Master Circular: Prudential Norms on IRAC & Provisioning (2009)

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It has also been placed on the RBI web-site ( http://www.rbi.org.in ). We advise that this revised Master Circular consolidates the instructions contained in the circulars listed in the Annex 7. Yours faithfully (B. Mahapatra) Chief General Manager Encls: As above MASTER CIRCULAR - PRUDENTIAL NORMS ON INCOME RECOGNITION, ASSET CLASSIFICATION AND PROVISIONING PERTAINING TO ADVANCES TABLE OF CONTENTS Para No. Particulars Page No. PART A 1 GENERAL 1 2 DEFINITIONS 1 2.1 Non­performing assets 1 2.2 ‘Out of Order' status 2 2.3 ‘Overdue’ 2 3 INCOME RECOGNITION 2 3.1 Income recognition ­policy 2 3.2 Reversal of income 3 3.3 Appropriation of recovery in NPAs 3 3.4 Interest Application 4 3.5 Computation of NPA levels 4 4 ASSET CLASSIFICATION 4 4.1 Categories of NPAs 4 4.1.1 Sub­standard Assets 4 4.1.2 Doubtful Assets 5 4.1.3 Loss Assets 5 4.2 Guidelines for classification of assets 5 4.2.3 Availability of security / net worth of borrower/ guarantor 5 4.2.4 Accounts with temporary deficiencies 6 4.2.5 Upgradation of loan accounts classified as NPAs 6 4.2.6 Accounts regularised near about the balance sheet date 7 4.2.7 Asset Classification to be borrower wise and not facility-­wise 7 4.2.8 Advances under consortium arrangements 8 4.2.9 Accounts where there is erosion in the value of security 8 4.2.10 Advances to PACS/FSS ceded to Commercial Banks 9 4.2.11 Advances against Term Deposits, NSCs, KVP/IVP, etc 9 4.2.12 Loans with moratorium for payment of interest 9 4.2.13 Agricultural advances 10 4.2.14 Government guaranteed advances 11 4.2.15 Projects under implementation 11 4.2.16 Take­out Finance 15 4.2.17 Post­-shipment Supplier's Credit 15 4.2.18 Export Project Finance 16 4.2.19 Advances under rehabilitation approved by BIFR/ TLI 16 5 PROVISIONING NORMS 16 5.1 General 16 5.2 Loss assets 17 5.3 Doubtful assets 17 5.4 Sub­standard assets 18 5.5 Standard assets 18 5.6 Floating provisions 19 5.7 Provisions for advances at higher than prescribed rates 21 5.8 Provisions on Leased Assets 21 5.9 Guidelines for Provisions under Special Circumstances 22 6 GUIDELINES ON SALE OF FINANCIAL ASSETS TO SECURITISATION COMPANY (SC)/ RECONSTRUCTION COMPANY (RC) 27 6.1 Scope 27 6.2 Structure 27 6.3 Financial assets which can be sold 28 6.4 Procedure for sale of banks’/ FIs’ financial assets to SC/ RC, including valuation and pricing aspects 28 6.5 Prudential norms for banks/ FIs for the sale transactions 30 6.6 Disclosure Requirements 31 6.7 Related Issues 32 7 GUIDELINES ON PURCHASE/SALE OF NON PERFORMING ASSETS 32 7.1 Scope 32 7.4 Structure 33 7.5 Procedure for purchase/ sale of non performing financial assets, including valuation and pricing aspects 33 7.6 Prudential norms for banks for the purchase/ sale transactions 35 7.7 Disclosure Requirements 37 8 WRITING­ OFF OF NPAs 37 PART B Prudential guidelines on Restructuring of Advances 9 Background on Restructuring of advances 39 10 Key Concepts 40 11 General Principles and Prudential Norms for Restructured Advances 40 11.1 Eligibility criteria for restructuring of advances 40 11.2 Asset classification norms 42 11.3 Income recognition norms 43 11.4 Provisioning norms 43 12 Prudential Norms for Conversion of Principal into Debt / Equity 45 12.1 Asset classification norms 45 12.2 Income recognition norms 45 12.3 Valuation and provisioning norms 45 13 Prudential Norms for Conversion of Unpaid Interest into 'Funded Interest Term Loan' (FITL), Debt or Equity Instruments 46 13.1 Asset classification norms 46 13.2 Income recognition norms 46 13.3 Valuation and provisioning norms 47 14 Special Regulatory Treatment for Asset Classification 47 14.1 Applicability of special regulatory treatment 47 14.2 Elements of special regulatory framework 47 15 Miscellaneous 49 16 Disclosures 50 17 Illustrations 50 18 Objective of Restructuring 50 PART C Agricultural Debt Waiver and Debt Relief Scheme, 2008 (ADWDRS)- Prudential Norms on Income Recognition, Asset Classification, Provisioning, and Capital Adequacy 19 The background 51 20 Prudential Norms for the Borrowal Accounts Covered under the ADWDRS 51 20.1 Norms for the Accounts subjected to Debt Waiver 51 20.2 Norms for the Accounts subjected to the Debt Relief 52 20.3 Grant of Fresh Loans to the Borrowers covered under the ADWDRS 55 20.4 Capital Adequacy 55 21 Subsequent Modifications to the Prudential Norms 55 21.1 Interest payment by the GOI 55 21.2 Change in instalment schedule of “other farmers” under the Debt Relief Scheme 56 ANNEXES Annex -1 List of relevant direct agricultural advances 57 Annex -2 Organisational Framework for Restructuring of Advances Under Consortium / Multiple Banking / Syndication Arrangements 58 Annex -3 Key Concepts in Restructuring 70 Annex -4 Particulars of Accounts Restructured 72 Annex -5 Asset Classification of Restructured Accounts under the Guidelines 73 Annex -6 Special Regulatory Relaxations for Restructuring (Available upto June 30,2009) 75 Annex- 7 List of circulars consolidated by the Master Circular 79 Master Circular - Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances Part A 1. GENERAL 1.1.In line with the international practices and as per the recommendations made by the Committee on the Financial System (Chairman Shri M. Narasimham), the Reserve Bank of India has introduced, in a phased manner, prudential norms for income recognition, asset classification and provisioning for the advances portfolio of the banks so as to move towards greater consistency and transparency in the published accounts. 1.2. The policy of income recognition should be objective and based on record of recovery rather than on any subjective considerations. Likewise, the classification of assets of banks has to be done on the basis of objective criteria which would ensure a uniform and consistent application of the norms. Also, the provisioning should be made on the basis of the classification of assets based on the period for which the asset has remained non­performing and the availability of security and the realisable value thereof. 1.3 Banks are urged to ensure that while granting loans and advances, realistic repayment schedules may be fixed on the basis of cash flows with borrowers. This would go a long way to facilitate prompt repayment by the borrowers and thus improve the record of recovery in advances. 