visual artist, blogger,

blog designer and of course an MBA and Banker from New
Delhi, India.
To know more about him you may visit his blog-site: Estudiante De La Vida

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