NPA Norms & Provisioning Final

GUIDANCE ON NON-PERFORMING ASSETS
TOPIC: NON-PERFORMING ASSETS
Basu & Basu, Chartered Accountants
Email: basuandbasu@gmail.com
NON-PERFORMING ASSETS
 NPA Identification
Classification
Provisioning
Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 2

NPA IDENTIFICATION:
1. Identification based on record of recovery of income.

2. Identification based on record of recovery of principal.
3. Identification based on operation in the account.
4. Identification based on present value of asset offered as primary security.

NPA IDENTIFICATION
Working Capital Term Loan

Conditions:
1. If interest and /or instalment of
principal remain overdue for a
1. If no Credits or Credits for 90 period of more than 90 days.
days are not sufficient to cover 2.If instalments of principal or
the interest during the same interest thereon remain overdue
period. for two crop seasons for short
duration crops. In the case long
term crop one crop season.
NPA IDENTIFICATION
3. The amount of liquidity facility

2. If Debit Balance in the remains outstanding for more than 90
days, in respect of a securitization
account exceeds the limit / DP transaction undertaken in terms of
continuously for 90 days as on guidelines on securitization dated Feb.1,
the balance sheet date. 2006.
4. In respect of derivative transactions,
the overdue receivables representing
3. If purchased /discounted positive mark-to-market value of a
bills remain overdue for a derivative contract. If these remain
unpaid for a period of 90 days from the
period of more than 90 days specified due date for payment.
Critical dates under prudential norms:
NPA PERIOD CLASSIFICATION
• From 1-4-2017 to 31-3-2018 • SUB-STANDARD ASSET
• From 1-4-2016 to 31-3-2017 • DOUBTFUL CATEGORY I
• From 1-4-2014 to 31-3-2016 • DOUBTFUL CATEGORY II
• Prior to 1-4-2014 • DOUBTFUL CATEGORY III
• EROSION IN VALUE OF SECURITY • LOSS ASSET

OVER 90 %
INCOME RECOGNITION
• 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 it to income account the interest on any NPA.
• Interest on advances against TD, other securities may be taken to income
account on the due date, provided adequate margin is available in the account.
• In respect of Govt. guaranteed advances become NPA, the interest on such
advances should not be taken to income.
• Fees and commissions earned by the banks as a result of renegotiations or
rescheduling of outstanding debits should be recognized on an accrual basis
over the period of time covered by the renegotiated or rescheduled extension
of credit.

TREATMENT OF INCOME UNDER SPECIAL CIRCUMSTANCES:
• Interest income on standard advances not be taken into income.
• In case of project under implementation which is subject of re- schedulement

and retained as standard asset after re- schedulement. As a result of re-
structure if interest during construction period is given as holiday period
which is beyond two years of original DCCO, interest shall not be taken into
income on accrual basis from the beginning of third year.

REVERSAL OF INCOME
• If any advance or bills slipped into NPA, the entire un-realized interest
(including past period) debited to the advance account should be reversed.
This will be applicable to Govt. guaranteed accounts also.
• In respect of NPA, fees, commission and similar income that have accrued
should cease to accrue in the current period and should be reversed with
respect to past period, if uncollected.
• In respect of leased assets slipped into NPA, to the extent of finance charges
component of finance income on the leased asset which has accrued and was
credited to income account before the asset became nonperforming, and
remaining unrealized, should be reversed or provided for in the current
account period.
APPROPRIATION OF RECOVERY IN NPA
• Interest realized on NPA may be taken to income account only out

of solitary credits and not out of granting of additional facility.
• In absence a clear agreement between the Borrower and Banks
for the purpose of appropriation of recoveries in NPA’s, Banks
should evolve an accounting principle for appropriation.

CLASSIFICATION OF ADVANCES
• Sub-standard: An advance has remain NPA for a period less than or

equal to 12 months.
• Doubtful : An advance has remain in the sub-standard category
for a period of 12 months.
• Loss assets: An advance is identified as loss asset by the bank or
internal or external auditors or the RBI inspection but the amount
has not been written of wholly.