1.4. With the introduction of prudential norms, the Health Code-­based system for classification of advances has ceased to be a subject of supervisory interest. As such, all related reporting requirements, etc. under the Health Code system also cease to be a supervisory requirement. Banks may, however, continue the system at their discretion as a management information tool. 2. DEFINITIONS 2.1 Non ­performing Assets 2.1.1 An asset, including a leased asset, becomes non­ performing when it ceases to generate income for the bank. 2.1.2 A non ­performing asset (NPA) is a loan or an advance where; i.interest and/ or instalment of principal remain overdue for a period of more than 90 days in respect of a term loan, ii.the account remains ‘out of order’ as indicated at paragraph 2.2 below, in respect of an Overdraft/Cash Credit (OD/CC), iii.the bill remains overdue for a period of more than 90 days in the case of bills purchased and discounted, iv. the instalment of principal or interest thereon remains overdue for two crop seasons for short duration crops, v. the instalment of principal or interest thereon remains overdue for one crop season for long duration crops, vi. the amount of liquidity facility remains outstanding for more than 90 days, in respect of a securitisation transaction undertaken in terms of guidelines on securitisation dated February 1, 2006. vii. in respect of derivative transactions, the overdue receivables representing positive mark-to-market value of a derivative contract, if these remain unpaid for a period of 90 days from the specified due date for payment. 2.1.3 Banks should, classify an account as NPA only if the interest due and charged during any quarter is not serviced fully within 90 days from the end of the quarter. 2.2 ‘Out of Order’ status An account should be treated as 'out of order' if the outstanding balance remains continuously in excess of the sanctioned limit/drawing power. In cases where the outstanding balance in the principal operating account is less than the sanctioned limit/drawing power, but there are no credits continuously for 90 days as on the date of Balance Sheet or credits are not enough to cover the interest debited during the same period, these accounts should be treated as 'out of order' . 2.3 ‘Overdue’ Any amount due to the bank under any credit facility is ‘overdue’ if it is not paid on the due date fixed by the bank. 3. INCOME RECOGNITION 3.1 Income Recognition Policy 3.1.1 The policy of income recognition has to be objective and based on the record of recovery. Internationally income from non­performing assets (NPA) is not recognised on accrual basis but is booked as income only when it is actually received. Therefore, the banks should not charge and take to income account interest on any NPA. 3.1.2 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. 3.1.3 Fees and commissions earned by the banks as a result of re­negotiations or rescheduling of outstanding debts should be recognised on an accrual basis over the period of time covered by the re­negotiated or rescheduled extension of credit. 3.1.4 If Government guaranteed advances become NPA, the interest on such advances should not be taken to income account unless the interest has been realised. 3.2 Reversal of income 3.2.1 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. 3.2.2 In respect of NPAs, fees, commission and similar income that have accrued should cease to accrue in the current period and should be reversed or provided for with respect to past periods, if uncollected. 3.2.3 Leased Assets The finance charge component of finance income [as defined in ‘AS 19 ­Leases’ issued by the Council of the Institute of Chartered Accountants of India (ICAI)] on the leased asset which has accrued and was credited to income account before the asset became non­performing, and remaining unrealised, should be reversed or provided for in the current accounting period. 3.3 Appropriation of recovery in NPAs 3.3.1 Interest realised on NPAs may be taken to income account provided the credits in the accounts towards interest are not out of fresh/ additional credit facilities sanctioned to the borrower concerned. 3.3.2 In the absence of a clear agreement between the bank and the borrower for the purpose of appropriation of recoveries in NPAs (i.e. towards principal or interest due), banks should adopt an accounting principle and exercise the right of appropriation of recoveries in a uniform and consistent manner. 3.4 Interest Application There is no objection to the banks using their own discretion in debiting interest to an NPA account taking the same to Interest Suspense Account or maintaining only a record of such interest in proforma accounts. 3.5 Computation of NPA levels Banks should deduct the following items from the Gross Advances and Gross NPAs to arrive at the Net advances and Net NPAs respectively: i) Balance in Interest Suspense Account ii) DICGC/ECGC claims received and held, pending adjustment iii) Part payment received and kept in suspense account iv) Total provisions held (excluding amount of technical write off and provision on standard assets) For the purpose, the amount of gross advances should exclude the amount of Technical Write off but would include all outstanding loans and advances; including the advances for which refinance has been availed but excluding the amount of rediscounted bills. The level of gross and net NPAs will be arrived at in percentage terms by dividing the amount of gross and net NPAs by gross and net advances, computed as above, respectively. 4. ASSET CLASSIFICATION 4.1 Categories of NPAs Banks are required to classify non­performing assets further into the following three categories based on the period for which the asset has remained non­performing and the realisability of the dues: I.Sub­standard Assets II.Doubtful Assets iii.Loss Assets 4.1.1 Sub­standard Assets With effect from 31 March 2005, a sub­standard asset would be one, which has remained NPA for a period less than or equal to 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. In other words, such an asset will have well defined credit weaknesses that jeopardise the liquidation of the debt and are characterised by the distinct possibility that the banks will sustain some loss, if deficiencies are not corrected. 4.1.2. Doubtful Assets With effect from March 31, 2005, an asset would be classified as doubtful if it has remained in the sub­standard category for a period of 12 months. A loan classified as doubtful has all the weaknesses inherent in assets that were classified as sub­standard, with the added characteristic that the weaknesses make collection or liquidation in full, – on the basis of currently known facts, conditions and values – highly questionable and improbable. 4.1.3 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. In other words, such an asset is considered uncollectible and of such little value that its continuance as a bankable asset is not warranted although there may be some salvage or recovery value. 4.2 Guidelines for classification of assets 4.2.1 Broadly speaking, classification of assets into above categories should be done taking into account the degree of well-­defined credit weaknesses and the extent of dependence on collateral security for realisation of dues. 4.2.2 Banks should establish appropriate internal systems to eliminate the tendency to delay or postpone the identification of NPAs, especially in respect of high value accounts. The banks may fix a minimum cut off point to decide what would constitute a high value account depending upon their respective business levels. The cut off point should be valid for the entire accounting year. Responsibility and validation levels for ensuring proper asset classification may be fixed by the banks. The system should ensure that doubts in asset classification due to any reason are settled through specified internal channels within one month from the date on which the account would have been classified as NPA as per extant guidelines. 