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BFM MODULE – D
Chapter 28: ASSET CLASSIFICATION AND
PROVISIONING NORMS (PART-I)
What will we study?
*What is Asset Classification?
*What is NPA?

ASSET CLASSIFICATION (History):

In August 1991, a high-level committee, headed by
M. Narasimhan was appointed to examine various
Aspects of financial system.
One of the important recommendations of the
Narasimham Committee was that balance sheets
Of the banks should be transparent and comply with
International accounting standards.
The Committee recommended that banks should
Adopt uniform accounting practices in regard to
Income recognition and bad debts provisioning.
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Inparti
cul
ar,
incomer
ecogni
ti
onofnon-
perf
orming
assetsshoul
dnotbeonaccr
ualbasi
sbutonrecor
d
ofrecover
y.
TheCommitteeal
sosuggest
edthatpr
ovisi
oning
shoul
ddependuponapropercl
assi
fi
cati
onof
asset
s,whi
chintur
nshouldbebasedonobjecti
ve
cri
ter
ia.
I
nl i
newi ththeinternat
ionalpracti
cesandasper
therecommendat ionsmadebyt heCommi tteeon
theFinancialSystem (Chair
manM.Nar asi
mham) ,
theReser veBankofI ndiahasintroduced,ina
phasedmanner ,prudenti
alnormsf orincome
recognit
ion,assetclassif
icat
ionandpr ov i
sioning
fortheadv ancespor t
foli
oofthebanks.
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Def
ini
ti
ons:Non-
per
for
mingAsset
s:
Anasset,i
ncl
udi
ngal easedasset
,becomesnon-
perf
ormingwhenitceasestogenerat
eincomefor
thebank.
Anon-
per
formingasset(
NPA)i
sal
oanoran
adv
ancewhere:
1-
IfTer
m Loan:
I
nt er
estand/ori
nstal
lmentofpri
nci
palr
emain
overdueforaperi
odofmor ethan90daysi
n
respectofatermloan.
2-
IfCC/
ODAccount
:
A)Theaccountr
emai
ns'
outofor
der'
inr
espectof
anOver
draft
/CashCr
edi
t(OD/
CC).
Or
B)IfCCandODli
mitisnotrenewed/rev
iewed
wit
hin180day
sfrom duedateofrenewal,
theni
tis
cal
ledNPA.
Or
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C)Ifstockst
atementwhi
chi
ssubmi
tt
edi
nbankby
customeris
3mont
hsol
d:i
rr
egul
araccount
6mothsol
dornofr
eshst
ockst
atementi
srecei
ved
i
nlast6mont
hs:NPA

'
OutofOr
der
’St
atus:
Anaccountshouldbetr
eatedas“outoforder
'ift
he
out
standingbal
anceismorethansancti
onedli
mit
orDrawingpowerformorethan90days.
or
Eithert
herei
snocredi
torcr
edi
tsar
enotenought
o
recoverthei
nter
est
.
Thentheseaccount
sshoul
dbet
reat
edas“
outof
order
'.
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3-
IfBi
llPur
chasedorBi
llHandl
ed:
Thebil
lremainsov
erdueforaperi
odofmoret
han
90daysinthecaseofbi
ll
spurchasedand
di
scounted.
'
Over
due'
:
Anyamountduet othebankunderanycr
edi
t
faci
li
tyi
s‘ov
erdue’i
fiti
snotpaidontheduedat
e
fi
xedbythebank.