Accounts with temporary deficiencies
classified as NPA.
• Outstanding in the account based on drawing power calculated from stock statements
older than three months, would be deemed as irregular.
• If irregular drawings are permitted in the account for a continuous period of 90 days
even though the unit may be working or the borrower’s financial position is
satisfactory.
• Regular and ad hoc credit limits need to be reviewed/ regularised not later than three
months from the due date/date of ad hoc sanction. In case of constraints such as non-
availability of financial statements and other data
from the borrowers, the branch should furnish evidence to show that renewal/ review
of credit limits is already on and would be completed soon.
• In any case regular and adhoc credit facilities have not been renewed / reviewed
within 180 days from the due date/ date of adhoc sanction it will slips into NPA.
Other important aspects to be considered at the
time of classification and upgradation
• Regularization of NPA account only out of genuine source and

not by granting of additional facility. The Banks must furnish
satisfactory evidence to the Statutory Auditor / Inspecting
Officers about the manner of regularization of the account to
eliminate doubts on their performing status.
• Asset Classification to be Borrower-wise and not facility-wise.

CLASSIFICATION OF ADVANCE BORROWER-WISE OR FACILITY WISE ?
• The bills discounted under LC favoring borrower may not be classified as

NPA when any other facility granted to the borrower is classified as NPA.
• If LC documents are not accepted on presentation or the payment under the

LC is not made on the due date by the LC issuing bank and borrower does
not immediately make good the amount disbursed as a result of discounting
of concerned bills, the outstanding bills discounted will be classified as NPA
with effect from the date when the other facilities had been classified as
NPA.

UNDER APPROVED RE-STRUCTURED PACKAGE:
• In case of advances under rehabilitation approved by Board for Industrial and

Financial Reconstruction (BIFR) / Term Lending Institution (TLIs), any
additional facilities sanctioned under the rehabilitation packages, the income
recognition, asset classification norms will become applicable after a period of
one year from the date of disbursement.

• In case of devolved LC or invoked BG parked in a separate account,
the balance outstanding in that account should be treated as part of
the Borrower’s principal operating account for the purpose of
prudential norms.
• Asset classification is not by branch- wise. Instead it is to classified
as Bank-wise.
• Asset classification under consortium arrangements should be based on
the record of recovery of the individual member banks.

• In respect of accounts where there are potential threats for recovery on
account of erosion in the value of security or non-availability of security
and existence of other factors such as frauds. In cases of such serious
credit impairment the asset should be straightaway classified as
doubtful or loss assets as appropriate. If erosion in value of security is
more than 50% it will be classified as Doubtful. If the realizable value of
security is less than 10% it will be classified as Loss asset.
• Loans under moratorium for payment of interest, interest become

overdue after due date for payment of interest on the respective due
dates.

RBI/2015-16/187
DBR.BP.BC.No.41/21.04.048/2015-16
September 24, 2015
Prudential Norms on Change in
Ownership of Borrowing Entities (Outside
Strategic Debt Restructuring Scheme)

RESERVE BANK OF INDIA to enhance banks’ ability to bring in a change in
ownership of borrowing entities which are under stress primarily due to operational/
managerial inefficiencies despite substantial sacrifices made by the lending banks, it
has been decided to allow banks to upgrade the credit facilities extended to
borrowing entities whose ownership has been changed outside SDR, to ‘Standard’
category upon such change in ownership.
Changes in ownership takes place in any of the following ways:
1.Change in ownership may be by way of sale by the lenders, to a new promoter, of
shares acquired by invocation of pledge or by conversion of debt of the borrower into
equity outside SDR.
2.Bringing in a new promoter by issue of fresh shares by the borrowing entity.
3.Acquisition of2, 2022
Wednesday, February the borrowing entity
Basuby another
& Basu, entity.
Chartered Accountants 19
However, the exemptions from certain clauses of Securities and Exchange
Board of India (SEBI) (Issue of Capital and Disclosure Requirements)
Regulations, 2009 with regard to equity conversion price, and, Securities
and Exchange Board of India (Substantial Acquisition of Shares and
Takeovers) Regulations, 2011, when conversion of debt into equity of
borrowing entities is carried out under the conditions specified in SDR
guidelines circular will not be available .

2. On such change in ownership of the borrowing entities, credit facilities of the
concerned borrowing entities may be upgraded as ‘Standard’. However, the
quantum of provision held by the bank against the said account as on the date of
change in ownership of the borrowing entities shall not be reversed.
However, the Banks may reverse the provision held against the said account only
when all the outstanding loan/facilities of the borrowing entities perform
satisfactorily during the ‘specified period’
In case satisfactory performance during the specified period is not evidenced, the
asset classification of the restructured account would be governed by the extant
asset classification norms with reference to the repayment schedule that existed
before the change in ownership as envisaged at (2) above and assuming that
upgrade in asset classification had not been given. However, in cases where the
bank exits the account completely, i.e. no longer has any exposure to the
borrower, the provision may be reversed/absorbed as on the date of exit .
To avail this benefit, the following conditions to be satisfied:
To upgrade the existing asset classification is subject to the following conditions: a.