4.2.3 Availability of security / net worth of borrower/ guarantor The availability of security or net worth of borrower/ guarantor should not be taken into account for the purpose of treating an advance as NPA or otherwise, except to the extent provided in Para 4. 2.9, as income recognition is based on record of recovery. 4.2.4 Accounts with temporary deficiencies The classification of an asset as NPA should be based on the record of recovery. Bank should not classify an advance account as NPA merely due to the existence of some deficiencies which are temporary in nature such as non­-availability of adequate drawing power based on the latest available stock statement, balance outstanding exceeding the limit temporarily, non­-submission of stock statements and non­-renewal of the limits on the due date, etc. In the matter of classification of accounts with such deficiencies banks may follow the following guidelines: i) Banks should ensure that drawings in the working capital accounts are covered by the adequacy of current assets, since current assets are first appropriated in times of distress. Drawing power is required to be arrived at based on the stock statement which is current. However, considering the difficulties of large borrowers, stock statements relied upon by the banks for determining drawing power should not be older than three months. The outstanding in the account based on drawing power calculated from stock statements older than three months, would be deemed as irregular. A working capital borrowal account will become NPA if such 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. ii) 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, delay beyond six months is not considered desirable as a general discipline. Hence, an account where the regular/ ad hoc credit limits have not been reviewed/ renewed within 180 days from the due date/ date of ad hoc sanction will be treated as NPA. 4.2.5 Upgradation of loan accounts classified as NPAs If arrears of interest and principal are paid by the borrower in the case of loan accounts classified as NPAs, the account should no longer be treated as non­performing and may be classified as ‘standard’ accounts. With regard to upgradation of a restructured/ rescheduled account which is classified as NPA contents of paragraphs 4.2.15 and 4.2.16 will be applicable. 4.2.6 Accounts regularised near about the balance sheet date The asset classification of borrowal accounts where a solitary or a few credits are recorded before the balance sheet date should be handled with care and without scope for subjectivity. Where the account indicates inherent weakness on the basis of the data available, the account should be deemed as a NPA. In other genuine cases, the banks must furnish satisfactory evidence to the Statutory Auditors/Inspecting Officers about the manner of regularisation of the account to eliminate doubts on their performing status. 4.2.7 Asset Classification to be borrower­-wise and not facility­-wise i) It is difficult to envisage a situation when only one facility to a borrower/one investment in any of the securities issued by the borrower becomes a problem credit/investment and not others. Therefore, all the facilities granted by a bank to a borrower and investment in all the securities issued by the borrower will have to be treated as NPA/NPI and not the particular facility/investment or part thereof which has become irregular. ii) If the debits arising out of devolvement of letters of credit or invoked guarantees are parked in a separate account, the balance outstanding in that account also should be treated as a part of the borrower’s principal operating account for the purpose of application of prudential norms on income recognition, asset classification and provisioning. iii) The bills discounted under LC favouring a borrower may not be classified as a Non-performing advance (NPA), when any other facility granted to the borrower is classified as NPA. However, in case documents under LC are not accepted on presentation or the payment under the LC is not made on the due date by the LC issuing bank for any reason and the borrower does not immediately make good the amount disbursed as a result of discounting of concerned bills, the outstanding bills discounted will immediately be classified as NPA with effect from the date when the other facilities had been classified as NPA. iv) The overdue receivables representing positive mark-to-market value of a derivative contract will be treated as a non-performing asset, if these remain unpaid for 90 days or more. In case the overdues arising from forward contracts and plain vanilla swaps and options become NPAs, all other funded facilities granted to the client shall also be classified as non-performing asset following the principle of borrower-wise classification as per the existing asset classification norms. Accordingly, any amount, representing positive mark-to-market value of the foreign exchange derivative contracts (other than forward contract and plain vanilla swaps and options) that were entered into during the period April 2007 to June 2008, which has already crystallised or might crystallise in future and is / becomes receivable from the client, should be parked in a separate account maintained in the name of the client / counterparty. This amount, even if overdue for a period of 90 days or more, will not make other funded facilities provided to the client, NPA on account of the principle of borrower-wise asset classification, though such receivable overdue for 90 days or more shall itself be classified as NPA, as per the extant IRAC norms. The classification of all other assets of such clients will, however, continue to be governed by the extant IRAC norms. v) If the client concerned is also a borrower of the bank enjoying a Cash Credit or Overdraft facility from the bank, the receivables mentioned at item (iv) above may be debited to that account on due date and the impact of its non-payment would be reflected in the cash credit / overdraft facility account. The principle of borrower-wise asset classification would be applicable here also, as per extant norms. vi) In cases where the contract provides for settlement of the current mark-to-market value of a derivative contract before its maturity, only the current credit exposure (not the potential future exposure) will be classified as a non-performing asset after an overdue period of 90 days. vii) As the overdue receivables mentioned above would represent unrealised income already booked by the bank on accrual basis, after 90 days of overdue period, the amount already taken to 'Profit and Loss a/c' should be reversed and held in a 'Suspense a/c' in the same manner as is done in the case of overdue advances. 