4-
IfAgr
icul
tur
eLoan:
t
hei
nstal
lmentofpr
inci
palori
nter
estt
her
eon
r
emai
nsov er
duefor
*
Twocr
opseasonsf
orshor
tdur
ati
oncr
ops.
*
Onecr
opseasonf
orl
ongdur
ati
oncr
ops.
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Banksshouldcl
assi
fyanaccountasNPAonlyi ft
he
i
nterestchar
geddur
inganyquart
erisnotser
viced
ful
lywithi
n90daysfr
om theendofthequart
er.
Theclassi
fi
cat
ionofanassetasNPAshoul
dbe
basedontherecor
dofrecover
y.
Bankshoul dnotcl assi
fyanadv anceaccountas
NPAmer elyduet otheexistenceofsome
defi
ciencieswhi charetempor aryi
nnaturesuchas
*non-
av ai
labil
it
yofadequat edr awi
ngpowerbased
onthel at
estav ail
ablestockstatement,
*
bal
anceoutst
andi
ngexceedi
ngt
hel
imi
t
t
emporar
il
y,
*nonsubmi
ssi
onofst
ockst
atement
sonduedat
e
and
*
non-
renewaloft
hel
imi
tsont
heduedat
e,et
c.
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AssetCl
assi
fi
cat
ion:
1-
Standar
dAsset
2-Subst
andar
dAsset
3-
Doubt
fulAsset
4-
LossAsset
Not
e:2,
3,
4ar
ecal
ledNPA.
1-
Standar
dAsset
:
Ifpaymenti
sregul
ator
ycomi
ngt
heni
tisa
standar
dasset.
Speci
alMensi
onAccount
:(
SMA)
*
Irr
egul
arst
andar
daccount
sar
ecal
ledSMA
Now,
SMA0:I
fir
regul
arf
or1-
30day
s
SMA1:
Ifi
rr
egul
arf
or31-
60day
s
SMA2:I
fir
regul
arf
or61-
90day
s
*Af
ter90day
saccountbecomeNPA.
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(
a)Subst
andar
dAsset
s:
OnbecomingNPAt heaccounti
scl
assi
fi
edas
Subst
andardaccount
.(
upto12months)
Witheff
ectfrom 31March2005,asubstandar
d
assetwouldbeone,whichhasremainedNPAf ora
peri
odlessthanorequalto12months.
(
b)Doubt
fulAsset
s:
I
fNPAorSubst
andar
dformor
ethan12mont
hs.

Witheffectfr
om March31,2005,anassetwouldbe
cl
assif
iedasdoubtfuli
fithasremainedi
nthe
subst
andar dcat
egoryforaperi
odof12mont hs.
Doubt
fulAsset
sar
efur
thercl
assi
fi
edas:

Doubt
ful1(
D1)
:Ifdoubt
fulupt
o1y
ear
Doubt
ful2(
D2):I
fdoubt
fulf
ormor
ethan1y
ear
andupto3years
Doubt
ful3(
D3)
:Ifdoubt
fulf
ormor
ethan3y
ear
s.
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(
c)LossAsset
s:
Thataccounti
nwhi
chmoneycan'
tber
ecov
ered.
Alossassetisonewherelosshasbeenident
if
ied
bythebankorinter
nalorext
ernalaudi
tor
sorthe
RBIinspect
ionbuttheamounthasnotbeenwritt
en
offwholl
y.

I
ncomeRecogni
ti
on:
Thepol
icyofi
ncomerecognit
ionhastobe
obj
ect
iveandbasedontherecordofr
ecover
y.
I
nternat
ionall
y ,i
ncomefrom non-perf
ormingassets
(NPA)isnotr ecogni
sedonaccr ualbasi
s,butis
bookedasi ncomeonl ywhenitisactual
lyrecei
ved.
Ther
efor
e,t
hebanksshoul
dnotchar
geandt
aket
o
i
ncomeaccounti
nter
estonanyNPA.
Howev er,inter
estonadvancesagai
nstterm
deposi
t s,NSCs, KVPsandli
fepoli
ciesmaybe
takentoi ncomeaccountont heduedate,
provided
adequat emar gi
nisavai
labl
eintheaccounts.
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Incaseofgovernmentguar ant
eedadvances
becomingNPA, thei
nterestonsuchadvances
shouldnotbetakentoincomeaccountunlessthe
i
nteresthasbeenreal
ised.
Summar
y:
*
SMA0:I
fir
regul
arf
or1-
30day
s
SMA1:
Ifi
rr
egul
arf
or31-
60day
s
SMA2:I
fir
regul
arf
or61-
90day
s
Thesear
est
andar
daccountbuti
rr
egul
ar
*Subst
andar
d:f
rom dat
eofNPA(
91t
hday
)andupt
o
1year
Thi
sisNPAaccount
.
*
Doubl
efulAsset
:IfNPAorSubst
andar
dformor
e
t
han1year.
D1:Doubt
fulf
or1y
ear
s
D2:Doubt
fulf
ormor
ethan1y
earupt
o3y
ear
s
D3:Doubt
fulf
ormor
ethan3y
ear
s
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Exampl
e:
31-
03-
2020:I
nst
all
mentwasdue.
01-
04-
2020:SMA0
30-
04-
2020:SMA0
01-
05-
2020:SMA1
30-
05-
2020:SMA1
31-
05-
2020:SMA2
29-
06-
2020:SMA2
30-
06-
2020:NPAorSubst
andar
d
30-
06-
2021:
NPAorSubst
andar
d
01-
07-
2021:
Doubt
fulAsset(
D1)
01-
07-
2022:
Doubt
fulAsset(
D1)
02-
07-
2022:
Doubt
fulAsset(
D2)
02-
07-
2024:
Doubt
fulAsset(
D2)
03-
07-
2024:Doubt
fulAsset(
D3)
Thenl
ossasset
.
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BFM MODULE – D
Chapter 28: ASSET CLASSIFICATION AND
PROVISIONING NORMS (PART-II)
What will we study?
*What is Provisioning Norm?

