What changed
The 2007 master circular updated and consolidated all previous instructions on income recognition, asset classification, and provisioning for advances, including guidelines on purchase/sale of NPAs. It replaced the 2006 master circular and incorporated instructions issued up to June 30, 2007.
What it means for you
Banks must adhere to standardized norms when buying or selling NPAs, ensuring that asset classification and provisioning are based on objective criteria like recovery record and security value. This promotes transparency and uniformity in NPA transactions, impacting how banks manage their stressed asset portfolios.
What you must do
- Review and update internal policies to align with the consolidated prudential norms on NPA purchase/sale.
- Ensure asset classification for purchased/sold NPAs follows objective criteria based on recovery period and security realizable value.
- Train staff on the updated guidelines to maintain consistency in NPA management and reporting.
- Monitor compliance with provisioning norms for NPAs acquired or transferred under these guidelines.
Who it affects
Commercial banks (excluding RRBs), Credit risk and NPA management teams, Loan recovery and asset resolution departments
What is the key principle for income recognition under these guidelines?
Income recognition must be objective and based on actual recovery record, not subjective considerations, ensuring consistency across banks.
How should asset classification be done for NPAs?
Classification should be borrower-wise, not facility-wise, and based on the period the asset has remained non-performing and the availability and realizable value of security.
Are there specific rules for purchasing NPAs from other banks?
Yes, the guidelines on purchase/sale of NPAs require banks to follow the same prudential norms for classification and provisioning as for their own originated assets.