4.2.8 Advances under consortium arrangements Asset classification of accounts under consortium should be based on the record of recovery of the individual member banks and other aspects having a bearing on the recoverability of the advances. Where the remittances by the borrower under consortium lending arrangements are pooled with one bank and/or where the bank receiving remittances is not parting with the share of other member banks, the account will be treated as not serviced in the books of the other member banks and therefore, be treated as NPA. The banks participating in the consortium should, therefore, arrange to get their share of recovery transferred from the lead bank or get an express consent from the lead bank for the transfer of their share of recovery, to ensure proper asset classification in their respective books. 4.2.9 Accounts where there is erosion in the value of security/frauds committed by borrowers 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 committed by borrowers it will not be prudent that such accounts should go through various stages of asset classification. In cases of such serious credit impairment the asset should be straightaway classified as doubtful or loss asset as appropriate: i. Erosion in the value of security can be reckoned as significant when the realisable value of the security is less than 50 per cent of the value assessed by the bank or accepted by RBI at the time of last inspection, as the case may be. Such NPAs may be straightaway classified under doubtful category and provisioning should be made as applicable to doubtful assets. ii. If the realisable value of the security, as assessed by the bank/ approved valuers/ RBI is less than 10 per cent of the outstanding in the borrowal accounts, the existence of security should be ignored and the asset should be straightaway classified as loss asset. It may be either written off or fully provided for by the bank. 4.2.10 Advances to PACS/FSS ceded to Commercial Banks In respect of agricultural advances as well as advances for other purposes granted by banks to PACS/ FSS under the on-­lending system, only that particular credit facility granted to PACS/ FSS which is in default for a period of two crop seasons in case of short duration crops and one crop season in case of long duration crops, as the case may be, after it has become due will be classified as NPA and not all the credit facilities sanctioned to a PACS/ FSS. The other direct loans & advances, if any, granted by the bank to the member borrower of a PACS/ FSS outside the on­-lending arrangement will become NPA even if one of the credit facilities granted to the same borrower becomes NPA. 4.2.11 Advances against Term Deposits, NSCs, KVP/IVP, etc Advances against term deposits, NSCs eligible for surrender, IVPs, KVPs and life policies need not be treated as NPAs, provided adequate margin is available in the accounts. Advances against gold ornaments, government securities and all other securities are not covered by this exemption. 4.2.12 Loans with moratorium for payment of interest i. In the 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. Therefore, such amounts of interest do not become overdue and hence do not become NPA, with reference to the date of debit of interest. They become overdue after due date for payment of interest, if uncollected. ii. In the case of housing loan or similar advances granted to staff members where interest is payable after recovery of principal, interest need not be considered as overdue from the first quarter onwards. Such loans/advances should be classified as NPA only when there is a default in repayment of instalment of principal or payment of interest on the respective due dates. 4.2.13 Agricultural advances i. A loan granted for short duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for two crop seasons. A loan granted for long duration crops will be treated as NPA, if the instalment of principal or interest thereon remains overdue for one crop season. For the purpose of these guidelines, “long duration” crops would be crops with crop season longer than one year and crops, which are not “long duration” crops, would be treated as “short duration” crops. The crop season for each crop, which means the period up to harvesting of the crops raised, would be as determined by the State Level Bankers’ Committee in each State. Depending upon the duration of crops raised by an agriculturist, the above NPA norms would also be made applicable to agricultural term loans availed of by him. The above norms should be made applicable to all direct agricultural advances as listed at items 1.1.1, 1.1.2, 1.1.3, 1.1.4, 1.1.5, 1.1.6 and 1.2.1, 1.2.2 and 1.2.3 of Master Circular on lending to priority sector. RPCD. No.Plan. BC. 9 /04.09.01/ 2008-­2009 dated July 1, 2008. An extract of the list of these items is furnished in the Annex I . In respect of agricultural loans, other than those specified in the Annex I and term loans given to non­-agriculturists, identification of NPAs would be done on the same basis as non­-agricultural advances, which, at present, is the 90 days delinquency norm. ii. Where natural calamities impair the repaying capacity of agricultural borrowers, banks may decide on their own as a relief measure ­conversion of the short-term production loan into a term loan or re­-schedulement of the repayment period; and the sanctioning of fresh short-term loan, subject to guidelines contained in RBI circular RPCD. No.PLFS.BC.6/ 05.04.02/ 2004­05 dated July 1, 2005. iii. In such cases of conversion or re-­schedulement, the term loan as well as fresh short-term loan may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms & conditions and would be treated as NPA if interest and/or instalment of principal remains overdue for two crop seasons for short duration crops and for one crop season for long duration crops. For the purpose of these guidelines, "long duration" crops would be crops with crop season longer than one year and crops, which are not 'long duration" would be treated as "short duration" crops. iv. The debts as on March 31, 2004 of farmers, who have suffered production and income losses on account of successive natural calamities, i.e., drought, flood, or other calamities which might have occurred in the districts for two or more successive years during the past five years may be rescheduled/ restructured by the banks, provided the State Government concerned has declared such districts as calamity affected. Accordingly, the interest outstanding/accrued in the accounts of such borrowers (crop loans and agriculture term loans) up to March 31, 2004 may be clubbed with the principal outstanding