PROVISIONING NORMS:
A non-performing asset (NPA) causes two-fold
Impact on the profitability of a bank.

On one hand, the bank ceases to earn interest on

This asset and thus is deprived of its legitimate
Income from the asset.

On the other hand, the bank is required to make

Provisions for this asset, depending on the
classification/ category of the asset and value of
security, if any.
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Thismakesaf
urt
herdenti
nthepr
ofi
tabi
li
tyoft
he
bank.
TheReserveBankofI ndiaint
r oducedt hesy
stem of
assetcl
assifi
cati
onandpr ovisioninginli
newith
i
nternat
ionalpract
icesforthef i
rstti
mei n1993.
Thenormshaveunder
gonesev
eralchangesdur
ing
thel
ast27year
s.
Inconformi
tywit
htheprudenti
alnor
ms, pr
ovi
sions
shouldbemadeont henon-per
formi
ngassetson
thebasisofcl
assi
fi
cati
onofassetsint
oprescr
ibed
categori
es.
Takingintoaccountt hetimelagbet weenan
accountbecomi ngdoubtfulofrecovery,
its
recognit
ionassuch, t
hereali
sationofthesecurit
y
andt heerosionov erti
mei nthev al
ueofsecurit
y
chargedt othebank, t
hebanksshoul dmake
provisi
onagai nstsubstandardassets,doubtf
ul
assetsandl ossasset sasment ionedbelow:
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St
andar
dAsset
s:
(i
)Banksarerequi
redtomakegeneralpr
ovi
sionf
or
standar
dassetsatthefol
lowi
ngr
ates:
LOAN(
Standar
dAsset
) Pr
ovi
sioni
ng
Nor
malRat
e 0.
4%
MSE 0.
25%
Medi
um Ent
erpr
ise 0.
40%
Advt
oAgr
icul
tur
e 0.
25%
Commer ci
alr
ealest
ate 1%
(shop,
offi
ce,
par
ketc.)
Commer
cialr
ealest
ate(
Housi
ng) 0.
75%
I
ndi
vi
dualHousi
ngl
oan 0.
25%
Housi
ngl
oanatt
easerr
ate 2%
Housi
ngl
oanatt
easerr
ate 0.
40%
aft
er1yearf
rom thedat
eonwhi ch
t
herat
esareresetathi
gherr
ates
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(a)
(i
)Farm Cr
editt
oagr
icul
tur
alacti
vi
ti
esandSmall
andMi cr
oEnter
pri
ses(
SMEs)sectorsat0.
25per
cent.
(a)(
ii
)TheMedium Enterpri
seswi
llat
tract0.
40%
standar
dassetpr
ov i
sioning.
(b)
(i
)Advancest
oCommerci
alRealEst
ate(
CRE)
Sectorat1.
00percent
.
(b)
(i
i)AdvancestoCommercialRealEst
ate-
Resident
ialHousi
ngSect
or(CRE-RH)at0. 75per
cent.
(c)Housi
ngl
oansextendedatt
easerrat
esat2per
centi
nv i
ewoft
hehigherri
skassoci
atedwi
ththem.
Thepr ovi
sioningrateshallbereducedto0.40per
centafter1y earfrom thedateonwhichtherates
areresetathi gherrat
esiftheaccountsremain
'
standard'.
(d)Al
lotherl
oansandadvancesnoti
ncl
udedi
n(a)
and(b)aboveat0.
40percent.
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(
ii
)Theprovi
sionsonstandar
dasset
sar
enott
obe
r
eckonedforarr
ivi
ngatnetNPAs.
(i
ii
)Theprovisi
onst owardsStandar
dAsset sneed
notbenettedfrom grossadvancesbutaretobe
shownseparatelyas'Conti
ngentProvisi
onsagainst
StandardAssets'under‘
OtherLiabi
li
ti
esand
Provi
sionsOthers'i
nSchedule5oft hebalance
sheet.
TeaserRat
e:
Wheninst
resestr
atesarelowint
hebegi
nni
ngand
af
tersometimeiti
ncreases.

