ASSET CLASSIFICATION

Having identified assets as NPA, banks are required to classify them further into ––

Sub-standard Assets: A sub-standard asset is one, which has remained NPA for a period

of less than or equal to 12 months.

Doubtful Assets: An asset is classified as doubtful if it has remained in the sub-standard

category for a period of 12 months.

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.

The asset classification norms have resulted in a huge quantity of assets being classified into the

sub-standard, doubtful, and loss assets. As at 31 March 1993, the total of Non-Performing Assets

(NPAs) for the public sector banks (SBI, its seven associates, and 20 nationalised banks) stood at

Rs 36,588 crores.

Banks will be required to make provisions for bad and doubtful debts on a uniform and

consistent basis so that the balance sheets reflect a true picture of the financial status of the bank.

PROVISIONING NORMS:

Sub-standard assets: A general provision of 10 per cent on total outstanding should be

made. At times bank give loans, which are unsecured i.e. the loan is sanctioned without

any security. If such account becomes NPA and is classified as substandard then

provision of 20% would be made.

Loss assets: Loss assets should be written off. If loss assets are permitted to remain in the

books for any reason, 100 per cent of the outstanding should be provided for.

Doubtful assets: 100 per cent 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.

Standard assets: A general provision of a minimum of 0.40 per cent on standard assets on

global loan portfolio basis.

RATIONALISATION OF OPERATIONS PRIVATE BANKS

As per the guidelines for licensing of new banks in the private sector issued in January 1993,

RBI had granted licenses to 10 banks.

Based on a review of experience gained on the functioning of new private sector banks, revised

guidelines were issued in January 2001.

The main provisions/requirements are listed below:

Initial minimum paid-up capital shall be Rs. 200 crore; this will be raised to Rs. 300 crore

within three years of commencement of business.

Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the

bank at any point of time; their contribution of 40 per cent shall be locked in for 5 years

from the date of licensing of the bank and excess stake above 40 per cent shall be diluted

after one year of bank’s operations.

Initial capital other than promoters’ contribution could be raised through public issue or

private placement.

While augmenting capital to Rs. 300 crore within three years, promoters need to bring in

at least 40 per cent of the fresh capital, which will also be locked in for 5 years. The

remaining portion of fresh capital could be raised through public issue or private

placement.

NRI participation in the primary equity of the new bank shall be to the maximum extent

of 40 per cent. In the case of a foreign banking company or finance company (including

multilateral institutions) as a technical collaborator or a co-promoter, equity participation

shall be limited to 20 per cent within the 40 per cent ceiling. Shortfall in NRI contribution

to foreign equity can be met through contribution by designated multilateral institutions.

No large industrial house can promote a new bank. Individual companies connected with

large industrial houses can, however, contribute up to 10 per cent of the equity of a new

bank, which will maintain an arms length relationship with companies in the promoter

group and the individual company/ies investing in equity. No credit facilities shall be

extended to them.

NBFCs with good track record can become banks, subject to specified criteria

A minimum capital adequacy ratio of 10 per cent shall be maintained on a continuous

basis from commencement of operations.

Priority sector lending target is 40 per cent of net bank credit, as in the case of other

domestic banks; it is also necessary to open 25 per cent of the branches in rural/semi-

urban areas.