therein as on March 31, 2004, and the amount thus arrived at shall be repayable over a period of five years, at current interest rates, including an initial moratorium of two years. As regards the crop loans and agricultural term loans which have already been restructured on account of natural calamities as per the standing guidelines, only the overdue instalments including interest thereon as on March 31, 2004 may be taken into account for the proposed restructuring. On restructuring as above, the farmers concerned will become eligible for fresh loans. The rescheduled/restructured loans as also the fresh loans to be issued to the farmers may be treated as current dues and need not be classified as NPA. While the fresh loans would be governed by the NPA norms as applicable to agricultural loans, in case of rescheduled/restructured loans, the NPA norms would be applicable from the third year onwards, i.e., on expiry of the initial moratorium period of two years. v. In case of Kharif crop loans in the districts affected by failure of the South­West monsoon as notified by the State Government, recovery of any amount either by way of principal or interest during the financial year 2002-­03 need not be effected. Further, the principal amount of crop loans in such cases should be converted into term loans and will be recovered over a period of minimum 5 years in case of small and marginal farmers and 4 years in case of other farmers. Interest due in the financial year 2002-­03 on crop loans should also be deferred and no interest should be charged on the deferred interest. In such cases of conversion or re-schedulement of crop loans into term loans, the term loans may be treated as current dues and need not be classified as NPA. The asset classification of these loans would thereafter be governed by the revised terms and conditions and would be treated as NPA if interest and / or instalment of principal remain overdue for two crop seasons. vi. While fixing the repayment schedule in case of rural housing advances granted to agriculturists under Indira Awas Yojana and Golden Jubilee Rural Housing Finance Scheme, banks should ensure that the interest/instalment payable on such advances are linked to crop cycles. 4.2.14 Government guaranteed advances The credit facilities backed by guarantee of the Central Government though overdue may be treated as NPA only when the Government repudiates its guarantee when invoked. This exemption from classification of Government guaranteed advances as NPA is not for the purpose of recognition of income. The requirement of invocation of guarantee has been delinked for deciding the asset classification and provisioning requirements in respect of State Government guaranteed exposures. With effect from the year ending 31 March 2006 State Government guaranteed advances and investments in State Government guaranteed securities would attract asset classification and provisioning norms if interest and/or principal or any other amount due to the bank remains overdue for more than 90 days. 4.2.15 Projects under implementation It was observed that there were instances, where despite substantial time overrun in the projects under implementation, the underlying loan assets remained classified in the standard category merely because the project continued to be under implementation. Recognising that unduly long time overrun in a project adversely affected its viability and the quality of the asset deteriorated, a need was felt to evolve an objective and definite time­frame for completion of projects so as to ensure that the loan assets relating to projects under implementation were appropriately classified and asset quality correctly reflected. In the light of the above background, it was decided to extend the norms detailed below on income recognition, asset classification and provisioning to banks with respect to industrial projects under implementation, which involve time overrun. i. The projects under implementation are grouped into three categories for the purpose of determining the date when the project ought to be completed: Category I : Projects where financial closure had been achieved and formally documented. Category II : Projects sanctioned before 1997 with original project cost of Rs.100 crore or more where financial closure was not formally documented. Category III : Projects sanctioned before 1997 with original project cost of less than Rs.100 crore where financial closure was not formally documented. Asset classification ii. In case of each of the three categories, the date when the project ought to be completed and the classification of the underlying loan asset should be determined in the following manner: Category I (Projects where financial closure had been achieved and formally documented): In such cases the date of completion of the project should be as envisaged at the time of original financial closure. In all such cases, the asset may be treated as standard asset for a period not exceeding two years beyond the date of completion of the project, as originally envisaged at the time of initial financial closure of the project. In case, however, in respect of a project financed after 1997, the financial closure had not been formally documented, the norms enumerated for category III below, would apply. Category II (Projects sanctioned before 1997 with original project cost of Rs.100 crore or more where financial closure was not formally documented): For such projects sanctioned prior to 1997, where the date of financial closure had not been formally documented, an independent Group was constituted with experts from the term lending institutions as well as outside experts in the field to decide on the deemed date of completion of projects. The Group, based on all material and relevant facts and circumstances, has decided the deemed date of completion of the project, on a project-­by-­project basis. In such cases, the asset may be treated as standard asset for a period not exceeding two years beyond the deemed date of completion of the project, as decided by the Group. Banks, which have extended finance towards such projects, may approach the lead financial institutions to which a copy of the independent Group’s report has been furnished for obtaining the particulars relating to the deemed date of completion of project concerned. Category III (Projects sanctioned before 1997 with original project cost of less than Rs.100 crore where financial closure was not formally documented): In these cases, sanctioned prior to 1997, where the financial closure was not formally documented, the date of completion of the project would be as originally envisaged at the time of sanction. In such cases, the asset may be treated as standard asset only for a period not exceeding two years beyond the date of completion of the project as originally envisaged at the time of sanction. iii. In all the three foregoing categories, in case of time overruns beyond the aforesaid