Subst
andar
dAsset
s:
AssetTy
pe Pr
ovi
sioni
ng
Nor
malSubst
andar
dor 15%
Secur
edSubst
andar
d 15%
Usecur
edSubst
andar
d 25%
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Ageneralprovi
sionof15%ont ot
aloutst
anding
shoul
dbemadewi thoutmakinganyall
owancefor
ECGCguar ant
eecov erandsecur
it
iesavai
labl
e.
The‘unsecuredexposures'
whicharei
dentif
iedas
substandar
dwoul dattr
actaddi
ti
onalpr
ovisi
onof
10%,i.e.
,atotalof25%ontheoutst
andingbalance.
Unsecur
edl
oan:
Aloanisconsider
edasunsecuredfrom begi
nning
i
freal
isabl
ev al
ueofsecur
it
iesattheti
meof
sanct
ionofloanwas10%orl essthan10%oft he
l
oanamountsanct i
oned.

Doubt
fulAsset
s:
Per
iodf
orwhi chAssetwas Secur
ed Unsecured
doubtful Porti
on Porti
on
Upt
o1y
ear
(D1) 25% 100%
1y
ear
+&upt
o3y
ear
s(D2) 40% 100%
3y
ear
s+(
D3) 100% 100%
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(i
)100%oft heextenttowhichtheadv anceisnot
coveredbythereali
sablevalueofthesecurit
yto
whichthebankhasav al
idrecourseandt he
real
isabl
evalueisesti
mat edonar eal
isti
cbasis.
(i
i)I
nregardtothesecuredporti
on,provi
sionmay
bemadeont hef ol
lowingbasi
s,attherat
esr angi
ng
fr
om 25%t o100%oft hesecuredporti
ondepending
upontheperi
odf orwhichtheassethasremai ned
doubtf
ul.
LossAsset
s:
AssetTy
pe Pr
ovi
sioni
ngr
equi
rement
LossAsset 100%

*
Lossasset
sshoul
dbewr
it
tenof
f.
*Ifl
ossasset
sar epermit
tedtoremaininthebooks
foranyr
eason, 100%oftheoutstandi
ngshouldbe
provi
dedforprovisi
oni
ng.
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Summar
y:
St
andar
dAsset
s:
LOAN(
Standar
dAsset
) Pr
ovi
sioni
ng
Nor
malRat
e 0.
4%
Advt
oSME 0.
25%
Advt
oMedi
um Ent
erpr
ise 0.
40%
Advt
oAgr
icul
tur
e 0.
25%
Commer ci
alr
ealest
ate 1%
(shop,
offi
ce,
par
ketc.)
Commerci
alr
ealest
ate 0.
75%
(Housi
ng)
I
ndi
vi
dualHousi
ngl
oan 0.
25%
Housi
ngl
oanatt
easerr
ate 2%
Housi
ngl
oanatt
easerr
ate 0.
40%
aft
er1y
earfrom t
hedateon
whi
cht
heratesarer
esetat
hi
gherrat
es
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Subst
andar
dAsset
s:
AssetTy
pe Pr
ovi
sioni
ng
Nor
malSubst
andar
dor 15%
Secur
edSubst
andar
d 15%
Usecur
edSubst
andar
d 25%

Doubt
fulAsset
s:

Per
iodforwhi
ch Provi
sioni
ng Provi
sioning
Assetwas Requir
ement Requir
ement
doubt
ful Secured Unsecured
Porti
on Porti
on
Upt
o1y
ear 25% 100%
1y
ear
+&upto3 40% 100%
year
s
3y
ear
s+ 100% 100%
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LossAsset
s:

AssetTy
pe Pr
ovi
sioni
ngr
equi
rement
LossAsset 100%
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BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY ) PART :- III

What we will study ?

*Case Study based on Provisioning Norms ?
 Join CAIIB WITH ASHOK On YouTube & APP
BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY-2 ) PART :- IV

What we will study ?

*Case Study based on Provisioning Norms ?
 Join CAIIB WITH ASHOK On YouTube & APP
BFM MODULE – D
CHPATER 28:- ASSET CLASSIFICATION AND
PROVISIONING NORMS
(CASE STUDY-3 ) PART :- V

What we will study ?

*Case Study based on GROOSS NPA,NET,NPA and
PROVISIONING ?