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Pune Branch of WIRC of ICAI
Bank Audit Conclave
Session 5
Non Performing Assets
Case Study
CA Niranjan Joshi
13.03.2016
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These are my personal views and can not
be construed to be the views of the ICAI
or my firm.
CA Niranjan Joshi
No representations or warranties are
made by the WIRC with regard to this
presentation.
These views do not and shall not be
considered as a professional advice.
This
presentation
should
not
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manner or form, without our written
permission.
2
Agenda
CA Niranjan Joshi
Objective – Prudential Norms of IRAC
and Provisioning pertaining to Advances
Case Study
3
Master Circular 01.07.2015
PART A – General
Definitions
CA Niranjan Joshi
Income Recognition
Asset Classification
Provisioning Norms
Guidelines for Sale of Financial Assets
Guidelines for Purchase/Sale of NPA
Writing Off of NPAs
Others
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Master Circular 01.07.2015
PART B – Guidelines on Restructuring
Background
CA Niranjan Joshi
Key Concepts
General Principles / Prudential Norms
Conversion of Principal into
Debt/Equity
Funded Interest Term Loan
Special Regulatory Treatment for Asset
Classification
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Master Circular 01.07.2015
PART C – Early recognition of financial
distress
CA Niranjan Joshi
PART C1 – Revitilising Distressed Asset
(JLF) (CAP)
PART C2 - Revitilising Distressed Asset
(Refiniancing,
Sale
of
NPA,
Other
Measures)
PART C3 – Strategic Debt Restructuring
Scheme
Annexure 1 to 7
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Objective (1.2)
Policy of IR should be objective & based
on record of recovery rather than on any
subjective considerations.
CA Niranjan Joshi
Classification of assets on the basis of
objective criteria, which ensure a uniform
& consistent application of the norms.
Provisioning made on the basis of the
classification of assets based on the
period for which the asset has remained
non-performing & the availability of
security & the realisable value thereof.
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Objective (1.2)
Banks should fix realistic repayment
schedules at the time of sanction based
on cash flows of borrower.
CA Niranjan Joshi
Master Circular
RBI/2015-16/101/DBR.No.BP.BC.2/
21.04.048/2015-16 dated July 1, 2015.
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Asset Classification
PERFORMING ASSET
(STANDARD ASSET)
CA Niranjan Joshi
Account is performing & does not carry
more than normal risk attached to the
business.
NON-PERFORMING ASSET (NPA)
(SUB STANDARD, DOUBTFUL, LOSS)
Asset ceases to generate income.
Higher risk than normal risk attached to
business.
Non performing as per various criteria for
various types of loans.
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Identification of NPA
Term Loans (2.1.2)
Exceptions – Moratorium, Schematic
Loans such as Housing / education / Staff
Loans etc.
CA Niranjan Joshi
Interest and/or Installment remains
overdue for a period of more than 90 days
Bills Purchased / Discounted
Bill Purchased / Discounted remains
overdue for a period of more than 90 days
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Identification of NPA
Agricultural Advances (4.2.13)
CA Niranjan Joshi
Short Duration Crop - Interest or
installments remains overdue for two
crop seasons (which are not long duration
crops)
Long Duration Crop - Interest or
installments remains overdue for one
crop seasons (season longer than 1 year)
How to find about duration of crops? *
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Identification of NPA
CA Niranjan Joshi
Derivative Transactions
Overdue receivables representing positive
mark to market value of derivative
contract remaining unpaid for a period of
90 days from specified due date
Liquidity Facility
Remains outstanding for more than 90
days
in
respect
of
securitisation
transaction.
Credit Card Dues (4.2.21)
If minimum amount due, as mentioned in
the statement, is not paid fully within 90
days from the next statement date.
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Identification of NPA
Cash Credit / Overdraft (2.2)
The account is ‘out of order’ if:
CA Niranjan Joshi
Outstanding
Balance
remains
continuously in excess of sanctioned
limit/drawing power for 90 days.
or
Outstanding Balance less than limit/DP,
but there are no credits continuously for
90 days as on the date of Balance Sheet
or
Credits in the account are not sufficient to
cover interest debited during the same
period.