period of two years, the asset should be classified as sub­standard regardless of the record of recovery and provided for accordingly. iv. As regards the projects financed by the FIs/ banks after 28th May, 2002 , the date of completion of the project should be clearly spelt out at the time of financial closure of the project. In such cases, if the date of commencement of commercial production extends beyond a period of six months after the date of completion of the project, as originally envisaged at the time of initial financial closure of the project, the account should be treated as a sub­standard asset. However, for Infrastructure projects alone, w.e.f. March 31, 2008, if the date of commencement of commercial production extends beyond a period of two years after the date of completion of the project, as originally envisaged, the account should be treated as substandard. v. It is, however, clarified that in terms of aforesaid paragraph, a project can remain classified as "standard" asset only if both the following conditions are satisfied : i. the delay in commencement of commercial production is not beyond six months (two years in case of Infrastructure projects) from the date of completion of the project, as originally envisaged at the time of initial financial closure of the project, ii. the principal and interest on the loans are regularly serviced during the six month or two year period, as the case may be. Income recognition vi. Banks may recognise income on accrual basis in respect of the above three categories of projects under implementation, which are classified as ‘standard’. v. Banks should not recognise income on accrual basis in respect of the above three categories of projects under implementation which are classified as a ‘substandard’ asset. Banks may recognise income in such accounts only on realisation on cash basis. Consequently, banks which have wrongly recognised income in the past should reverse the interest if it was recognised as income during the current year or make a provision for an equivalent amount if it was recognised as income in the previous year(s). As regards the regulatory treatment of ‘funded interest’ recognised as income and ‘conversion into equity, debentures or any other instrument’ banks should adopt the following: a) Funded Interest : Income recognition in respect of the NPAs, regardless of whether these are or are not subjected to restructuring/ rescheduling/ renegotiation of terms of the loan agreement, should be done strictly on cash basis, only on realisation and not if the amount of interest overdue has been funded. If, however, the amount of funded interest is recognised as income, a provision for an equal amount should also be made simultaneously. In other words, any funding of interest in respect of NPAs, if recognised as income, should be fully provided for. b) Conversion into equity, debentures or any other instrument : The amount outstanding converted into other instruments would normally comprise principal and the interest components. If the amount of interest dues is converted into equity or any other instrument, and income is recognised in consequence, full provision should be made for the amount of income so recognised to offset the effect of such income recognition. Such provision would be in addition to the amount of provision that may be necessary for the depreciation in the value of the equity or other instruments, as per the investment valuation norms. However, if the conversion of interest is into equity which is quoted, interest income can be recognised at market value of equity, as on the date of conversion, not exceeding the amount of interest converted to equity. Such equity must thereafter be classified in the “available for sale” category and valued at lower of cost or market value. In case of conversion of principal and /or interest in respect of NPAs into debentures, such debentures should be treated as NPA, ab initio, in the same asset classification as was applicable to loan just before conversion and provision made as per norms. This norm would also apply to zero coupon bonds or other instruments which seek to defer the liability of the issuer. On such debentures, income should be recognised only on realisation basis. The income in respect of unrealised interest which is converted into debentures or any other fixed maturity instrument should be recognised only on redemption of such instrument. Subject to the above, the equity shares or other instruments arising from conversion of the principal amount of loan would also be subject to the usual prudential valuation norms as applicable to such instruments. Provisioning vii.While there will be no change in the extant norms on provisioning for NPAs,banks which are already holding provisions against some of the accounts,which may now be classified as ‘standard’, shall continue to hold the provisions and shall not reverse the same. 4.2.16 Take­out Finance Takeout finance is the product emerging in the context of the funding of long­-term infrastructure projects. Under this arrangement, the institution/the bank financing infrastructure projects will have an arrangement with any financial institution for transferring to the latter the outstanding in respect of such financing in their books on a pre­determined basis. In view of the time­-lag involved in taking-­over, the possibility of a default in the meantime cannot be ruled out. The norms of asset classification will have to be followed by the concerned bank/financial institution in whose books the account stands as balance sheet item as on the relevant date. If the lending institution observes that the asset has turned NPA on the basis of the record of recovery, it should be classified accordingly. The lending institution should not recognise income on accrual basis and account for the same only when it is paid by the borrower/ taking over institution (if the arrangement so provides). The lending institution should also make provisions against any asset turning into NPA pending its take over by taking over institution. As and when the asset is taken over by the taking over institution, the corresponding provisions could be reversed. However, the taking over institution, on taking over such assets, should make provisions treating the account as NPA from the actual date of it becoming NPA even though the account was not in its books as on that date. 4.2.17 Post­-shipment Supplier's Credit i. In respect of post­-shipment credit extended by the banks covering export of goods to countries for which the ECGC’s cover is available, EXIM Bank has introduced a guarantee­-cum-­refinance programme whereby, in the event of default, EXIM Bank will pay the guaranteed amount to the bank within a period of 30 days from the day the bank invokes the guarantee after the exporter has filed claim with ECGC. ii. Accordingly, to the extent payment has been received from the EXIM Bank, the advance may not be treated as a non­performing asset for asset classification and provisioning purposes. 