The ‘new promoter’ should not be a person/entity/subsidiary/associate etc.
(domestic as well as overseas), from/belonging to the existing promoter/promoter
group. Banks should clearly establish that the acquirer does not belong to the
existing promoter group; and
b. The new promoter should have acquired at least 51 per cent of the paid up
equity capital of the borrower company. If the new promoter is a non-resident, and
in sectors where the ceiling on foreign investment is less than 51 per cent, the new
promoter should own at least 26 per cent of the paid up equity capital or up to
applicable foreign investment limit, whichever is higher, provided banks are
satisfied that with this equity stake the new non-resident promoter controls the
management of the company. Basu & Basu, Chartered Accountants
Wednesday, February 2, 2022 22
PROVISIONING- standard advances
• Direct advances to agricultural and Small and Micro Enterprises

(SME’s) 0.25%
• Advances to commercial Real Estate (CRE) 1.00%
• Advances to commercial Real Estate (CRE-RH) 0.75%
• Housing loans extended at teaser rates- 2% From the beginning
and 0.40% after one year from the date on which the rates are
reset at higher rates.
• All other advances( other than restructure) 0.40%

Higher provision on Standard advances:
• In respect of existing loans/exposures of Banks to Companies having

directors whose name/s appear more than once in the list of willful
defaulters will be 5% in case of standard advances.
• When the advance slips into NPA, if it is covered by security 25% is

required after six months. D1 40% and D2 onwards 100%.

100% provision on standard advances:
Funded Interest term loan (FITL) requires 100% provision even though
the account is classified as standard advances under prudential norms

PROVISIONING- Sub-standard assets
• General provision of 15% on total outstanding without excluding
ECGC cover.
• NPA of Un-secured loan granted ab-initio shall attract additional
provision of 10%, i.e. a total of 25% on the total outstanding. Un-
secured loan is an account assessed by the bank/ approved valuer
/ Reserve Bank’s inspecting officers, is not more than 10%, ab-
initio, of the outstanding exposure towards unsecured exposure.
Exposure shall include all funded and non-funded exposures.
• In respect of above stated category of advances falling under
infrastructure lending having escrow accounts available the total
provision is restricted to 20%.
PROVISIONING- Doubtful advances
• Secured portion:
Upto one year: 25%
One to three years 40%
More than three years 100%
• Un-Secured portion: 100%

PROVISIONING –Loss assets
• 100% provision on the balance outstanding.

ISSUES WITH REGARD TO PROJECT UNDER
IMPLEMENTATION
• With effect from 28-5-2002 all projects financed by the FIs/ Banks
should clearly spelt out at the time of financial closure of the project
and should be formally documented about Date of Commencement of
Commercial Operation (DCCO).
• Project loan would mean any term loan which has been extended of
setting up of an economic venture.
• Benefits are available to:
a. Projects loan for infrastructure sector.
b. Projects loan for non-infrastructure sector (Other than commercial
real estate).
Project under implementation.
SCOPE:
• Concession available for the projects which could not be commenced as per
original DCCO due to legal/ or extraneous reasons like delays in Government
approvals etc.
GENERAL PRUDENTIAL NORMS APPLICABLE FOR SUCH DELAY:

a. A loan shall be classified as NPA during project under implementation as per the
record of recovery (90 days overdue) unless it is restructured.
b. A loan for infrastructure project shall be classified as NPA if it fails to commence the
commercial operation within two years from the original DCCO even though there is
no overdue.

BENEFITS UNDER THIS SCHEME:
• If a project loan classified as Std. Asset is restructured in accordance

with Part B within two years from original DCCO, it can be retained as
a standard asset provided:
A. In case of project delayed due to court cases/ arbitration, the revised
DCCO shall not be more than two years.(In total extension is 2+2 years).
B. In case the delay is due to other than the reason stated above and
beyond the control of promoters revised DCCO shall not be more than
one year.( In total extension is 2+1 years).