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Identification of NPA
CA Niranjan Joshi
In case of interest payments, 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. (2.1.3)
Overdue – Any amount due to bank under
any credit facility is ‘overdue’ if it is not
paid on the due date fixed by the bank.
(2.3)
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Income Recognition
Interest on Advances against Term
Deposits, NSC, KVP, IVP and Life Policies
may be taken to income account on due
date, provided adequate margin is
available in the account. (3.1.2)
CA Niranjan Joshi
Policy of income recognition has to be
objective and based on record of
recovery. Banks should not charge and
take to income account interest on any
NPA. (3.1.1)
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Income Recognition
CA Niranjan Joshi
Fees and commissions earned by banks as
a
result
of
renegotiation
and
reschedulement of outstanding debts
should be recognised on accrual basis
over the period of time covered by
extension of credit. (3.1.3)
If any advance becomes NPA, the entire
interest accrued and credited to income in
past periods should be reversed if the
same is not realised. (3.2.1)
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Income Recognition
Interest realised on NPA may be taken to
income provided credits are not out of
fresh/additional credit facility sanctioned
to borrower. (3.3.1)
CA Niranjan Joshi
In respect of NPA, fees, commission or
similar income that have accrued, should
cease to accrue for past periods, if
uncollected. (3.2.2)
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Income Recognition
CA Niranjan Joshi
In absence of clear agreement between
bank and borrower for the purpose of
appropriation of recoveries in NPA
(interest or principal), banks should
adopt
an
accounting
principle
and
exercise the right of appropriation of
recoveries in a uniform and consistent
manner. (3.3.2)
On account turning NPA, Banks should
reverse the interest already charged and
not collected by debiting P&L Account and
stop further application of interest. (3.4)
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Classification Norms
Standard Asset The account is performing
A sub standard Asset is one
which has remained a Non
Performing Asset for a period
of less than or equal to 12
months.
Doubtful
I – up to 1 years
II – 1 to 3 years
III – More than 3 years
Loss Assets
These are accounts, identified
by the bank or internal or
external auditors or by RBI
Inspectors
as
wholly
irrecoverable but the amount
for which has not been written
off.
CA Niranjan Joshi
Sub-Standard
Asset
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Classification Norms
Availability of security or net worth
should not be considered while treating
advance as NPA (4.2.3)
Non-renewal/ Non – regularisation of
regular/ adhoc limit within 180 days from
the due date. (TD)
CA Niranjan Joshi
Temporary deficiencies (4.2.4)
Outstanding Balance in account based on
the DP calculated from stock statements
older than 3 months would be deemed as
irregular & if such irregular drawings are
permitted for a period of 90 days, account
needs to be classified as NPA. (TD)
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Classification Norms
Upgradation (4.2.5)
CA Niranjan Joshi
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 NPA and
may be classified as ‘Standard’ account.
For restructured accounts refer para 12.2
and 15.2 of master circular.
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Classification Norms
Accounts regularised near about the BS
Date (4.2.6)
CA Niranjan Joshi
Care should be taken that a solitary or
few credits in the account made at/near
the balance sheet date extinguishing the
overdue interest/principal is not the only
criteria for classifying the asset as
standard.
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Classification Norms
Classification Borrower wise and
facility wise (Qua borrower) (4.2.7)
not
Consortium Advances (4.2.8)
 Member
banks
shall
classify
the
accounts according to their own record
of recovery.
 Bank needs to arrange to get their share
of recovery or obtain an express
consent from the Lead Bank.
CA Niranjan Joshi
All facilities granted to a borrower shall
be treated as NPA & not only that facility
which has become irregular.
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Classification Norms
Erosion in Value of Security (4.2.9)
Where realisable value of security is less
than
10%
of
outstanding
balance,
account to be straightaway classified as
Loss Asset.
CA Niranjan Joshi
Where realisable value of security is less
than 50% of the value assessed, account
to be straightaway classified as Doubtful
Asset.