4.2.18 Export Project Finance i. In respect of export project finance, there could be instances where the actual importer has paid the dues to the bank abroad but the bank in turn is unable to remit the amount due to political developments such as war, strife, UN embargo, etc. ii. In such cases, where the lending bank is able to establish through documentary evidence that the importer has cleared the dues in full by depositing the amount in the bank abroad before it turned into NPA in the books of the bank, but the importer's country is not allowing the funds to be remitted due to political or other reasons, the asset classification may be made after a period of one year from the date the amount was deposited by the importer in the bank abroad. 4.2.19 Advances under rehabilitation approved by BIFR/ TLI Banks are not permitted to upgrade the classification of any advance in respect of which the terms have been re­negotiated unless the package of re­negotiated terms has worked satisfactorily for a period of one year. While the existing credit facilities sanctioned to a unit under rehabilitation packages approved by BIFR/term lending institutions will continue to be classified as sub­standard or doubtful as the case may be, in respect of 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. 5 PROVISIONING NORMS 5.1 General 5.1.1 The primary responsibility for making adequate provisions for any diminution in the value of loan assets, investment or other assets is that of the bank managements and the statutory auditors. The assessment made by the inspecting officer of the RBI is furnished to the bank to assist the bank management and the statutory auditors in taking a decision in regard to making adequate and necessary provisions in terms of prudential guidelines. 5.1.2 In conformity with the prudential norms, provisions should be made on the non­performing assets on the basis of classification of assets into prescribed categories as detailed in paragraphs 4 supra. Taking into account the time lag between an account becoming doubtful of recovery, its recognition as such, the realisation of the security and the erosion over time in the value of security charged to the bank, the banks should make provision against sub­standard assets, doubtful assets and loss assets as below: 5.2 Loss assets Loss assets should be written off. If loss assets are permitted to remain in the books for any reason, 100 percent of the outstanding should be provided for. 5.3 Doubtful assets i. 100 percent of the extent to which the advance is not covered by the realisable value of the security to which the bank has a valid recourse and the realisable value is estimated on a realistic basis. ii. In regard to the secured portion, provision may be made on the following basis, at the rates ranging from 20 percent to 100 percent of the secured portion depending upon the period for which the asset has remained doubtful: Period for which the advance has remained in ‘doubtful’ category Provision requirement (%) Up to one year 20 One to three years 30 More than three years 100 iii. Banks are permitted to phase the additional provisioning consequent upon the reduction in the transition period from substandard to doubtful asset from 18 to 12 months over a four year period commencing from the year ending March 31, 2005, with a minimum of 20 % each year. Note: Valuation of Security for provisioning purposes With a view to bringing down divergence arising out of difference in assessment of the value of security, in cases of NPAs with balance of Rs. 5 crore and above stock audit at annual intervals by external agencies appointed as per the guidelines approved by the Board would be mandatory in order to enhance the reliability on stock valuation.Collaterals such as immovable properties charged in favour of the bank should be got valued once in three years by valuers appointed as per the guidelines approved by the Board of Directors. 5.4 Sub­standard assets (i) A general provision of 10 percent on total outstanding should be made without making any allowance for ECGC guarantee cover and securities available . (ii) The ‘unsecured exposures’ which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 20 per cent on the outstanding balance. The provisioning requirement for unsecured ‘doubtful’ assets is 100 per cent. Unsecured exposure is defined as an exposure where the realisable value of the security, as assessed by the bank/approved valuers/Reserve Bank’s inspecting officers, is not more than 10 percent, ab-­initio , of the outstanding exposure. ‘Exposure’ shall include all funded and non-­funded exposures (including underwriting and similar commitments). ‘Security’ will mean tangible security properly discharged to the bank and will not include intangible securities like guarantees (including State government guarantees), comfort letters etc. (iii) In order to enhance transparency and ensure correct reflection of the unsecured advances in Schedule 9 of the banks' balance sheet, it is advised that the following would be applicable from the financial year 2009-10 onwards : a) For determining the amount of unsecured advances for reflecting in schedule 9 of the published balance sheet, the rights, licenses, authorisations, etc., charged to the banks as collateral in respect of projects (including infrastructure projects) financed by them, should not be reckoned as tangible security. Hence such advances shall be reckoned as unsecured. b) Banks should also disclose the total amount of advances for which intangible securities such as charge over the rights, licenses, authority, etc. has been taken as also the estimated value of such intangible collateral. The disclosure may be made under a separate head in "Notes to Accounts". This would differentiate such loans from other entirely unsecured loans. 5.5 Standard assets (i) As a countercyclical measure, the provisioning requirements for all types of standard assets stands amended as below, w.e.f November 15, 2008. Banks should make general provision for standard assets at the following rates for the funded outstanding on global loan portfolio basis: (a) direct advances to agricultural and SME sectors at 0.25 per cent; (b) all other loans and advances at 0.40 per cent (ii) The revised norms would be effective prospectively but the provisions held at present should not be reversed. However, in future, if by applying the revised provisioning norms, any provisions are required over and above the level of provisions currently held for the standard category assets, these should be duly provided for. (iii) While the provisions on individual portfolios are required to be calculated at the rates applicable to them, the excess or shortfall in the provisioning, vis-a-vis the position as on any previous date, should be determined on an aggregate basis. If the provisions on an aggregate basis required to be held w.e.f November 15, 2008 are less than the provisions already held, the provisions rendered surplus should not be reversed to P&L and should continue to be maintained at the existing level. In case of shortfall determined on aggregate basis, the balance should be provided for by debit to P&L. (iv) The provisions on standard assets should not be reckoned for arriving at net NPAs. (v) The provisions towards Standard Assets need not be netted from gross advances but shown separately as 'Contingent Provisions against Standard Assets' under 'Other Liabilities and Provisions ­Others' in Schedule 5 of the balance sheet. 