CONDITIONS TO AVAIL THE BENEFIT:
• Application for restructuring should be received before the expiry of
period of two years from the original DCCO and when the account is
still standard as per record of recovery.
OTHER POINTS FOR CONSIDERATIONS:

a. As a result of re-structure if interest during construction period is
given as holiday period which is beyond two years of original DCCO,
interest shall not taken into income on accrual basis from the beginning
of third year.

• Mere extension of DCCO would not be considered as restructuring, if
the revised DCCO falls within the period of two years from the original
DCCO and consequential shift in repayment period be remain equal or
shorter duration as per the original repayment terms.
IN CASE OF NON-INFRASTRUCTURE PROJECTS (OTHER THAN

COMMERCIAL REAL ESTATE EXPOSURE):
To avail benefit under this scheme, application for re-structure shall be

made within one year from the original DCCO and it should be a
standard asset at the time of application. The fresh DCCO shall not be
extended beyond two years from original DCCO.

Any change in the repayment schedule of a project loan caused due to an
increase in the project outlay on account of increase in scope and size of the
project, would not be treated as restructuring if:
(a) The increase in scope and size of the project takes place before commencement of
commercial operations of the existing project.

(b) The rise in cost excluding any cost-overrun in respect of the original project is 25% or more of
the
original outlay.
( c )The bank re-assesses the viability of the project before approving the enhancement of scope
and fixing a fresh DCCO.

(d) On re-rating, (if already rated) the new rating is not below the previous rating by more than
one notch.
RBI circular dated 14th August, 2014 on Project under implementation:
• Where the initial financial closure does not envisage financing of cost overruns, Banks are
permitted to fund in the following manner:
i) Banks may fund additional ‘Interest During Construction’, which may arise on account of
delay in completion of a project;
ii) Other cost overruns (excluding Interest During Construction) up to a maximum of 10% of
the original project cost;
iii) The Debt Equity Ratio as agreed at the time of initial financial closure should remain
unchanged subsequent to funding cost overruns or improve in favour of the lenders and the
revised Debt Service Coverage Ratio should be acceptable to the lenders;
iv) Disbursement of funds for cost overruns should start only after the Sponsors/Promoters
bring in their share of funding of the cost overruns; and
iv) All other terms and conditions of the loan should remain unchanged or enhanced in
favour of the lenders.
ISSUES REGARDING RE-
SCHEDULEMENT OF ADVANCES
• Ever since liberalisation opened up and deregulated the
markets and institutions that constitute India’s financial
system, the positive effect that has had on India’s banks has
been a periodic refrain. One indicator regularly used to
support that argument is the sharp fall in the share of non-
performing loans to total, with the ratio of gross non-
performing assets to gross advances falling from close to 16
per cent in the mid-1990s to as low as 2.5 per cent a decade
later, where it has remained since

However, the figures of loans on the books of the
scheduled commercial banks that are non-performing
seem to be gross underestimates. This is because the loans
given to a number of large borrowers, who have been
finding it difficult to meet the associated interest and
amortisation commitments have been “restructured” in
recent times. This allows troubled or even non-performing
assets to be recorded as standard assets, concealing in the
process the real state of affairs.

Definition of Restructure:
• A restructured account is one where the bank, for economic or legal
reasons relating to the borrower's financial difficulty, grants to the
borrower concessions that the bank would not otherwise consider.
Restructuring would normally involve modification of terms of the
advances / securities, which would generally include, among others,
alteration of repayment period / repayable amount/ the amount of
instalments / rate of interest (due to reasons other than competitive
reasons). However, extension in repayment tenor of a floating rate loan on
reset of interest rate, so as to keep the EMI unchanged provided it is
applied to a class of accounts uniformly will not render the account to be
classified as ‘Restructured account’. In other words, extension or
deferment of EMIs to individual borrowers as against to an entire class,
would render the accounts to be classified as 'restructured accounts’.
Repeated Restructured Accounts:
• When a bank restructures an account a second (or more) time(s), the
account will be considered as a 'repeatedly restructured account'.
• However, if the second restructuring takes place after the period upto
which the concessions were extended under the terms of the first
restructuring, that account shall not be reckoned as a 'repeatedly
restructured account'.