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Classification Norms
CA Niranjan Joshi
Advances to Primary Agricultural Credit
Society (PACS) and Farmers Service
Societies (FSS) ceded to commercial
banks. (4.2.10) Qua borrower concept not
to apply. Only facility which is overdue
will be classified as NPA.
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Classification Norms
Advances against TD/KVP/NSC/IVP/LIP
etc.
CA Niranjan Joshi
These advances need not be treated as
NPA
provided
adequate
margin
is
available. Advances against Gold loans,
government securities are not covered in
this criteria. (4.2.11)
Central Government guaranteed advance
to be classified as NPA only if Government
repudiates the guarantee when invoked.
(4.2.14)
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Project under Implementation
For all projects financed by the FIs/
banks after 28th May, 2002, the DOC and
the DCCO of the project should be clearly
spelt out at the time of financial closure
of the project. (para 4.2.15)
CA Niranjan Joshi
Project Loan means any term loan which
has been extended for the purpose of
setting up of an economic venture. Banks
should fix date of completion (DOC) and
Date of Commencement of Commercial
Operations (DCCO) for all project loans at
the time of sanction of the loan / financial
closure
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Project Loans – Infrastructure Sector
Classify as NPA if its fails to commence
commercial operations within two years
from the original DCCO, even if regular as
per
record
of
recovery,
unless
restructured and eligible to be classified a
standard.
CA Niranjan Joshi
Classify as NPA during any time before
commencement of commercial operations
as per record of recovery (90 days
overdue), unless restructured and eligible
to be classified as standard. (4.2.15.2 &
4.2.15.3)
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Project Loans - Types
Project Loans of Two Types:Infrastructure / Non Infrastructure
A loan for an infrastructure / Non
Infrastructure project will be classified as
NPA
during
any
time
before
commencement of commercial operations
as per record of recovery (90 days
overdue), unless it is restructured and
eligible for Standard classification.
CA Niranjan Joshi
Project Loan: A Term Loan extended for
the purpose of setting up of an economic
venture.
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Project Loan – Asset Classification
Non Infrastructure
Classified as NPA if
it fails to commence
commercial
operations within
Two (2) years from
the original DCCO,
even if regular as
per record of
recovery.
One (1) years from
the original DCCO,
even if regular as
per record of
recovery.
Standard account
Restructured any
time during the
period up to
Two (2) years from
the original DCCO, it
can be retained as
standard.
Two (2) years from
the original DCCO, it
can be retained as
standard.
CA Niranjan Joshi
Infrastructure
Fresh DCCO is fixed
Upto another Two
1. In cases involving (2) years (beyond
court cases
extended period of 2
years) total 4 years
2. In cases involving
other reasons
beyond control of
promoters
Upto another One
(1) years (beyond
extended period of 2
years) total 3 years
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Project under Implementation
Infrastructure
Non Infrastructure
This is subject to adherence to
provisions regarding restructuring.
Two (2) years
from the original
DCCO, when
account is
standard as per
record of recovery.
One (1) years
from the original
DCCO, when
account is
standard as per
record of recovery.
Provisioning
Additional
provisioning if
standard.
Additional
provisioning if
standard.
If appointed date
is extended by
concession
authority, this will
not be
restructuring
CA Niranjan Joshi
Application to be
received for
restructuring
before the expiry
of period
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Project Loans – Other Issues
Multiple revisions of DCCO within the
permitted time limits will not be considered
as repeated restructuring.
CRE projects merely extension of DCCO would
not be considered as restructuring, if the
revised DCCO falls within a period of 1 year
from original DCCO & there is no change in
other terms & conditions except possible shift
of repayment schedule and servicing of loan.
Such CRE projects will be treated as
Standard.
CA Niranjan Joshi
Mere extension of DCCO within permitted
time limits & consequential shift in repayment
period by equal or shorter duration would not
mean restructure, provided all other terms &
conditions remain unchanged.
