NPA
Asset:
An
asset becomes non-performing asset, when it ceases to generate income for the
bank. The principle or interest or both the component of the loan given are overdue
for more than 90 days.
Categories of NPAs
Banks
are required to classify non performing assets further into three categories a) substandard
b) Doubtful c) Loss assets based on
a)
the period for which the asset has remained NPA and
b)
realizability of the dues:
Substandard
Assets:
a) Meaning: Asset that has remained NPA for less
than or equal to 12 months.
b) Features:
-Sub-standard assets show explicit signs of credit weaknesses affecting the realization of debt +
-There is clear cut possibility of banking facing some losses from the credit given, If not corrected.
Doubtful
asset:
a) Meaning: Asset that has remained in substandard
category for a period of 12 months.
b) Features:
-Doubtful asset has all characteristics of substandard asset +
-The credit weakness is such that, it shall render
the realization of debt in full highly questionable & improbable.(on
the basis of currently relevant facts at hand)
Loss
asset:
a) Meaning: Loan given is considered totally uncollectible
and needs to be fully written off
b) Additional points:
-Identified by bank management, external auditor
or by rbi inspector as Loss asset
-Is of insignificant book value and is also of
little salvage value that carrying them in books as bankable asset is not
required.
Provisioning Norms
As per prudential
norms, provisions has to be made for non-performing assets on the basis of its classification
Substandard assets
a) Provisioning norms applicable to substandard assets
i) On Total outstanding : General provision of 15% on total
outstanding should be made on total outstanding value (without making any adjustments
for ECGC guarantee cover or securities available)
ii) On Unsecured exposure: An additional provision of 10% on the unsecured exposures out of substandard assets.
Making the total provision on sub-standard assets to 25% on the outstanding balance.
b) In case of Escrow
availability:
where escrow funds are available in respect of infrastructure loan accounts classified as sub-standard, then the provision shall be 20% instead of the aforesaid 25%. But the banks should have mechanism in place to ensure the bank has the first legal claim on these cash flows.
What is unsecured exposure?
Exposure where realizable value of security as assessed by competent authorities is not more than 10 % of outstanding exposure.
Bank's exposure includes all funded and non-funded exposures (including underwriting and similar commitments)
Security refers only to the tangible security charged to the bank by the borrower and does not include intangibles like bank guarantees (including State government guarantees), comfort letters etc.
II. Doubtful assets
Secured portion:
In regard to the secured portion, provision may be made on the following basis.
|
Period for which advance has remained in doubtful category |
Provisioning requirement (%) |
|
Up
to one year One
to three years More
than three years |
25 40 100 |
Provision at 100% on that portion of advance, which is not covered by the realizable value of security
Note: Unsecured portion value= Total loan value- realisable value of the security (realizable value has to be estimated on realistic basis and the bank must have valid recourse to the security)
Other guidelines wrt Doubtful assets
In cases of NPAs with outstanding balance of ₹5 crore and above, annual stock audit by external auditors is mandatory to confirm the real stock value.
Also, Immovable property given as collateral charge must be valued once in three years by registered valuer.
III. Loss assets
Loss assets should be written off completely. If in case their outstanding value is continued to be shown in books for some reason, then 100% of the outstanding should be provided and net off against the outstanding balance.