Roll-over of short term loans:(stand alone)
• In the cases of roll-over of short term loans, where proper pre-
sanction assessment has been made, and the roll-over is allowed
based on the actual requirement of the borrower and no concession
has been provided due to credit weakness of the borrower, then these
might not be considered as restructured accounts. However, if such
accounts are rolled-over more than two times, then third roll-over
onwards the account would have to be treated as a restructured
account. Besides, banks should be circumspect while granting such
facilities as the borrower may be availing similar facilities from other
banks in the consortium or under multiple banking. Further, Short
Term Loans for the purpose of this provision do not include properly
assessed regular Working Capital Loans like revolving Cash Credit or
Working Capital Demand Loans.
RBI GUIDELINES ON RESTRUCTURING
OF ADVANCES
• Restructuring of advances extended to Industrial Units.
• Restructuring of advances extended to Industrial Units under CDR mechanism.
• Restructuring of advances extended to SME.
• Restructuring of all other advances
• Restructuring not permitted for certain loans:
Retaining asset classification by restructuring is not available to the following
advances:
a. Consumer and personal advances.
b. Advances classified as Capital market exposures.
c. Advances classified as commercial real estate exposures
Consequences of re-structure – under normal
situation
• Accounts classified as standard assets should be immediately re-
classified as sub-standard assets upon restructuring.
• NPA assets continue to have same category of advances.
• NPA restructured advances eligible for up-gradation to the standard
category after observation of satisfactory performance during the
specified period.
• Any additional finance may be treated as standard asset, upto a
period of one year after first interest/principal payment, whichever is
earlier, falls due under the approved restructuring package.

Special regulatory treatment for asset
classification
• Incentive for quick implementation of the restructuring
package under CDR 120 days from the date of approval
under CDR mechanism. Other than those restructured under
CDR mechanism 120 days.
• Retention of the asset classification of the restructured

account in the pre-restructuring asset classification category.

Conditions to satisfy the special Regulatory
Treatment
• Advances secured by tangible security are eligible. However MSE borrowers
where the outstanding upto Rs.25 Lacs and infrastructure projects, provided the
cash flow generated from the projects are adequate for repayment for the
advance are waived to have tangible security.
• The unit becomes viable in 8 years if it is engaged in infrastructure activities and
in 5 years in the case of other units.
• The repayment period of the restructured advance including the moratorium if
any does not exceed 15 years –infrastructure and 10 years in case of other
advances. In case of housing loans 10 years period would not be applicable.
• Promoters sacrifices and additional funds brought by them should be a minimum
of 20% of bank’s sacrifice or 2% of restructured debt whichever is higher.
However, the Bank could insists higher sacrifice considering the risk factor and
promoter's capability.
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GUIDANCE ON NON-PERFORMING ASSETS

TOPIC: NON-PERFORMING ASSETS

Basu & Basu, Chartered Accountants

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 2

1. Identification based on record of recovery of income.

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 3

Working Capital Term Loan

3. The amount of liquidity facility

• From 1-4-2016 to 31-3-2017 • DOUBTFUL CATEGORY I

• From 1-4-2014 to 31-3-2016 • DOUBTFUL CATEGORY II

• Prior to 1-4-2014 • DOUBTFUL CATEGORY III

• EROSION IN VALUE OF SECURITY • LOSS ASSET

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 7

• Interest income on standard advances not be taken into income.

• In case of project under implementation which is subject of re- schedulement

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 8

• Interest realized on NPA may be taken to income account only out

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 10

• Sub-standard: An advance has remain NPA for a period less than or

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 11

• Regularization of NPA account only out of genuine source and

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 13

• The bills discounted under LC favoring borrower may not be classified as

• If LC documents are not accepted on presentation or the payment under the

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 14

• In case of advances under rehabilitation approved by Board for Industrial and

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 15

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 16

• Loans under moratorium for payment of interest, interest become

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 17

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 18

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 20

To upgrade the existing asset classification is subject to the following conditions: a.

• Direct advances to agricultural and Small and Micro Enterprises

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 23

• In respect of existing loans/exposures of Banks to Companies having

• When the advance slips into NPA, if it is covered by security 25% is

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 24

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 25

• Un-Secured portion: 100%

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 27

• 100% provision on the balance outstanding.

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 28

GENERAL PRUDENTIAL NORMS APPLICABLE FOR SUCH DELAY:

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 30

• If a project loan classified as Std. Asset is restructured in accordance

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 31

OTHER POINTS FOR CONSIDERATIONS:

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 32

IN CASE OF NON-INFRASTRUCTURE PROJECTS (OTHER THAN

To avail benefit under this scheme, application for re-structure shall be

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 33

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 36

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 37

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 39

Wednesday, February 2, 2022 Basu & Basu, Chartered Accountants 42

• Retention of the asset classification of the restructured