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Provisioning Norms
Farm Agricultural and SMEs Sectors
Commercial Real Estate (CRE)
Sector
(CRE) Residential Housing Sector
All Others not included above
Housing Loans (Teaser)
0.25 %
1.00 %
0.75 %
0.40 %
2.00%
Sub Standard
Asset
Total Outstanding
If Total Outstanding is Unsecured
15.00 %
25.00%
Bad &
Doubtful
Asset
Doubtful I – upto 1 year (Secured
Portion)
Doubtful II – 1 to 3 years (Secured
Portion)
Doubtful III – more than 3 years
Unsecured Portion of all I, II
25.00 %
100.00 %
100.00%
Loss Asset
Total Outstanding
100.00 %
Provision
Coverage
Ratio (PCR)
Banks should have total
Provisioning Coverage Ration of not
less than 70%
as on 30.09.2010
CA Niranjan Joshi
Standard
Asset
(5.5)
40.00 %
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Write Off – NPA’s
Banks may write off accounts at HO Level
even though the advances are still
outstanding at branches. (8.4)
CA Niranjan Joshi
It is necessary that provision is made as
per the classification accorded to the
respective accounts .
The banks should either make full
provision as per the guidelines or write
off such advances & claim such tax
benefits as are applicable, by evolving
appropriate methodology in consultation
with
their
auditors/tax
consultants.
Recoveries made in such accounts should
be offered for tax purposes as per the
rules. (8.3)
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Part B – Guidelines for Restructuring
CA Niranjan Joshi
Four Broad Catagories:
Advances extended to Industrial Units
Advances extended to IU under CDR
Advances to SME
All other advances
CDR
mechanism
available
only
to
borrowers engaged in industrial activities.
Eligibility
Any account classified under standard,
sub standard and doubtful categories.
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Eligibility Criteria for Restructuring
Restructuring cannot be done retrospectively.
While the restructuring proposal is under
consideration, usual asset classification norms
would continue to apply.
Restructuring should be subject to customer
Application / consent for terms and conditions.
CA Niranjan Joshi
Asset Classification status on date of approval
of restructuring relevant to decide the asset
classification status after such restructuring
Financial viability should be established and
there is reasonable certainty of repayment.
Borrowers indulging in frauds & malfeasance
are ineligible.
BIFR cases are
express approval.
not
eligible
without
their
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Restructuring of Advances
CA Niranjan Joshi
 Standard Asset would get reclassified
as sub standard immediately
 Account which is already NPA would
continue
to
have
the
same
classification.
 Additional finance would be treated as
standard up to a period of one year.
 All restructured accounts, classified as
NPA upon restructuring would be
eligible
for
upgradation
after
observation of satisfactory performance
during the specified period. (Annex 5
(viii) – during 1year it should not be out
of order for more than 90 days and no
overdue at the end)
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Restructuring – Provisioning Norms
Provision on restructured advance as per
extant provisioning norms.

Standard restructured advances will
attract higher provision for first 2 years.

NPA
restructured
advances
upgraded to standard attract
provision in first year.

Diminution in fair value is an economic
loss to bank & needs additional provision
on each BS date.

For advances below Rs.1 crore, 5% of
total exposure can be provided notionally
for such diminution in faire value of
advance.
when
higher
CA Niranjan Joshi

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Restructuring of Advances
Incentive
for
quick
implementation
of
package (up to 31.03.2015 as per 20.2.3)
The asset classification status may be
restored
if
the
approved
package
is
implemented :
 Within
in 120 days from the date of
approval under CDR mechanism
 Within 120 days from the date of receipt of
application by Bank in other cases.
CA Niranjan Joshi
Special Regulatory Treatment for asset
classification.
Not available to Consumer & Personnel
Advances, Advances
classified as Capital
Market Exposure, Advances classified as
Commercial Real Estate Exposure.
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Restructuring of Advances
CA Niranjan Joshi
Asset classification benefits
Standard advance will not be downgraded
upon restructuring if following conditions
are satisfied.
 Dues of the bank are fully secured by
tangible security (except SSI borrower
with outstanding upto Rs.25 lacs &
infrastructure projects)
 Unit becomes viable in 8 years, if it is
engaged in infrastructure activities and
in 5 years in case of other units.
