Non Performing Assets (NPA)
An asset, including a leased asset, becomes non performing when it ceases to generate income for the bank. If one account of the borrower in the bank becomes NPA in one branch, then all accounts of that borrower in other branches of the same bank also are classified as NPA. Thus classification as NPA is done borrower wise and not account wise. In all NPA accounts, provision is to be made on the basis of asset classification.
- If Interest and/ or instalment of principal remain overdue for aperiod of more than 90 days
- If the account remains out of order or the limit is not renewed/reviewed within180 days from the due date of renewal.
Out of order means an account where
- The balance is continuously more than the sanctioned limit or drawing power (or)
- Where as on the date of Balance Sheet, there is no credit in the account continuously for 90 days or credit is less than interest debited (or)
- Where stock statement not received for 3 months or more. if the bill remains overdue for a period of more than Bills 90 days from due date .
- If the loan has been granted for short duration crop: interest and/or installment of principal remains overdue for two crop seasons beyond the due date.
- If the loan has been granted for long duration crop: interest and/or installment of principal remains overdue for one crop season beyond due date.
Short Duration Crop – 2 Crop Seasons
Long Duration Crop – 1 Crop Season
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Loan against FD, NSC, KVP, LIC:
- Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies not treated as NPAs provided sufficient margin is available.
- Advances against gold ornaments, govt securities and all other securities are not covered by this exemption
Loan guaranteed by Government:
- Loan guaranteed by Central Govt not treated as NPA for asset classification and provisioning till the Government repudiates its guarantee when invoked. Treated as NPA for income recognition.
- Advances guaranteed by the State Government classified as NPA as in other cases
- Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks.
Loans with Moratorium for payment of interest:
- In case of bank finance given for industrial projects or for agricultural plantations etc. where moratorium is available for payment of interest, payment of interest becomes ‘due’ only after the moratorium or gestation period is over.
- Such amounts of interest do not become overdue and hence do not become NPA.
Assets can be categorized into four categories namely
- Standard Asset
- Sub Standard Asset
- Doubtful Asset
- Loss Asset
The last three categories are classified as NPAs based on the period for which the asset has remained non performing and the realisability of the dues.
- Standard Assets: The loan accounts which are regular and do not carry more than normal risk. Within Standard assets, there could be accounts which though have not become NPA but are irregular. Such accounts are called as Special Mention accounts (SMA).
- SMA 0: Principal or interest payment not overdue for more than 30 days but account showing signs of incipient stress.
- SMA 1: Principal or interest payment overdue between 31 – 60 days.
- SMA 2: Principal or interest payment overdue between 61 – 90 days.
- Sub-standard Assets: A sub-standard asset is one, which is classified as NPA for a period not exceeding 12 Months. In such cases, the current net worth of the borrower/ guarantor or the current market value of the security charged is not enough to ensure recovery of the dues to the banks in full.
- Doubtful Assets: An asset is to be classified as doubtful, if it has remained NPA or sub standard for a period exceeding 12 months. Doubtful accounts are further classified in three categories namely Doubtful 1 (D1), Doubtful 2 (D2) and Doubtful 3 (D3).
- D1: It is that account which is doubtful up to one year.
- D2: It is that account which is doubtful for more than one year but up to 3 year.
- D3: It is that account which is doubtful for more than 3 year.
- Loss Assets: A loss asset is one where loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.
- The banks should not charge and take to income account interest on any NPA till it is actually realised
- On an account turning NPA, the interest already charged by bank should be reversed or provided for banks to the extent not recovered by debiting Profit and Loss account,and stop further application of interest.
- 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.
- If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised.
- 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 account in the past periods, should be reversed or provided for if the same is not realised. This will apply to Government guaranteed accounts also.
Under provisioning, banks have to set aside a prescribed percentage of their bad assets from their own funds most probably profits. The percentage of bad asset that has to be provided is called provisioning coverage ratio.
When banks reports profits, they give low dividends now a days because of the provisioning requirements. Many banks have sustantial NPAs now and they are setting apart a major chunk of their profit to meet the provisioning.
Provisioning is made on all types of assets i.e. Standard, Sub standard, Doubtful and loss assets.
- Direct advance to agriculture or Micro and Small Enterprise – 0.25% of outstanding
- Commercial Real Estate – 1% of outstanding
- Commercial Real Estate – Housing – 0.75% of outstanding
- Teaser Home Loans – 2% of outstanding
Sub Standard Assets:
- Sub-standard Secured – 15%
- Sub-standard Unsecured – 25%
- Sub-standard unsecured (infrastructure accounts) – 20%
- Doubtful – up to 12 months – 25%
- Doubtful – more than 12 months but up to 3 years – 40%
- Doubtful – more than 3 years (secured/unsecured) – 100%
- Loss account – 100%
If loan is guaranteed by ECGC, CGFT or CGFLHS, CGTSME provision is not on guaranteed portion.