5.6 Prudential norms on creation and utilisation of floating provisions 5.6.1 Principle for creation of floating provisions by banks The bank's board of directors should lay down approved policy regarding the level to which the floating provisions can be created. The bank should hold floating provisions for ‘advances’ and ‘investments’ separately and the guidelines prescribed will be applicable to floating provisions held for both ‘advances’ & ‘investment’ portfolios. 5.6.2 Principle for utilisation of floating provisions by banks i. The floating provisions should not be used for making specific provisions as per the extant prudential guidelines in respect of non­performing assets or for making regulatory provisions for standard assets. The floating provisions can be used only for contingencies under extraordinary circumstances for making specific provisions in impaired accounts after obtaining board’s approval and with prior permission of RBI. The boards of the banks should lay down an approved policy as to what circumstances would be considered extraordinary. ii. To facilitate banks' boards to evolve suitable policies in this regard, it is clarified that the extra-ordinary circumstances refer to losses which do not arise in the normal course of business and are exceptional and non-recurring in nature. These extra-ordinary circumstances could broadly fall under three categories viz. General, Market and Credit. Under general category, there can be situations where bank is put unexpectedly to loss due to events such as civil unrest or collapse of currency in a country. Natural calamities and pandemics may also be included in the general category. Market category would include events such as a general melt down in the markets, which affects the entire financial system. Among the credit category, only exceptional credit losses would be considered as an extra-ordinary circumstance. iii. In terms of the Agricultural Debt Waiver and Debt Relief Scheme, 2008, lending institutions shall neither claim from the Central Government, nor recover from the farmer, interest in excess of the principal amount, unapplied interest, penal interest, legal charges, inspection charges and miscellaneous charges, etc. All such interest / charges will be borne by the lending institutions. In view of the extraordinary circumstances in which the banks are required to bear such interest / charges, banks are allowed, as a one time measure, to utilise, at their discretion, the Floating Provisions held for 'advances' portfolio, only to the extent of meeting the interest / charges referred to above. 5.6.3 Accounting Floating provisions cannot be reversed by credit to the profit and loss account. They can only be utilised for making specific provisions in extra­ordinary circumstances as mentioned above. Until such utilisation, these provisions, till the year 2008-09, could have either been netted off from gross NPAs to arrive at disclosure of net NPAs, or treated as part of Tier II capital within the over­all ceiling of 1.25 % of total risk weighted assets. However, from the year 2009-10 onwards, Floating Provisions cannot be netted from gross NPAs to arrive at net NPAs, but can only be reckoned as part of Tier II capital subject to the overall ceiling of 1.25% of total Risk Weighted Assets. 5.6.4 Disclosures Banks should make comprehensive disclosures on floating provisions in the “notes on accounts” to the balance sheet on (a) opening balance in the floating provisions account, (b) the quantum of floating provisions made in the accounting year, (c) purpose and amount of draw down made during the accounting year, and (d) closing balance in the floating provisions account. 5.7 Additional Provisions for NPAs at higher than prescribed rates The regulatory norms for provisioning represent the minimum requirement. A bank may voluntarily make specific provisions for advances at rates which are higher than the rates prescribed under existing regulations, to provide for estimated actual loss in collectible amount, provided such higher rates are approved by the Board of Directors and consistently adopted from year to year. Such additional provisions are not to be considered as floating provisions. The additional provisions for NPAs, like the minimum regulatory provision on NPAs, may be netted off from gross NPAs to arrive at the net NPAs 5.8 Provisions on Leased Assets i) Sub­standard assets a) 10 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component. The terms ‘net investment in the lease’, ‘finance income’ and ‘finance charge’ are as defined in ‘AS 19 ­Leases’ issued by the ICAI. b) Unsecured lease exposures, as defined in paragraph 5.4 above, which are identified as ‘substandard’ would attract additional provision of 10 per cent, i.e., a total of 20 per cent. ii) Doubtful assets 100 percent of the extent to which, the finance is not secured by the realisable value of the leased asset. Realisable value is to be estimated on a realistic basis. In addition to the above provision, provision at the following rates should be made on the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component of the secured portion, depending upon the period for which asset has been doubtful: Period for which the advance has remained in ‘doubtful’ category Provision requirement (%) Up to one year 20 One to three years 30 More than three years 100 iii) Loss assets The entire asset should be written off. If for any reason, an asset is allowed to remain in books, 100 percent of the sum of the net investment in the lease and the unrealised portion of finance income net of finance charge component should be provided for. 5.9 Guidelines for Provisions under Special Circumstances 5.9.1 Advances granted under rehabilitation packages approved by BIFR/term lending institutions (i) In respect of advances under rehabilitation package approved by BIFR/term lending institutions, the provision should continue to be made in respect of dues to the bank on the existing credit facilities as per their classification as sub­standard or doubtful asset. (ii) As regards the additional facilities sanc

Reproduced for reference with acknowledgment — Source: Reserve Bank of India · RBI/2009-10/39 · issued 01 Jul 2009. The plain-English explanation above is BankPulse’s own independent summary.

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