 Repayment period including moratorium
does
not
exceed
15
years
for
infrastructure & 10 years for other
projects (10 years ceiling won’t apply to
restructured Home Loans).
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Restructuring of Advances
 Prior to 30.05.2013 If promoters face
genuine difficulty then 50% upfront and
the balance within one year
 The restructuring
restructuring’
is
not
CA Niranjan Joshi
 Promoters sacrifice and additional funds
brought by them should be a higher of
20% of bank’s sacrifice or 2% of
restructured debt.
‘repeated
During the specified period the asset
classification of sub standard / doubtful
accounts
will
not
deteriorate,
if
satisfactory performance is demonstrated.
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Part C – Early Recognition of Financial
Distress
Joint Lenders Forum (JLF) and Corrective
Action Plan (CAP)
CA Niranjan Joshi
Applicable for Consortium and Multiple
Banking
Advances
read
with
Restructuring guidelines.
Before an account becomes NPA, banks
have to identify incipient stress in the
account by creating three (3) Categories
under Special Mention Accounts
42
Early Recognition of Financial Distress
Basis for classification
SMA – 0
Principal or interest payment
not overdue for more than 30
days but account showing
signs
of
incipient
stress
(Please see Appendix to Part
C)
SMA – 1
Principal or interest payment
overdue between 31-60 days
SMA – 2
Principal or interest payment
overdue between 61-90 days
RBI Circular No. DBS.CO.OSMOS/ B.C./4/
33.04.006/ 2002-2003 dated 12.09.2012
CA Niranjan Joshi
SMA
Subcategories
43
Early Recognition of Financial Distress
of
Banks to report
borrowers.
of
credit
information
Banks are advised that as soon as an
account is reported by any of the lenders to
CRILC as SMA-2, they should mandatorily
form a committee to be called JLF if the
aggregate exposure (AE) of lenders in that
account is Rs. 1000 million & above.
Lenders also have the option of forming a
JLF even when the AE in an account is less
than Rs.1000 million &/or when the
account is reported as SMA-0 or SMA-1.
CA Niranjan Joshi
RBI to set up Central Repository
Information on Large Credits (CRILC)
44
Early Recognition of Financial Distress
CA Niranjan Joshi
The JLF may explore various options to
resolve the stress in the account to arrive
at an early and feasible solution to
preserve the economic value of the
underlying assets as well as the lenders’
loans. Banks to report credit information
of borrowers.
Options under Corrective Action Plan
(CAP)
- Rectification
- Restructuring
- Recovery
45
Early Recognition of Financial Distress
Accelerated Provisioning Required
These guidelines have become effective
from April 1, 2014.
CA Niranjan Joshi
In cases where banks fail to report SMA
status of the accounts to CRILC or resort
to methods with the intent to conceal the
actual status of the accounts or evergreen
the account, banks will be subjected to
accelerated
provisioning
for
these
accounts
and/or
other
supervisory
actions as deemed appropriate by RBI.
46
Early Recognition of Financial Distress
Period as NPA
Current
provisioning
(%)
Revised
Accelerated
provisioning (%)
Sub – Standard
Secured
Up to 6 Months
6 M to 1 Year
15
15
15
25
Sub – Standard
Unsecured
Up to 6 Months
6 M to 1 Year
25 (NI) /20 (I)
25 (NI)/20 (I)
25
40
Doubtful I
2nd Year
25 (S)/100 (U)
40 (S)/100 (U)
Doubtful II
3rd & 4th Year
40 (S)/100 (U)
100 (S & U)
Doubtful III
5th Year
onwards
100 (S & U)
100 (S & U)
CA Niranjan Joshi
Asset
Classification
47
Case Study
Term Loan - *
Cash Credit (TD) - *
CA Niranjan Joshi
Cash Credit (General) - *
Loan Against Deposit - *
48
Questions
CA Niranjan Joshi
49
CA Niranjan Joshi
CA Niranjan Joshi,
B.Com., FCA, DISA (ICAI)
Email: [email protected]
Cell: 9819078061
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